Financial Firms

FINRA Fines Merrill Lynch $6M For Supervisory Failures and REG SHO Violations

Published on: October 28, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is fining and censuring Merrill Lynch, Pierce, Fenner & Smith Incorporated $2.5M for not setting up, maintaining, and enforcing supervisory procedures and systems related to certain areas, including Regulation SHO. The self-regulatory organization is fining Merrill Lynch Professional Clearing Corp. $3.5M, also for Reg SHO violations. Bank of America (BAC), which acquired Merrill Lynch in 2008, will pay the $6M fines to FINRA.

Reg SHO is an SEC rule governing short sales. One of its purposes is to curb abusive naked short selling. The regulation also seeks to lower the incidents of sellers neglecting to deliver securities in a timely manner by requiring firms to timely “close out” fail-to-deliver positions by purchasing or borrowing securities of similar type and quantity. It lets firms reasonably allocate fail-to-deliver positions to brokerage firm clients that contributed or caused those positions.

According to the SRO, from 9/08 through 7/12, Merrill Lynch PRO failed to close out certain fail-to-deliver position, and, for most of that period, lacked the necessary procedures and systems to handle REG Show close-out requirements. FINRA said that from 09/08 through 3/011, the firm’s supervisory systems and procedures were not sufficient, making it possible for the firm to improperly allocate fail-to-deliver positions to the brokerage firm’s clients on the basis of clients’ short positions while not having to heed clients played a part in the fail-to-deliver positions.

European Commission Takes Action Against JPMorgan, UBS, RBS & Credit Swiss for Cartel Conduct

Published on: October 27, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The European Commission has found that Royal Bank of Scotland (RBS), JPMorgan (JPM), UBS AG (UBS) and Credit Suisse (CS) engaged in cartel behavior. Except for RBS, which received immunity from having to pay any fines by disclosing the cartel conduct, the other banks were fined $120 million for their activities. For cooperating, UBS and JPMorgan received fine reductions. Along with Credit Suisse, both banks got a 10% reduction for consenting to settle.

All four financial institutions are accused of running a cartel involving bid-ask spreads of Swiss franc interest-rate derivatives in the European Economic Area. Banks and companies typically use interest rate derivatives to manage interest rate fluctuation risks. A “bid-ask spread” is the difference between how much a market maker is willing to sell and purchase a product.

According to the European Commission, between May and September ’07, the four banks agreed to quote to third parties wider fixed bid-ask spreads on certain short-term, over-the-counter Swiss franc interest rate derivatives while keeping narrower spreads for trades between them. The purpose was to reduce their transaction costs and keep liquidity among themselves, as well as keep other market makers from competing on equal terms in the Swiss franc derivatives market. In one action, JPMorgan Chase (JPM) was fined €61.7 million euros for purportedly manipulating the Swiss franc Libor benchmark interest rate in an illegal cartel with RBS, which, again, had immunity from fees.

SEC Fines E*TRADE Subsidiaries Over $1M Penalty for Unregistered Microcap Securities Sales, Puts Out Risk Alert Regarding Broker-Dealer Duties To Clients

Published on: October 25, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Earlier this month, the U.S. Securities and Exchange Commission put out a Risk Alert reminding brokerage firms about their duties when they take part in unregistered transactions for customers. The guidance came, along with the announcement that the agency had filed an enforcement action against former and current E*TRADE Financial Corporation (ETFC) brokerage subsidiaries that did not successfully act as gatekeepers and improperly engaged in the unregistered sales of microcap stock for customers.

According to the SEC, E*TRADE Capital Markets and E*TRADE Securities sold billions of penny stock shares for customers between 2007 and 2011. During this time, there were numerous occasions when they disregarded red flags indicating that the offerings were taking place without an applicable exemption from federal securities laws’ registration provisions.

The two brokerage firms consented to repay over $1.5 million in disgorgement plus prejudgment interest from commissions they made on the improper sales. They also have to pay a $1 million combined penalty.

73 Swiss Banks Want the US to Modify Proposed Tax Amnesty Deals

Published on: October 25, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Lawyers for 73 Swiss banks are questioning the terms of self-disclosure program that would allow them to achieve amnesty for having helped Americans avoid paying taxes to the U.S. government. In a request to the Justice Department, the attorneys objected to certain terms while recommending changes to the model accord.

The program wins bank participants a guarantee that they won’t be prosecuted if they disclose accounts belonging to Americans that had previously gone undeclared. While the bank could still be slapped with penalties the equivalent of up to half of what was in the hidden funds, they might be able to negotiate the amount down.

One of the requirements under the plan is that banks have to cooperate with other foreign or domestic law enforcement agencies that become involved in any probe over a tax evasion matter. However, Bloomberg reports, according to a number of the lawyers, this requirement wasn’t in the program when some 100 firms signed up so they could win non-prosecution deals in exchange for their cooperation. The banks claim that such a stipulation turns a program having to do with U.S. tax issues into a global agreement that doesn’t include guarantees or safeguards for them.

Wells Fargo to Pay $5M Over Inadequate Controls, Altered Documents

Published on: October 21, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Wells Fargo Advisers LLC has consented to pay $5M to resolve U.S. Securities and Exchange Commission charges accusing the firm of not keeping up adequate controls so that one of its employees would be unable to use a customer’s nonpublic information to engage in insider trading. Wells Fargo also was charged with taking too long to produce documents during the SEC’s probe and giving the regulator an altered document related to a review of a broker’s trading activities.

Federal law mandates that investment advisers and broker-dealers set up, keep up, and enforce procedures and policies so that material nonpublic data of customers is not misappropriated. This is the first time the Commission has charged a brokerage firm for not protecting a customer’s material, nonpublic data. Wells Fargo is settling the charges without admitting or denying wrongdoing.

The agency says that Wells Fargo broker Waldyr Da Silva Prado Neto found out in confidence from a customer that private equity firm 3G Capital Partners Ltd. was acquiring Burger King in 2010. The client had placed $50 million in the fund that would go on to acquire the hamburger chain. Prado then traded on the information before it was made public. The regulator filed insider trading charges in 2012.

Pension Fund Securities Lawsuits: JPMorgan to Face MBS Case, PERSM Files Class Action Case, & Institutional Clients Can Sue BP

Published on: October 17, 2014 | by Shepherd Smith Edwards & Kantas, LLP

JPMorgan Ordered to Face $10B Mortgage-Backed Securities Case

A federal judge said that JPMorgan Chase & Co. (JPM) must face a class action securities fraud lawsuit filed by investors accusing the bank of misleading them about the risks involved in $10B of mortgage-backed securities that they purchased from the firm prior to the financial crisis.

U.S. District Judge Paul Oetken certified a class action as to the bank’s liability but not for damages. He said it wasn’t clear how investors were able to value the certificates they purchased considering that the market hadn’t been especially liquid. He did, however, say that the plaintiffs could attempt again to seek class certification on class damages.

UBS is Fined $3.6M, Plus Must Pay $1.7M in Restitution Over Puerto Rico Closed-End Mutual Fund Sales

Published on: October 14, 2014 | by Shepherd Smith Edwards & Kantas, LLP

UBS Financial Services Incorporated of Puerto Rico (UBS) has reached a settlement with the Commonwealth’s Office of the Commissioner of Financial Institutions (OCIF) over UBS’s offering and sale of closed-end mutual funds in Puerto Rico. As part of the agreement, UBS will pay a $3.5 million fine, as well as $1.7 million in restitution to 34 clients. As is typical with such settlements, UBS is not denying or admitting to any wrongdoing.

After examining UBS’s operations between the periods of 1/1/06 through 9/30/13, OCFI discovered that UBS had placed clients with conservative risk tolerances in high concentrations of Puerto Rico Closed-End Funds (PRCEF). OCIF further alleged that UBS recommended or allowed these clients to use “non-purpose” loans to buy more PRCEF, which should have never happened. OCFI also reported irregularities in the way some clients’ accounts were managed and said UBS had engaged in inadequate supervision and recordkeeping.

The clients that are entitled to restitution are primarily elderly investors with low net worth and conservative financial profiles. UBS is going to pay them almost $1.7 million in restitution. This offer has to be made within 45 days of the settlement’s execution. The $3.5 million penalty will go to the Securities Trading, Investor Education and Training Fund.

Barclays to Pay $20M To Settle Libor Manipulation

Published on: October 14, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Barclays PLC (BARC) has consented to pay $20 million to settle complaints over the manipulation of the London interbank offered rate benchmark. As part of the accord, the bank will cooperate with a group of Eurodollar-futures traders that have filed lawsuits against other banks over Libor manipulation.

The deal resolves claims by firms and individuals that traded in Eurollar futures contracts and options on exchanges that were Libor based from 1/1/05 to 5/31/10. Now, a district court judge in Manhattan must approve the settlement.

This is the first settlement reached in the U.S. antitrust litigation involving investments linked to Libor. In addition to paying the $20 million, Barclays will help traders with their claims against other banks. This will include giving documents and information and other support to the plaintiffs so that they can bolsters their cases.

Credit Suisse, Goldman Sachs, JPMorgan, and 16 Other Banks Agree to Swaps Contract Modifications to Assist Failed Firms

Published on: October 11, 2014 | by Shepherd Smith Edwards & Kantas, LLP

JPMorgan Chase & Co. (JPM), HSBC Holdings Plc (HSBA), Goldman Sachs Group Inc. (GS), Credit Suisse (CS), and fourteen other big banks have agreed to changes that will be made to swaps contracts. The modifications are designed to assist in the unwinding of firms that have failed.

Under the plan, which was announced by the International Swaps and Derivatives Association, banks’ counterparties that are in resolution proceedings will postpone contract termination rights and collateral demands. According to ISDA CEO Scott O’Malia, the industry initiative seeks to deal with the too-big-to-fail issue while lowing systemic risks.

Regulators have pressed for a pause in swaps collateral collection. They believe this could allow banks the time they need to recapitalize and prevent the panic that ensued after Lehman Brothers Holdings Inc. failed in 2008. Regulators can then move the assets of a failing firm, as well as its other obligations, into a “bridge” company so that derivatives contracts won’t need to be unwound and asset sales won’t have to be conducted when the company is in trouble. Delaying when firms can terminate swaps after a company gets into trouble prevents assets from disappearing and payments from being sent out in disorderly, too swift fashion as a bank is dismantled.

Securities Fraud: Ex-Ameriprise Adviser to Pay $3M for Ponzi Scam, Four Insurance Agents Allegedly Defrauded Senior Investors, and Trading in Nine Penny Stocks is Suspended

Published on: October 8, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Former Ameriprise Adviser Ordered to Jail, Must Pay $3M Restitution

Oscar Donald Overbey Jr., an ex-Ameriprise Financial Services (AMP) financial adviser, must pay back the $3 million he allegedly stole from investors while operating a Ponzi scam. The 47-year-old has been sentenced to three and a half years behind bars.

Court documents say that from 1996 into 2007, Overbey stole about $4 million of client funds that he was supposed to invest. Instead, the money was used to pay earlier investors, cover his personal expenses, and pay off his gambling debts.