SEC Enforcement

SEC Probes High-Yield Funds in the Wake of Third Avenue’s Junk Bond Fund Collapse, Says Reuters

Published on: January 13, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Reuters is reporting that the Securities and Exchange Commission is examining the possible liquidity risks involved in high-yield bond funds. The probe comes following the collapse of the Third Avenue’s Focused Credit Fund (TFCVX) in early December. That has been touted as the largest mutual fund failure since the financial crisis of 2007.

The fund failed because of its inability to meet so many investor redemption request following heavy losses in the junk bond market. When the fund couldn’t find more buyers, it ended up having to suspend the redemptions and liquidate.

Now, regulators want to look into the ways in which mutual funds deal with liquidity risks and how such disruptions can impact not just shareholders but also the wider market. Reuters said that last month the SEC notified mutual funds and exchange-traded funds that it wants information about how securities that are less liquid are priced and whether certain parties have questioned these prices.

In particular, reports the news agency, the Commission has specifically asked for daily internal illiquidity calculations from 8/31/15 to 12/15/15, the names of large fund shareholders, disclosures related to liquidity, redemption activity, portfolio composition quality for each fund, and the daily outflow and inflow of information. Fund mangers were reportedly given only 24 hours to provide a little over half of the information requested and another week to hand over the rest of the documents.

SEC Cautions Mutual Funds That They May be Misdirecting “Sub-Accounting Fees” And Impacting Investor Returns

Published on: January 8, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission’s Division of Investment Management has put out a guidance on its website cautioning mutual fund directors to more closely scrutinize the money that is paid to brokers and certain other intermediaries. The warning comes following a sweep exam, which found that fees that should be going toward record-keeping and other administrative services are instead being directed toward encouraging fund sales. A number of mutual funds, brokerage firms, investment advisers, and transfer agents were examined prior to the issuance of this guidance.

SEC rules stipulate that sub-accounting fees cannot go toward finance distribution. These fees should only go toward record-keeping and shareholder services. However, there is an issue with mutual fund-maintained omnibus accounts in which all the fees can be placed together. In such instances, payments made to brokers for selling certain funds may get buried in these administrative fees.

Now, the Commission wants fund directors to watch out for fees that intermediaries selling the funds are getting for account services. It wants these directors to establish processes to assess whether a sub-accounting fee is being harnessed to increase sales. It also is calling on fund service providers and advisers to explain distribution and servicing specifics to fund directors.
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Man Released from Prison Faces New Fraud Charges in $11M Investor Stock Scam

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

The Securities and Exchange Commission is charging Edward Durante with bilking investors once again. Durante, who already served a 10-year sentence for a previous securities fraud conviction, is accused of using different aliases to defraud even more investors of millions of dollars and hiding his criminal past.

According to the regulator, Durante sold shares of a shell company that he was secretly in control of and told investors that stock sale proceeds would support the company’s operations. Instead, he allegedly used the funds for his own spending while the company’s stock was worthless.

The Commission contends that Durante started planning this scam while in prison. He purportedly used the name Anthony Walsh to acquire VGTel Inc. He scammed at least 50 inexperienced investors of at least $11 million by selling them this shell company’s stock. (Financial Advisor magazine places the number of investors bilked at closer to 100 investors.)
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Morgan Stanley to Pay $8.8M in Parking Scam

Published on: December 19, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley Investment Management (MISM) will pay $8.8 million to resolve SEC charges accusing a firm portfolio manager of engaging in a parking scheme that gave preferential treatment to certain client accounts. Also, as part of the settlement, SG Americas, who is accused of helping in the fraud, will pay over $1 million to resolve the charges.

The portfolio manager, Sheila Huang, has consented to an industry bar. According to an SEC probe, while overseeing accounts that had to liquidate certain positions in 2011 and 2012, Huang arranged for the sale of mortgage-backed securities to Yimin Ge, an SG Americas subsidiary, at prices that were predetermined so she could buy back the positions at small markups in other accounts that Morgan Stanley advised.

Huang sold more bonds at prices that were above market so she would not suffer losses for certain accounts. She then bought the positions back at prices that were unfavorable in a fund she oversaw without disclosing this to the client whose fund had been disadvantaged.

Huang is accused of engaging in prearranged transactions for five bond trade sets. As a result of her parking scam, some Morgan Stanley clients benefited more than others. Purchasing clients were generally the ones that profited from the market saving, while buying and selling clients did not.

Securities Fraud Cases: Investment Adviser Faces SEC Charges, Woman Pleads Guilty to $1.1M Financial Scam, and NJ Man is Accused of $13M Pump-and-Dump Scam

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

Connecticut Firm Accused of Conflict of Interest Involving $43M Fraud
The Securities and Exchange Commission is filing fraud charges against Atlantic Asset Management LLC (AAM). The regulator says that the Connecticut-based investment advisory firm got clients involved in certain bonds that resulted in an undisclosed financial benefit to a brokerage firm whose parent company is part owner of AAM.

The firm is accused of investing over $43M of investor money in illiquid bonds that were issued by a Native American tribal corporation. The sales provided the brokerage-firm with a private placement fee.

The SEC says that investors should have been notified of the financial gain that resulted and the firm violated its obligation to them when it placed its own financial interests before client’s interests.

In its complaint the SEC says that it was a representative from BFG Socially Responsible Investing Ltd., which partially owns AAM, who suggested that the investment advisory firm buy the illiquid bonds for clients. AAM purportedly knew that the bond sale proceeds would to go toward an annuity that the parent company provided.

The Commission says that after finding out that their money had been placed in the bonds, several AAM clients demanded that the investments be unwound but their requests were unsuccessful.

Ex-Investment Adviser Pleads Guilty to Securities and Annuities Scam
Janet Fooshee has pleaded guilty to 31 charges related to a $1.178M financial scam involving securities and annuities. The 63-year-old former New Jersey investment adviser admitted to fraudulently servicing over 100 financial account statements that increased 14 client accounts by about $818K collectively. She also admitted to stealing about $151K from clients, keeping over $190K in unlawful fees, defrauding another investor of almost $81K, and stealing the identities of about eight corporations. Fooshee said that she illegally took funds from over two dozen retirees and others over a period spanning a decade.

Fooshee also used the names Janet Katz and Janet Gurley. As part of the plea deal she must pay $415K in restitution. A seven-year prison term is recommended for her.
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J.P. Morgan Chase Settles SEC and CFTC Charges Alleging Client Steering for $307M

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

J.P. Morgan Chase & Co. (JPM) will pay $307M to resolve Securities and Exchange Commission and Commodity Futures Trading Commission charges accusing two of its units of not telling wealthy clients about certain conflicts of interest. The JPM businesses are J.P. Morgan Securities LLC, its wealth management investment advisory business that offers investment products to clients that have a net worth of $250K – $5M, and JPMorgan Chase Bank N.A., its U.S. private bank that deals with clients that have a $5M net worth or greater.

According to the agreement, the investment advisory service did not tell wealth management customers that its Chase Strategic Portfolio, which is a program for wealth management customers, favored mutual funds managed by the firm. For several years, the program put about $10 billion of $32.6 billion in proprietary funds, and until the earlier part of 2012, at least 47% of the assets were in such funds.

The private bank also showed a similar preference toward the bank’s products. It was not until 2011 that it told clients that language in its disclosures noting that it preferred managers affiliated with JPM had been “mistakenly” removed. The language was not put back until last year.

Alleged Immigration Scams Lead to SEC Fraud Charges

Published on: December 8, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed enforcement actions against a number of attorneys for offering EB-5 investments even though they are not registered brokers. As SEC Enforcement Division Director Andrew J. Ceresney noted, individuals who conduct certain services and get commissions when raising funds for EB-5 projects have to be officially registered.

Under the EB-5 Immigrant Investor Program, foreign investors are given an opportunity to gain U.S. residency if they invest in a designated projected that preserves or establishes at least 10 jobs for workers in this country. In its complaint, the SEC accused Hui Feng and his firm, the Law Offices of Feng & Associates of acting as unregistered brokers when selling EB-5 investments to over 100 investors. The Commission said that they bilked clients by not disclosing that they were paid commissions on the investments, which is a breach of their legal and fiduciary obligations. The regulator also said that they bilked certain entities that do offer such investments. Feng and his law offices are based in New York.

The SEC also filed charges against Mehorn P. Azarmehr and his Azarmehr Law Group, Michael Bander and his Bander Law Firm, Miami, Fla. lawyer Roger Bernstein, Hoboken, NH lawyer Allen Kaye, Los Angeles-based lawyers Taraneh Khorrami, Mike Manesh and this firm Manesh and Mizrahi, and Kefei Wang, who is based on China. All of these individuals and entities have agreed to cease and desist from acting as unregistered brokers. Most of them have consented to pay disgorgement, prejudgment interest, and/or a penalty.

SEC Investigating Whether Banks Were Involved in Credit Swap Collusion

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

Bloomberg reports that the U.S. Securities and Exchange Commission is looking into whether financial firms colluded together so that prices in the $6 trillion credit default swaps indexes market became skewed. According to the news outlet’s source, the regulator is trying to figure out whether dealers misrepresented index prices. The SEC is reportedly examining indexes that are less-liquid and actively traded.

With the credit-default swaps benchmark, investors can make bets on whether companies, mortgage-backed securities, or countries will default. Trading in swaps index contracts has increased in recent years because investors have been looking for easy ways to make bets via speculation.

At the conclusion of every trading day, benchmark prices for indexes are calculated by third-party providers according to dealer quotes. This sets the level at which traders are able to make their positions. This process resembles the way markets that don’t trade on exchanges establish benchmark prices.

SEC Approves Change to FINRA’s BrokerCheck On When to Publish Firings

Published on: December 3, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has approved the Financial Industry Regulatory Authority’s plan to shorten the waiting period for when certain information reported on Form U5 can be released on BrokerCheck.com from 15 days to three days. This includes information about broker firings. The modification will go into effect on December 12.

Brokerage firms use Form U5 to give notice of when a broker has been let go. This notification is published on BrokerCheck, which is a public database that includes background information about registered brokers, as well whether any of them have a disciplinary history and what that may be.

The 15 days was so that brokers could have time to explain why they were fired. FINRA, however, has now decided that it is important to notify the public of such terminations sooner than that so that the investors who are thinking hiring these brokers receive this employment history right away. The self-regulatory organization says that it believes three business days still gives a broker a chance to comment on his/her firing.

BrokerCheck.com is an excellent resource for looking up information about a broker and his/her history. It’s important as an investor that you do your due diligence when considering whether to have someone handle your investments and finances. You can also get information about a broker from the Central Registration Depository, which is a computerized database. Another way to find out about a broker is to call your state securities regulator and request access to his/her registration, disciplinary, and employment information. You can get information about how to reach your state regulator through the North American Securities Administrators Association’s website.
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SEC Files Charges Against Traders for Options Trading Scams

Published on: November 30, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has filed charges against ex-broker Richard Kenney and twin brothers Shahryar Afshar and Behruz Afshar. The regulator is accusing them of going around market structure rules and engaging in options trading scams. The regulator claims that the three men improperly traded options to garner lower fees and gain execution priority. They also purportedly took part in spoofing so they could get liquidity rebates.

SEC Enforcement Division Director Andrew Ceresney said that the men’s alleged actions fooled the options exchanges and placed other participants at a disadvantage. The regulator maintains that because of their purported wrongdoing, the two brothers and Kenney were able to get benefits that were not intended for professional traders.

Specifically, according to the SEC order: Even though the Afshars’ accounts should have gotten the “professional” designation for acting as non-broker-dealers that placed over 390 orders/day during the subsequent quarter, they were able to place orders as “customer” non-broker dealers. They did this by alternating trading between accounts. After one account became designated “professional” for the next quarter, they would use the other “customer” account and then trade off the next quarter.

The SEC says that Kenny and the Afshars were able to execute this scam through misrepresentations that made it seem as if just one of the brothers owned Fineline Trading Group, LLC while the other was supposedly the sole owner of Makino Capital, LLC.
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