SEC Enforcement

Securities Fraud Cases: VFG Securities Settles With FINRA Over Nontraded REIT Sales, Massachusetts Seeks To Ban Trader and His Software Company, and Utah Man Who Bilked Over 5,700 in $25M Fraud Gets Prison Sentence

Published on: November 22, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Broker-Dealer Owner and His Firm Settle SEC Case Alleging Overconcentration of Investor Money In Illiquid Investments

Jason Vanclef and his brokerage firm VFG Securities Inc. have settled the Financial Industry Regulatory Authority’s case accusing them of not adequately supervising their brokers so that clients’ portfolios did not end up concentrated in illiquid investments. Vanclef and VFG Securities, however, are not denying or admitting to the claims made in the complaint.

According to FINRA, from 11/2010 to 6/2012, nearly 95% of the broker-dealer’s revenue came from direct participation programs (DPP) and nontraded real estate investment trusts (nontraded REIT) sales. The illiquid investments were sold retail customers.

FINRA claimed that Vanclef had used “The Wealth Code,” which was the book that he authored, as a sales tool to promote investing in DPPs and nontraded REITs and to attract potential investors. The settlement with the regulator notes that in the book Vanclef repeatedly touted both types of illiquid investments as offering capital preservation and better returns—claims that FINRA said are “inaccurate and misleading” and conflict with information that the firm offered in prospectuses for the nontraded REITs and DPPs.

Edward Jones is Sued Over 401(K) Excessive Fees—Again

Published on: November 21, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Another group of plaintiffs is suing Edward Jones, accusing the firm of charging excessive fees and self-dealing in its 401(K) Plan. In the complaint, the brokerage firm and a number of its employees, including managing partner James Weddle and financial adviser Brett Bayston, are accused of breach of fiduciary duty related to their decision to choose costlier mutual funds when there were less expensive, equivalent funds available. Edwards Jones and its employees are also accused of choosing an “unreasonable” amount of risky investment choices and engaging in self-dealing.

The purported self-dealing allegedly occurred through its distribution deals with a number of fund companies, including Franklin Templeton Investments, American Funds, BlackRock (BLK), and Goldman Sachs (GS). The plaintiffs claim that the fund companies paid Edward Jones revenue-sharing fees for access to its “captive market,” which included 401(K) participants, and “shelf space” in its brokerage business that targeted retail investors. As part of the distribution relationship, Edward Jones offered the fund companies’ investment options in its Edward D. Jones & Co. Profit Sharing and 401(K) Plan.

The plaintiffs believe that these distribution relationships affected the decisions made by the fiduciaries and ended up costing participants millions of dollars in excessive fees. An Edward Jones spokesperson says that the allegations are false and that the broker-dealer would mount a “vigorous defense.”

Securities Fraud: CFP Board Suspends California Investment Adviser for Bilking Professional Athletes, SEC Orders Israeli-Based Firm to Pay $1.7M for Misleading Investors About Binary Options, and Ex-Movie Producer is Accused of Bilking Hedge Fund Investors

Published on: November 16, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Investment Adviser Who Bilked Pro Athletes Gets CFP Board Suspension
The Certified Financial Planner Board of Standards has issued a temporary suspension against Ash Narayan. The California-based investment adviser is accused of bilking professional athletes of millions of dollars.

Narayan was recently named in a Securities and Exchange Commission complaint. In June, the regulator accused him of misrepresenting his professional qualifications and misappropriating client monies when he allegedly siphoned funds from investors’ accounts and invested the money in Ticket Reserve, a flailing online sports and entertainment ticket business.

Narayan is accused of moving $33M of investor funds to the company and did not tell the athletes that he was a member of Ticket Reserve’s board, owned stock in the company, and was paid a $2M in finder’s fees for making the investments. The CFP Board called the investments “unsuitable” and not in line with clients’ objectives. The board also noted that some of the investments were made without client consent or knowledge.

SEC Awards Whistleblower $20M

Published on: November 16, 2016 | by Shepherd Smith Edwards & Kantas, LLP

In its third highest award to a tipster since the inception of its whistleblower program, the Securities and Exchange Commission has awarded an individual $20M for coming forward right away to disclose “valuable information” that allowed the regulator to swiftly bring an enforcement action against the wrongdoers before they could spend the funds. This latest award ups the total awarded by the SEC to whistleblowers to $130M since 2012. The regulator issued its highest award to date, of $30M, in 2014 and awarded another whistleblower $22M in August.

The SEC Whistleblower Program allows the regulator to award the person who provided the tip 10-30% of monetary sanctions collected. The sanctions, however, must exceed $1M. The tip should relate to a federal securities law violation that already happened, is currently taking place, or is about to happen, and it must be unique information. More than one whistleblower may qualify to receive an award from an over $1M sanction obtained as a result of the tips provided.

Because the law protects whistleblower confidentiality, more specifics about this latest case, including who was involved or who received the award, were not disclosed.

SEC Says Triad Advisors and Securities America Advisors May Have Charged Clients For Mutual Fund with 12b-1 Fees Even Though There Were Less Costlier Options

Published on: November 10, 2016 | by Shepherd Smith Edwards & Kantas, LLP

According to parent firm Ladenburg Thalmann Financial Services Inc. (LTS), the SEC is scrutinizing Securities America Advisors Inc., which is the registered investment adviser arm of independent broker-deal Securities America Inc., and Triad Advisors Inc., over allegations that the firms sold mutual funds that charged clients yearly marketing fees when there were less costly options available. These marketing fees are referred to as 12b-1 fees. It is paid to advisors yearly for continuing education and service.

Ladenburg Thalmann’s disclosed news that its firms were under investigation in its quarterly earnings report. In the report, the firm said that SEC staff gave Securities America Holdings and Triad reports in May and August contending that the two firms had “acted inconsistently” regarding their fiduciary duty when recommending and choosing mutual fund share classes that paid these marketing fees. The SEC pointed out that there had been less costly share classes available in the same funds.

Ladenburg Thalmann said that Securities America Advisors and Triad are looking at the SEC’s assessments and they may have to pay restitution to clients.
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Energy Company Cases: Arizona Corporation Commission Orders Texas Man to Pay $1.4M, Two Other Companies to Pay $11.2M in Restitution to More than 700 Investors, & SEC Files Stock Manipulation Charges Against Multiple Individuals

Published on: November 4, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Texas Man and His Energy Company Must Pay Arizona Restitution, Penalties for Oil Well-Related Misrepresentations

Texas resident Kenneth White and his Marchant International Resources Inc. must pay almost $1.4M plus $150K in penalties for misrepresenting its participation in two oil well projects that was backed by 12 Arizona investors. The fine was issued by the Arizona Corporation Commission (ACC), which accused White of failing to disclose the complete facts about his business, the company’s experience with well-drilling, and Merchant’s efforts with two wells. The $150K penalty is because White did not disclose that he was previously convicted for a $4.3M felony theft crime when he was marketing himself and his experience in energy extraction.

More than 700 Investors to Get $11.2M in Restitution Over Inadequate Disclosures

White and his company are not the only ones facing fines brought by the ACC in an energy case. Brian C. Hageman and his Hydrotherm Power Corp. and Deluge Inc. now have to pay $11.2M in resittion to over 700 investors. According to the state, while marketing a thermal hydraulic engine project, Hageman did not tell investors that the two companies were no longer in valid operation. He also must pay a $55K administrative penalty for bilking shareholders.

SEC Accuses Minnesota-Based Energy Company Co-Founder of Stock Price Manipulation

The Securities and Exchange Commission has filed charges against the co-founder of a Minnesota-based energy company. Ryan Gilbertson is accused of rigging Dakota Plains Holdings’ stock price while hiding his control of the company in order make a lot of money. The SEC claims that Gilbertson enriched himself by over $16M as he and others allegedly bilked shareholders through price rigging. Meantime, his co-founder, Michael Reger, will pay almost $8M to settle the charges brought against him.

SEC Adopts Final Rules to Modernize Fund Raising for Intrastate and Regional Offerings, Enhance Information that is Reported by Funds, and Enhance the Effectiveness of Risk Management Programs

Published on: October 27, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has adopted final rules to modernize the way companies are allowed to raise funds for their businesses via small and intrastate offerings, all the while keeping investor protections in place. The final rules include amendment to Securities Act Rule 147 and a new Securities Act Rule 147A for out-of-state residents and companies organized or incorporated outside the state.

Under the Rule 147A and Securities Act Rule 147 amendments, the current intrastate offering framework, which allows companies to raise funds from investors in their state without having to federally register the sales and offerings, would be modernized. New Rule 147A would differ from Rule 147 in that it would permit out-of-state residents and companies outside the state, or companies that were incorporated outside the state, to access these securities offerings.

There are also now amendments to Regulation D’s Rule 504 that would grant registration exemption for offers and sales as high as $1M of securities within a one-year period, as long as the issuer does not qualify as an Exchange Act reporting company, blank check company, or investment company. The aggregate quantity of securities that could be offered and sold under Rule 504 within any yearlong period would go up from $1M to $5M. Meantime, the new final rules would repeal Rule 505, which allowed for offerings of up to $5M yearly that were sold only to accredited investors or 35 non-accredited investors maximum.

SEC Cases: Embraer Settles FCPA Charges for $205M, Bank Leumi is Charged with Engaging Unregistered US Cross-Border Business, and Lime Energy Company and Executives Settle Accounting Fraud Charges

Published on: October 26, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Aircraft Manufacturer Settles FCPA Violation Charges With the SEC and DOJ for Over $205M

Embraer S.A. has arrived at a global settlement with the U.S. Securities and Exchange Commission, the U.S. Department of Justice, and Brazilian authorities. The agreement resolves allegations that the aircraft manufacturer violated the Foreign Corrupt Practices Act, and it requires the company to pay over $205M.

According to the SEC’s complaint, Embraer made over $83M because of bribe payments made by its subsidiary in the US. The payments were made via third-party agents to foreign government officials in Saudi Arabia, the Dominican Republic, and Mozambique, as well as an agent in India. The company allegedly generated false records and books to hide the illegal payments and took part in an accounting scam in India.

To settle, Embraer will pay the DOJ $107M as part of a deferred prosecution deal and over $98M to the SEC in disgorgement plus interest. It is also expected to pay disgorgement to authorities in Brazil in that country’s civil case.

Securities Cases: Merrill Lynch Ordered to Pay $2.8M for Supervisory And Other Violations, Ernst & Young Agrees to Pay $11.8M for Failed Audits, and Ex-Morgan Stanley Client Administrator is Suspended Over Fraudulent Wire Transfer

Published on: October 20, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Financial Industry Regulatory Authority Fines Merrill Lynch $2.8M

FINRA has fined Merrill Lynch, Pierce, Fenner and Smith Inc. $2.8 million. By settling, the firm is not denying or admitting to the self-regulatory organization’s charges.

FINRA said because of system errors, Merrill Lynch inaccurately reported millions of trades. The regulator said that Merrill Lynch’s supervisory system as it relates to specific matters related to documenting, reporting, and records was not designed in a reasonable manner.

Ernst & Young Settles Audit Failure Charges By Agreeing to Pay Over $11.8M

Ernst & Young LLP has agreed to resolve U.S. Securities and Exchange Commission charges accusing it of audit failures. The monetary settlement, along with the $140M penalty that audit client Weatherford International agreed to pay separately, will go back to investors who were hurt in the accounting fraud.

Artis Capital Management Accused of Not Preventing $6M Insider Trading

Published on: October 17, 2016 | by Shepherd Smith Edwards & Kantas, LLP

A San Francisco-based hedge fund advisory firm has agreed to settle U.S. Securities and Exchange Commission charges alleging its failure to notice that one its employees was engaged in insider trading. Artis Capital Management will disgorge the more than $5.1M in illicit rating profits made by employee Matthew G. Teeple for the firm plus over $1.1M of interest. The hedge fund firm will also pay a more than $2.5M penalty.

According to the regulator, Artis Capital did not maintain policies and procedures adequate enough to prevent insider trading from taking place at the firm. The Commission contends that Teeple’s supervisor, Michael W. Harden, did not respond as needed when red flags arose to indicate that Teeple was engaging in wrongful behavior.

To settle the SEC charges against him, Harden will pay a $130K penalty and serve a 1-year suspension from the securities industry. He and Artis Capital consented to the regulator’s order. However, they did not deny or admit to the Commission’s findings.