Friday, April 17, 2009
U.S. v. FINRA, a recently issued opinion from the federal district court (E.D.N.Y. Apr. 9, 2009), presents an interesting issue stemming from the collapse of Bear Stearns hedge funds. The U.S. sought to enjoin FINRA from conducting arbitration proceedings brought by a customer pending completion of a related criminal case against the hedge fund managers. Although the defendants in the criminal case were not parties to the arbitration, both proceedings involved the same subject matter --whether the criminal defendants' conduct was securities fraud. The court denied the government's petition. It concluded that the only "prejudice" to the government in allowing the arbitration to proceed was that the criminal defendants would have more information than they would otherwise be entitled to under the Federal Rules of Criminal Procedure and that "this loss of the government's usual tactical advantage is insufficient to justify enjoining the arbitration." (Thanks to Jill Gross for calling this to my attention.)
Thursday, April 16, 2009
The United States District Court for the Northern District of Illinois entered an order permanently enjoining Michael E. Kelly (Kelly), a former resident of North Liberty, Indiana and Cancun, Mexico, in connection with a civil injunctive action filed in September, 2007 against Kelly and 25 other defendants. The order, entered with Kelly's consent, permanently enjoins him from violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The SEC's complaint in this matter charges that Kelly and 25 other defendants participated in a massive fraud on U.S. investors that involved the offer and sale of securities in the form of Universal Lease investments. Universal Leases were structured as timeshares in several hotels in Cancun, Mexico, coupled with a pre-arranged rental agreement that promised investors a high, fixed rate of return. The SEC's complaint alleges that from 1999 until 2005, Kelly and others raised at least $428 million through the Universal Lease scheme from investors throughout the United States, with more than $136 million of the funds invested coming from IRA accounts. The SEC further alleges that Kelly used a nationwide network of unregistered salespeople who sold the Universal Leases and collected undisclosed commissions totaling more than $72 million. The SEC also alleges that Kelly and others ran the scheme from Cancun, Mexico through a number of foreign entities in Mexico and Panama. According to the SEC's complaint, Kelly and others told investors that Universal Leases would generate guaranteed income through the leasing of investor timeshares by a large, independent leasing agent. In fact, the complaint alleges the leasing agent was a small Panamanian travel agency controlled by Kelly and for most of the scheme its payments to investors came from accounts funded by money raised from new investors. Further, the complaint alleges that Kelly and others failed to disclose key facts about the Universal Lease investments, including the risks of the investments and that more than $72 million in investor funds were used to pay commissions as high as 27% to the selling brokers. The SEC continues to pursue its claims against Kelly for disgorgement and civil penalties. The SEC's action against the remaining defendants is also pending.
The SEC announced today that on April 10, 2009, the District Court for the Central District of California entered a final judgment against J. Thomas Talbot ("Talbot"), a former Director of Fidelity National Financial Inc. ("Fidelity"), in an insider trading case. Without admitting or denying the allegations in the complaint, Talbot consented to the entry of the final judgment which (1) permanently enjoins him from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, (ii) orders him to pay disgorgement of $67,881 and prejudgment interest of $26,916, and (iii) orders him to pay a civil penalty of $135,762.
The Commission's complaint alleged that in April 2003, Talbot engaged in insider trading by purchasing stock of LendingTree, Inc. ("LendingTree"), after learning at a meeting of the Fidelity Board of Directors that LendingTree would be acquired by another company. According to the SEC's Complaint, Talbot wrote "LendingTree" on the top of his meeting agenda, the only notes that Talbot made during the four-hour Board meeting. The Complaint alleged that after this information was conveyed to the Board of Directors, a Fidelity Board member cautioned the directors not to trade in LendingTree securities because they had been provided with confidential information; however, two days after the Board meeting, Talbot purchased 5,000 shares of LendingTree stock and also subsequently purchased an additional 5,000 shares of LendingTree. The Complaint further alleged that on May 5, 2003, the day that USA Interactive announced that it would acquire LendingTree, Talbot sold his 10,000 shares of LendingTree stock, realizing illicit profits of $67,881.
NASAA will host its annual Public Policy Conference on April 28 in Washington, D.C. to discuss the challenges facing the current financial services regulatory structure and outline policy proposals to strengthen regulatory safeguards for Main Street investors. The conference will open with a keynote speech by U.S. Rep. Paul Kanjorski (D-PA), who serves on the House Financial Services Committee and is chairman of its Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises. The conference also features two panel discussions.
Panel One: Answering an Angry Public: Restructuring Our Regulatory System and Restoring Investor Confidence
Moderator: James Cox, Duke University School of Law
Panelists: Mark Cooper, Director of Research, Consumer Federation of America
Matt Kitzi, Missouri Commissioner of Securities
Donald Langevoort, Georgetown University School of Law
Panel Two: Risky Business: Rebuilding Market Integrity through Systemic Risk Regulation
Moderator: Joseph Borg, Alabama Securities Commission Director
Panelists: Monica Lindeen, Montana State Auditor
Sarah Bloom Raskin, Maryland Commissioner of Financial Regulation
Dean Shahinian, Senior Counsel, U.S. Senate Banking Committee
More information is available at the NASAA website.
Wednesday, April 15, 2009
Here is the agenda and list of participants at the SEC's Roundtable Discussion on Credit Rating Agencies, which is being held today, and is webcast from the SEC website. Academic participants include Professor Frank Partnoy of San Diego, Lawrence White of NYU, and Joseph Grundfest of Stanford.
SEC and New York State File Charges Against Former New York State Political Leader and Hedge Fund Manager in Pension Fund Fraud
The SEC today charged Raymond Harding, who is a former leader of the New York Liberal Party, and Barrett Wissman, a former hedge fund manager, in connection with a multi-million dollar kickback scheme involving New York's largest pension fund. According to the SEC's complaint, Harding and Wissman participated in a scheme that extracted kickbacks from investment management firms seeking to manage the assets of the New York State Common Retirement Fund. (The SEC previously charged Henry "Hank" Morris and David Loglisci with orchestrating the fraudulent scheme to enrich Morris and others with close ties to them.) Specifically, the SEC alleges that Wissman arranged some of the payments made to Morris, and Wissman was rewarded with at least $12 million in sham "finder" or "placement agent" fees. Harding received approximately $800,000 in sham fees that were arranged by Morris and Loglisci.
In addition, Attorney General Andrew M. Cuomo today announced charges against Harding and a guilty plea from Wissman for their alleged involvement in the kickback scheme at the Office of the New York State Comptroller. The felony complaint alleges that Harding obtained over $800,000 in illegal fees on State pension fund investments as a reward for opening up a State Assembly seat for then Comptroller Alan Hevesis son and for over 30 years of prior political endorsements. The felony complaint filed today in New York County Criminal Court charges that Harding committed multiple felonies in violation of the Martin Act, the New York securities fraud statute.
The SEC's amended complaint additionally charges three entities through which Wissman perpetrated the fraud - Flandana Holdings Ltd., Tuscany Enterprises LLC, and W Investment Strategies LLC - as well as two investment management firms with which he was affiliated at the time, HFV Management L.P. and HFV Asset Management L.P. According to the SEC's amended complaint, Wissman was a longtime family friend of Loglisci and a key participant in the kickback scheme. Wissman worked with Loglisci and Morris to extract sham finder fee payments for Morris and for himself from investment managers. Wissman received millions of dollars in sham fees and other illicit payments, and arranged millions of dollars in additional payments for Morris. In addition, Wissman caused HFV Management L.P. and HFV Asset Management L.P. to pay sham finder fees to Morris in one New York State Common Retirement Fund transaction.
According to the SEC's amended complaint, Harding was a political ally who was allegedly inserted by Morris and Loglisci into at least two fund transactions for the sole purpose of compensating Harding, and Harding received a total of approximately $800,000 in sham "finder" fees. In one of those transactions, the investment management firm already had a finder and Morris arranged for that finder to secretly split his fee with Harding. In another transaction, Morris and Loglisci simply inserted Harding as a finder on an investment solely for the purpose of directing money to Harding.
In a partial settlement of the SEC's charges, Wissman and Flandana Holdings Ltd. have consented, without admitting or denying the SEC's allegations, to the entry of a partial final judgment that permanently enjoins them from violating Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 ("Advisers Act") and defers the determination of disgorgement and financial penalties until a later date.
In addition, HFV Management and HFV Asset Management have consented, without admitting or denying the SEC's allegations, to the entry of a final judgment that permanently enjoins them from violating Sections 17(a)(2) and 17(a)(3) of the Securities Act and Section 206(2) of the Advisers Act, and that orders them to pay a penalty in the aggregate amount of $150,000.
The SEC's charges against Harding remain pending. The amended complaint alleges that Harding aided and abetted violations of Section 10(b) of the Exchange Act and Rule 10b-5 committed by Morris and Loglisci. The SEC is seeking a permanent antifraud injunction, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties
Tuesday, April 14, 2009
On April 14, 2009, the SEC filed civil injunctive actions in the United States District Court for the Eastern District of New York charging seven leading members of a church in Queens, N.Y. for orchestrating a fraudulent investment scheme that targeted mostly elderly parishioners. According to the complaint, the seven individuals defrauded scores of investors of more than $12 million by making numerous misrepresentations, including promises of returns as high as 75 percent, to encourage them to invest in two hedge funds - the Logos Fund and the Donum Fund. Instead of investing the money as promised, the defendants misappropriated millions of dollars to furnish their own lavish lifestyles with purchases of luxury cars, jewelry, clothing, meals, and expensive foreign travel.
According to the Commission's complaint, the fraudulent scheme was orchestrated by seven individuals who were active members and leaders of the church: Isaac I. Ovid; Aaron Riddle; J. Jonathan Coleman; Stephen Cina; Cory A. Martin; Timothy Smith; and Robert J. Riddle. The Complaint alleges that these individuals used two entities to carry out the fraudulent scheme: Jadis Capital, Inc. - the hedge fund manager of the Logos Fund and the Donum Fund - and Jadis Capital's subsidiary, Jadis Investments, LLC, a registered investment adviser and the investment manager of the funds. The SEC's complaint alleges that between January and November 2005, the defendants raised more than $12 million from more than 80 investors in the two funds by making material misrepresentations including promises of incredible returns.
The SEC's complaint charges each of the defendants with multiple violations of the federal securities laws.. The SEC's complaint seeks a final judgment permanently enjoining the defendants from future violations of the above provisions of the federal securities laws, ordering them to disgorge their ill-gotten gains plus prejudgment interest, and ordering them to pay civil monetary penalties.
FINRA announced today that it fined Fifth Third Securities, Inc., (FTS) of Cincinnati, OH, $1.75 million for a series of violations related to variable annuity sales and exchanges. FINRA found that FTS made 250 unsuitable sales and exchanges to 197 customers through 42 individual brokers. FINRA also found that FTS's supervisory systems and procedures were inadequate for policing the firm's variable annuity sales and exchanges. In settling this matter, FTS neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
In addition to the fine, FINRA ordered FTS to pay more than $260,000 in restitution to 74 customers to compensate them for surrender charges incurred in the unsuitable transactions. The firm must also offer all 197 customers the opportunity to rescind their unsuitable transactions and receive the initial value of their purchase plus interest and any surrender charges required, adjusted for any withdrawals made.
FINRA found that between January 2004 and December 2006, FTS effected 250 unsuitable VA exchanges or transactions through 42 brokers, who, in many cases, worked in Fifth Third Bank branches. They used lists provided by the bank of customers with maturing CDs and referrals from bank employees to identify new customers — some of them elderly and/or unsophisticated and with conservative investment objectives — to purchase VAs.
One broker had 74 customers enter into 118 unsuitable exchanges shortly after he joined FTS in early 2005. To avoid leaving substantial customer assets at his prior firm, he switched his customers into VAs issued by the same insurance company with the same riders. In recommending these cookie cutter transactions, the broker ignored substantial differences in his customers' ages, incomes, investment objectives and investment sophistication. The customers paid, in aggregate, at least $260,000 in charges to surrender their old annuities and were locked into essentially identical VAs that were more expensive and had new surrender periods. The commissions earned on these transactions enabled the broker to win a firm sales contest and he and his supervisor were each awarded a 42" flat screen TV. FINRA found that FTS knew the broker was engaging in a mass switch and approved each of the broker's transactions, failing to adequately respond to red flags indicating that the exchanges were unsuitable.
FINRA also found that 41 other FTS brokers recommended and effected 132 unsuitable VA purchases for 123 customers. These customers used cash from CDs or bank accounts to purchase the same VA and they put their entire investments into the fixed rate sub-account of the VA. Many of these customers were elderly and/or possessed limited financial sophistication, and had conservative investment objectives. FINRA found these identical transactions, in which customers traded liquid assets for a VA with a seven-year surrender period and annual fees, to be unsuitable given the customers' financial situations, needs, and investment objectives.
As part of the settlement, FINRA is requiring the firm to retain an independent consultant to review the adequacy of and recommend modifications to the firm's supervisory system and procedures and training relating to VA transactions.The firm also violated FINRA registration rules by allowing improperly registered representatives to buy and sell equities and bonds and by allowing at least one Fifth Third Bank employee to maintain his securities license with FTS even though he did no work for FTS and FTS did not pay him. FINRA also found that the firm failed to maintain accurate books and records related to its VA business
Orgeon sued Oppenheimer Funds charging that the money manager understated risks in its 529 College Savings bond fund that lost $36 million. According to the state, Oppenheimer did not disclose that the fund invested in credit default swaps and other high-risk derivative instruments. WSJ, Oregon Sues Over Risks Taken In Its '529' Fund.
Monday, April 13, 2009
In February 2009, the SEC issued a proposing release that included several proposals to further the Credit Rating Agency Reform Act’s purpose of promoting accountability, transparency, and competition in the credit rating industry. (The proposing release is available on the Commission’s Web site.) In addition, on April 15, the SEC will host a roundtable discussion regarding the oversight of credit rating agencies, as it relates to both the Commission’s pending proposals and more broadly. The roundtable will be webcast live at the SEC's website. The roundtable will consist of four panels. Roundtable participants were not identified in the release, but will include leaders from investor organizations, financial services associations, credit rating agencies, and academia.
The panel discussions will focus on:
• The perspective of current NRSROs: What went wrong and what corrective steps is the industry taking?
• Competition Issues: What are current barriers to entering the credit rating agency
• The perspective of users of credit ratings.
• Approaches to improve credit rating agency oversight.
Mapping the American Shareholder Litigation Experience: A Survey of Empirical Studies of the Enforcement of the U.S. Securities Law, by Randall S. Thomas, Vanderbilt University - School of Law, and James D. Cox, Duke University School of Law, was recently posted on SSRN. Here is the abstract:
In this paper, we provide an overview of the most significant empirical research that has been conducted in recent years on the public and private enforcement of the federal securities laws. The existing studies of the U.S. enforcement system provide a rich tapestry for assessing the value of enforcement, both private and public, as well as market penalties for fraudulent financial reporting practices. The relevance of the U.S. experience is made broader by the introduction through the PSLRA in late 1995 of new procedures for the conduct of private suits and the numerous efforts to evaluate the effects of those provisions.
We believe that the evidence reviewed here shows that the PSLRA's provisions have largely achieved their intended purposes. For example, many more private suits are headed by an institutional lead plaintiff, such plaintiffs appear to fulfill the desired role of monitoring the suit's prosecution and their presence is associated with suits yielding better settlements and lower attorneys' fees awards. SEC enforcement efforts, while significant, have tended to focus on weaker targets, suggesting that the big fish get away. Equally importantly, markets impose their own discipline on companies whose managers release false financial reports and, in turn, firms discipline the managers who are responsible for false misleading reporting, perhaps because of the presence of, or potential for, private enforcement actions.
Eliminating Securities Fraud Class Actions Under the Radar, by Barbara Black, University of Cincinnati - College of Law, was recently posted on SSRN. Here is the abstract:
At least since Basic, Inc. v. Levinson, the business community and many influential scholars have challenged the existence of the securities fraud class action on a variety of grounds. Recently, two proposals have been advanced to "fix" the problem of "abusive" securities fraud class actions. One proposal requires arbitration of all securities fraud class actions; the other eliminates the corporate defendant in most actions. Proponents assert that shareholders should have the right to adopt these proposals through amendment of the company's certificate of incorporation. In reality, adoption of either proposal would substantially curtail, if not eliminate, the securities fraud class action.
Part I of this paper first reviews the rationales - compensation and deterrence - for the federal securities class action, sets forth the critics' principal arguments as to why these goals are not achieved, and argues that the post-PSLRA securities fraud class action is reasonably effective in achieving both compensatory and deterrence goals. Part II then describes the two proposals. Part III explains why these proposals are impermissible under the anti-waiver clause, Section 29(a) of the Securities Exchange Act. Part IV explains why these proposals are also, under state law, illegal, unfair to current shareholders that do not vote in favor of them, and unenforceable as to future stock purchasers. Part V concludes by calling for a national debate on the future of the securities fraud class action. The arguments for and against the securities fraud class action involve complexities and uncertainties that make "quick and dirty" solutions like these two proposals inappropriate
The Development of Nonprofit Corporation Law and an Agenda for Reform, by James Fishman, Pace University - School of Law, was recently posted on SSRN. Here is the abstract:
This article examines the development of the law of "charitable corporations" and attempts to explain why the charitable corporation rather than the charitable trust became the predominant organizational form for charitable and benevolent activities in the United States. It then discusses some of the inconsistencies of non-profit corporation law and provides an agenda for future reform.
Treatment Differences and Political Realities in the GAAP-IFRS Debate, by Lawrence A. Cunningham, George Washington University Law School, was recently posted on SSRN. Here is the abstract:
The Securities Exchange Commission has introduced a "Roadmap" that describes a process leading to mandatory use of IFRS by domestic issuers by 2014. The SEC justifies this initiative on the grounds that global standardization yields cost savings and an ultimate gain in comparability, facilitating the search for global opportunities by U.S. investors and making U.S. capital markets more attractive to foreign issuers.
This paper enters an objection, noting that the stakes include more than the choice of the framework for standard setting. The accounting treatments themselves are at issue, treatments that for the most part concern domestic reporting firms and domestic users of financial statements.
We present a treatment by treatment comparison of GAAP and IFRS and go on to discuss the differences' implications. FASB maintained its independence during its 35 year history in the teeth of opposition from corporate management, which experienced a steady diminution of its zone of financial reporting discretion.
A switch to IFRS would allow management to reclaim some of the lost territory. Meanwhile, the interest group alignment that protected FASB, comprised of auditing firms, actors in the financial markets, and the SEC, has disintegrated as U.S. capital market power has waned in the face of international competition. Management is the shift's incidental beneficiary, with possible negative effects for reporting quality in domestic markets.
Friday, April 10, 2009
Following up on its meeting earlier this week, the SEC today released for comment the two proposals to restrict short sales. Here is the introductory paragraph in its release:
The Securities and Exchange Commission (“Commission”) is proposing amendments to Regulation SHO under the Securities Exchange Act of 1934 (“Exchange Act”). We are proposing two approaches to restrictions on short selling – one is a price test that would apply on a market wide and permanent basis (“short sale price test” or “short sale price test restriction”) and one that would apply only to a particular security during severe market declines in that security (“circuit breaker”). With respect to the first approach, we propose two alternative short sale price tests: one based on the national best bid and the second based on the last sale price. With respect to the second approach, we propose two basic alternatives: one alternative is a circuit breaker rule that would temporarily prohibit short selling in a particular security when there is a severe decline in the price of that security (a “halt”), which could operate in place of, or in addition to, a short sale price test rule; and the second alternative is a circuit breaker rule that would trigger a short sale price test rule; we propose that such a short sale price test either be based on the national best bid for any security for which there has been a severe price decline or be based on the last sale price for any security for which there has been a severe price decline.
Comments are due 60 days after publication in the Federal Register.
The SEC filed a civil action on April 8, 2009, against Crossroads Financial Planning, Inc., and Julie M. Jarvis, of Columbus, Ohio, in connection with an alleged scheme by Jarvis to misappropriate funds from two elderly clients. Crossroads is an investment adviser registered with the Commission, and Jarvis is its president, chief operating officer and principal owner. The Commission's complaint, filed in the United States District Court for the Southern District of Ohio, alleges that Jarvis, the owner of Crossroads, misappropriated at least $2.3 million between June 2000 and March 2009. According to the Commission's complaint, in or about May 2000, Jarvis first caused the unauthorized transfer of funds from a client's account at a brokerage firm. Over the course of the next nine years, through various means including forged and falsely notarized funds transfers instructions, Jarvis misappropriated funds from the investment accounts of the two elderly clients and used those funds for her personal expenses and benefit. In some instances, Jarvis had to liquidate securities to effect the fraudulent transfers.
On April 9, 2009, the court granted the Commission's motion for a Temporary Restraining Order ("TRO") and set the Preliminary Injunction hearing for April 22, 2009. In addition to enjoining the defendants from violating provisions of the Federal Securities laws, as charged by the Commission in its complaint, the TRO imposes a freeze on Jarvis's and Crossroads' assets. The Judge also ordered Jarvis to submit a financial accounting, and he granted the Commission's request for expedited discovery and other emergency relief.
The SEC announced that it has voluntarily dismissed all claims against Kent H. Roberts, the former General Counsel of McAfee Inc. in connection with allegations of backdating stock options. On March 20, 2009, the United States District Court for the Northern District of California entered an order dismissing with prejudice all claims in this action against defendant Kent H. Roberts.
Erik R. Sirri, the departing Director of the SEC's Division of Trading and Markets made a speech on April 9, 2009 at the National Economists Club on Securities Markets and Regulatory Reform, in which he defended the SEC's much-criticized actions in the Consolidated Supervised Entity (CSE) Program. As he stated:
Today, I want to discuss a Commission action that I believe has been unfairly characterized as being a major contributor to the current crisis. I am referring to the Commission's 2004 rule amendments to the broker-dealer net capital rule that established the consolidated supervised entity (CSE) program. Since August 2008, commenters in the press and elsewhere have suggested that the 2004 amendments removed a leverage restriction that had prevented the firms from taking on debt that exceeded more than twelve times their capital and, as a consequence, the Commission allowed these firms to increase their debt-to-capital ratios to unsafe levels well-above 12-to-1, indeed to 33-to-1 as some have suggested. These commenters point to the 2004 amendments as a significant factor leading to the demise of Bear Stearns. While this theme has been repeated often in the press and elsewhere, it lacks foundation in fact.
Thursday, April 9, 2009
On April 9, 2009, the SEC filed a Complaint for Injunctive and Other Relief ("Complaint") in the United States District Court for the Northern District of Georgia against Robert P. Copeland ("Copeland"). The Complaint sets forth a classic Ponzi scheme operated by Copeland, in which he used new investor funds to make payment obligations to earlier investors. The Complaint alleges that from at least 2004 through January 2009 Copeland, a Georgia resident and an attorney licensed to practice in the State of Georgia, fraudulently raised over $35 million from at least 140 investors in several states, including Georgia. The Complaint further alleges that Copeland promoted investments orally and through written materials claiming to earn 15-18 percent interest per year, and claiming that investor funds would be loaned in connection with real estate transactions, including private mortgage lending. Through entities which he controlled, Copeland directed the unregistered offer and sale of promissory notes evidencing the investor loans. The notes were often collateralized by security deeds to which Copeland signed the names of fictitious persons.
The Complaint seeks (i) a permanent injunction against future violations; (ii) disgorgement of ill-gotten gains plus prejudgment interest; and (iii) imposition of civil penalties.
Edward D. Jones Settles FINRA Charges for Failure to Deliver Official Statements in Municipal Securities Sales
FINRA announced today that it fined Edward D. Jones & Co., L.P. of St. Louis $900,000 for its failure to timely deliver official statements to customers who purchased new-issue municipal securities and related supervisory and recordkeeping failures. With limited exceptions, broker-dealers selling a new-issue municipal securities are required under the rules of the Municipal Securities Rulemaking Board (MSRB) — which are enforced by FINRA — to deliver a copy of the official statement to the customer on or before settlement date.
FINRA found that Edward Jones's late deliveries occurred when the firm was conducting retail transactions but was not a member of the underwriting syndicate for a new issue. FINRA further found that the firm's failures from 2002 through 2006 were systemic. During that time period, Edward Jones engaged in approximately 100,000 new-issue municipal bond transactions in which it was not an underwriter. For a significant number of those transactions, the firm was late in delivering official statements to its customers. The firm's systemic late deliveries had multiple causes, including lack of training for employees, incorrect instructions to employees, limited photocopying capacity and errors by employees of the firm, including trading supervisors. FINRA further found that Edward Jones's own internal communications repeatedly referenced that it was not timely delivering official statements. Nevertheless, the firm failed to take reasonable and sufficient steps to comply with its delivery obligations.
FINRA also found that Edward Jones failed to keep required records, did not have written supervisory procedures addressing the requirements for delivery of official statements until May 2006, and that those procedures contained incorrect guidance. As part of the settlement, an officer of Edward Jones will certify that it has adopted and implemented systems and procedures reasonably designed to ensure compliance with MSRB rules, including systems and procedures to provide adequate oversight if third party vendors are utilized. In settling this matter, Edward Jones neither admitted nor denied the charges, but consented to the entry of FINRA's findings.