Financial Firms

FINRA Fines Charles Schwab $2M for Supervisory Failures, Capital Deficiencies

Published on: September 5, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is fining Charles Schwab & Co. (SCHW) $2 million. The self-regulatory organization said that between 5/15/14 and 7/1/14, Schwab was capital deficient by up to $775M because of cash inflows that went beyond what it could invest with existing facilities on three occasions. Because of this, said FINRA, the firm moved $1 billion to its parent company for overnight investment. Under a revolving loan agreement, Schwab’s Treasury group approved the funds as an unsecured loan.

The SRO claims that Schwab lacked the procedures that would have mandated that its Treasury group consult with the company’s regulatory reporting group. It also contends that the firm’s supervisory systems were not designed in a manner reasonable enough to stop the Treasury group from going into unsecured transfers with affiliates that could lead to a net capital deficiency.

Schwab is not denying or admitting to the FINRA alelagtions. A firm representative did issue a statement expressing regret over the failure to note the overnight cash transfers.

FINRA Orders UBS to Pay Investors Over $2.9M For Puerto Rico Bond and Fund Losses

Published on: September 1, 2015 | by Shepherd Smith Edwards & Kantas, LLP

UBS (UBS) must pay over $2.9M to investors Andres Ricardo Gomez and Ana Teresa Lopez-Gonzales for losses related to their investments in Puerto Rico securities. Mr. Ricardo, Ms. Lopez-Gonzales and their relatives filed an arbitration case with the Financial Industry Regulatory Authority (“FINRA”) claiming breach of fiduciary duty, fraud, breach of contract, negligence, unsuitability, misrepresentation and omission, overconcentration, and failure to supervise under FINRA rules and Puerto Rican law.

Mr. Ricardo’s and Ms. Lopez-Gonzales’ relatives resolved the securities fraud case for an undisclosed sum before the FINRA arbitration panel issued its ruling. The allegations are related to investments in Puerto Rico municipal bonds, UBS proprietary closed-end funds, and the use of Claimants’ investments as collateral to borrow money through credit lines. UBS Financial Services and UBS Financial Services Inc. of Puerto Rico denied all claims.

The Claimants had initially sought $10 million in compensatory damages and other appropriate relief, the cancellation of all loan balances, disgorgement of fees and commissions earned by UBS, pre- and post-award interest, legal fees, expenses, and other fees. Claimants also sought punitive damages.

In response, UBS sought to have the Puerto Rico bond fund case dismissed. In addition, UBS requested that the FINRA panel order Mr. Ricardo and one of the other claimants pay $500,000 in damages.
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11th Circuit Revives City of Miami’s Mortgage Fraud Lawsuits Against Wells Fargo, Citigroup, and Bank of America

Published on: August 31, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The 11th U.S. Circuit Court of Appeals said that a lower court made a mistake when it threw out the city of Miami’s claims accusing Bank of America Corp. (BAC), Wells Fargo & Co. (WFC ), and Citigroup Inc. (C) of engaging in predatory mortgage lending to Hispanic and black borrowers. The Florida city brought its claims under the Fair Housing Act.

Miami claims that the three banks directed non-Caucasian borrowers toward more expensive loans that were frequently not affordable to them even if their credit was good. The city said that because of this “reverse redlining,” there were a lot of foreclosures, a rise in spending to fight blight, and lower property tax collections.

A U.S. district court judge threw out Miami’s mortgage fraud lawsuits last year. Judge William Dimitrouleas claimed that the city did not have the standing to sue and the harm alleged was too remote from the conduct of the banks.

The 11th circuit, however, said that standard was too strict. It believes that the banks could have foreseen that there would be attendant harm from such alleged discriminatory practices.
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SEC Charges J.P. Morgan Ex-Investment Bank Analyst and Friends with Insider Trading

Published on: August 28, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging ex- J. P. Morgan Securities, LLC (JPMS) bank analyst Ashish Aggarwal with illegally tipping confidential information about firm clients in impending acquisitions and mergers involving technology companies to his friend Shahriyar Bolandian. Bolandian then purportedly used the information to trade in his own accounts and in the accounts of his sister and father, while also tipping his friend Kevan Sadigh so that he too could insider trade. Together, Bolandian and Sadigh allegedly made over $672,000 in illicit profits. The regulator is also charging them both with insider trading.

According to the SEC Complaint, Aggarwal misappropriated confidential information about two deals in which J.P. Morgan had served as an adviser. After notifying Bolandian, the latter and Sadigh purchased the same call options in two companies: PLX Technology and ExactTarget. The two men allegedly traded prior to the public announcement of PLX Technology Inc.’s intended acquisition by Integrated Device Technology Inc. in 2012 and ExactTarget’s acquisition by Salesforce.com and PLX Technology in 2013.
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Shareholders Can Sue Barclays Over Libor Rigging, Rules Judge

Published on: August 28, 2015 | by Shepherd Smith Edwards & Kantas, LLP

A U.S. Judge says that the shareholder lawsuit suing Barclays PLC (BCS) for inflating its stock price by manipulating the London Interbank Offered Rate can proceed. According to lead plaintiffs, the St. Clair Shores Police & Fire Retirement System in Michigan and the Carpenters Pension Trust Fund of St. Louis, Barclays and several of its ex-officers purposely misrepresented and understated how much it costs to borrow funds by submitting false information about LIBOR during the period running from August 2007 to January 2009. The rigging of LIBOR by Barclays was disclosed in a 2012 settlement with global regulators in which the financial institution agreed to pay a $450 million fine.

LIBOR is the benchmark used by financial institutions to establish interest rates for lending purposes on different kinds of financial transactions. It is also used to set interest rates in trillions of dollars of investments and loans. The benchmark is calculated for ten currencies. Member banks turn in a figure according to an estimate of what rate they would be charged for borrowing money from other banks.

The shareholder plaintiffs claim that during a conference call in 2008, ex-Barclays president Robert Diamond made a misguided statement about LIBOR when he said that the bank was not paying rates that were higher in any currency. They also believe that Barclays misrepresented its financial health during the period at issue while artificially inflating its share price.

FDIC Sues Bank of NY Mellon, Citigroup, and US Bancorp for soured RMBSs Purchased by Guaranty Bank

Published on: August 27, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Federal Deposit Insurance Corp. is suing Bank of New York Mellon Corp. (BK), Citigroup (C), and US Bancorp (USB) for residential mortgage-backed securities that were purchased by the former Guaranty Bank.

The Texas-based bank closed shop in 2009 and the FDIC, which is its receiver, arranged for its deposits to be taken on by BBVA Compass, a U.S. unit of Spanish institution Banco Bilbao Vizcaya Argentaria SA (BBVA.MC). The regulator estimated that the shutdown would cost its deposit insurance fund $3 billion.

The 12 mortgage-backed trusts involved in this RMBS lawsuit were issued by Countrywide Home Loans and Bear Stearns Cos’ (BSC) EMC Mortgage Corp unit. In 2008, JPMorgan Chase & Co. (JPM.N) purchased Bear Stearns while Bank of America Corp. (BAC) purchased Countrywide.

Former Merrill Lynch Broker Must Pay $1.4M for Insider Trading

Published on: August 26, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Gary Yin, an ex-Bank of America Merrill Lynch (BAC) broker, must pay $1.4M in restitution for helping a client launder money made from insider trading. Yin admitted to helping former Qualcomm Inc. president Jing Wang conceal hundreds of thousands of dollars made in insider trading in that company and another company.

Yin set up brokerage accounts in the British Virgin Islands using a shell company to hide the scam and helped Wang transfer $525,000 to the shell account. He also transported documents to Wang’s brother in China to allegedly help hide the scheme from the FBI.

Now Yin must forfeit $27,000 in profits he made from trades in Qualcomm stock that were set up in a Merrill broker account in his mother-in-law’s name in the British Virgin Islands. He must also pay a $5,000 fine

Citigroup Global Markets to Pay $15M Penalty to the SEC for Surveillance and Compliance Failures

Published on: August 21, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission said that Citigroup Global Markets (C) will pay a $15M penalty to settle charges that it did not enforce procedures and policies that would stop and identify securities transactions potentially involving the wrongful use of material, nonpublic information. Citigroup agreed to the SEC’s order without denying or admitting to the regulator’s findings.

The firm also has paid $2.5 million to advisory client accounts that were affected. That amount is how much Citigroup made from the principal transactions that resulted because of the purported compliance and surveillance failures.

According to SEC, which conducted a probe, over a period of ten years, Citigroup failed to review thousands of trades that were made by a number of trading desks. Even though firm personnel looked at reports to assess trades daily, technological errors caused several information sources regarding thousands of key trades to be left out.

As the SEC noted in its order, advanced computer systems are often now involved in automated trading. Technology oversight is key to making sure that compliance is in effect.

Citigroup Affiliates to Pay $180M To Resolve Hedge Fund Fraud Charges

Published on: August 18, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup Global Markets Inc. (CGMI) and Citigroup Alternative Investments LLC (CAI) have consented to pay close to $180M to resolve Securities and Exchange Commission charges accusing them of bilking about 4,000 investors in the Falcon fund and the ASTA/MAT fund. The two hedge funds went on to fail during the financial crisis. The settlement money will go to investors who were hurt in the purported fraud.

According to an SEC probe, the Citigroup (C) affiliates made misleading and false misrepresentations to investors. The two hedge funds, managed by Citigroup Alternative Investments, were highly leveraged and sold only to advisory clients of Smith Barney and Citigroup Private Bank. They were sold by financial advisers associated with Citigroup Global Markets. Together, the hedge funds raised close to $3 billion in capital from investors before they went on to fail.

In its order, the SEC said that the ASTA/MAT fund bought municipal bonds and hedged interest rates by employing a Treasury or LIBOR swap. It described the Falcon fund as multi-strategy, invested in fixed-income strategies (including collateralized loan obligations, collateralized debt obligations, asset-backed securities) as well as in the other hedge fund.

Investors claim that the two affiliates misrepresented the hedge funds as low-risk, safe, and suitable for bond investors looking for traditional investments, when, in fact, the funds were high risk. They contend that even as the funds started failing, CAI accepted close to $110 million in investments.

UBS Puerto Rico Branch Manager Had Warned that Brokers Were Pushing Improper Loan Practices

Published on: August 16, 2015 | by Shepherd Smith Edwards & Kantas, LLP

According to Reuters, internal correspondence records show that in 2012, a former branch manager at UBS Puerto Rico (UBS) warned the Swiss banking giant’s officials that its brokers were encouraging customers to get involved in improper loan practices. In a number of emails, Carlos Capacete, who was a branch manager at the time, wrote to at least two bank officers noting his suspicions of misconduct.

Reuters says that in the documents it reviewed, Capacete told regional manager Doel Garcia that he had encouraged Mariela Torres, a UBS Puerto Rico compliance director, to look into suspect loans. In another email, Capacete followed up with his inquiry to see if the loans had been investigated for possible misuse involving the bank’s credit lines.

Then, in yet another email, Capacete documented what he knew about the loans, which he believed were fraudulent, explained how he discovered the purported wrongdoing, and noted his efforts to notify Torres about the alleged misconduct. Capacete also wrote that a UBS attorney had told him that the firm had conducted an audit and found that his suspicions were wrong.

Despite this alleged audit, late last year UBS reached a $5.2 million municipal bond settlement with Puerto Rico’s Office of the Commissioner of Financial Institutions to resolve allegations of improper loan practices. The bank settled that case without denying or admitting to the charges. It did, however, consent to enhancing its supervision of several brokers whom regulators said may have steered clients toward improperly borrowing money to purchase more funds. UBS also terminated a broker for the same allegations and received an arbitration award of $2.5 million against it in an early case concerning the same broker.
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