SEC Enforcement

SEC Sets Deadline for New Fiduciary Standard

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

The Securities and Exchange Commission’s Office of Management and Budget says to expect the notice of proposed rulemaking for the Personalized Investment Advice Standard of Conduct in October 2016. The SEC’s fiduciary standard rule has been anticipated ever since 2010 when the Dodd-Frank Act gave the regulator the authority to proceed with such a rule.

A new fiduciary rule would mandate that both advisers and brokers who give financial advice do so in their clients’ best interests. Now that the proposed rule isn’t expected for nearly another year, the SEC will be able to see what happens with the Department of Labor’s own proposed fiduciary rule, which is expected to be finalized early in 2016.

SEC, CFTC Look to Enhance Oversight of Alternative Trading Systems, High Speed Trading

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

The Securities and Exchange Commission has voted to propose rules to make enhancements to the regulatory oversight and operational transparency of Alternative Trading Systems (ATSs). The proposal would mandate that a ATS trading through the National Market System (NMS) submit detailed disclosures regarding: operations and broker-dealer operator and affiliated-related activities, the kinds of orders and market data used on these trading systems, and procedures regarding priority and execution. The information would be submitted on the newly proposed-Form ATS. ATSs trade stocks on national securities exchanges, such as dark pools.

The SEC’s proposal would make the disclosures at issue are available to the public on the regulator’s website. This could make it easier for market participants to be able to better assess whether to do business with an ATS. The disclosures could also allow participants to have more information when assessing decisions made by their brokers regarding their orders.

Also, the proposals would give the commission a process for qualifying NMS stock ATS for the exemption that they operate under and allow them to review disclosures submitted on Form ATS.

Following the proposal’s publication on the federal register, the SEC has allotted 60 days for comments.

Securities Fraud Cases: Wedbush to Pay $813K Over Investment Fraud Allegations, SEC Files Pump-and-Dump Charges in Marley Coffee Case, and CFTC Accuses IB Capital of Soliciting $50M for Forex Trading While Unregistered

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

Wedbush to Pay Trusts, Family Members Over $813,000
A Financial Industry Regulatory Authority Panel says that Wedbush securities and investment advisor Kevin Thomas Scarpelli must jointly and severally pay several investors over $813,000 to resolve allegations of professional negligence and failure to supervise related to investments made in Natural Resources USA Corp. The respondents denied the allegations and asked that the claims be thrown own.

After considering the pleadings, evidence, and testimony, the panel decided that Wedbush and Scarpelli must pay claimants: Mary L. Riscornia TTEE nearly $263,000, Jennifer Tiscornia over $252,313, Nicolas E. Toussaint over $55,300, Nicolas E. Toussaint TTEE over $1800, Michael J. Nicolai over $18,4000, Michael Nicolai TTEE over $156,221, Jeffrey M. Nicolai over $22,154, Katherine M. Nicolai over $22,000 and Alexandria P. Nicolai over $22,000 in damages, interest, legal fees, and costs. The FINRA panel denied Scarpelli’s request to have his record expunged of this securities case.

SEC Files Charges in $78M Pump-and-Dump Scam Involving Jammin’ Java Stock, Marley Trademark
The Securities and Exchange Commission is accusing ex-Jammin’ Java CEO Shane Whittle of masterminding a $78 million pump-and-dump scam involving the company’s shares. Jammin’ Java operates Marley Coffee, which uses the late reggae legend Bob Marley’s trademark to sell products.

According to the regulator, Whittle used a reverse merger to-in secret-get control of millions of Jammin’ Java shares, which he then spread to offshore entities under the control of Michael Sun, Wayne Weaver, and René Berlinger. The shares were dumped on the public after their price rose in the wake of bogus promotional campaigns. Whittle purportedly hid the scam by making misleading omissions and statements in reports submitted to the SEC.
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SEC Says Amish Investors Were Bilked in $3.9M Securities Fraud

Published on: November 17, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission is suing Earl D. Miller for securities fraud. According to the regulator, the Indiana man bilked investors, many of whom were Amish and new to investing, through private investment vehicles 5 Star Capital LLC and 5 Star Commercial LLC.

The SEC says Miller began recruiting investors last year. The private investment entities he created were supposed to invest in real estate property and green products with patents that one of the companies owned. However, claims the regulator, no patents were actually owned. Instead, contends the agency, the money went to companies that were supposedly developing other products, including energy-efficient washing machines and a pedal-run wheelchair. The bulk of these investments quickly failed. Most of the funds were invested in loans and were supposed to result in interest payments every month. However, such payments only were issued for five months and then they stopped completely.

Miller marketed his investment services in Amish newspapers and in Amish community meetings. He gave investors promissory notes for their money. The notes came with a fixed 8-12%/year return rate, which is a lot higher than the rates for other fixed-return investments, including bank deposits. He also purportedly said he was not paid any money for managing the fund even though he allegedly took $1M for his own spending. At least 70 investors were bilked.
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Virtus Investment Advisers to Pay $16.5M to Settle False Performances Claims Related to ETF Portfolio Strategy

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

The Securities and Exchange Commission says that Virtus Investment Advisers will pay $16.5M to resolve charges accusing the investment management firm of misleading mutual fund investors and others using ads with false historical performance information about exchange-traded fund portfolio strategy AlphaSector. According to the regulator, the firm publicized a performance track record that it got from F-Squared that was substantially overstated. Virtus had hired F-Squared as a mutual fund subadvisor as well as a subadvisor for those that followed AlphaSector.

The SEC, following its probe, said that Virtus falsely stated in SEC filings, client presentations, marketing collateral, and other communications that the AlphaSector’s strategy had a performance history going as far back as 2001 and had for a number years outperformed the S & P 500 Index. The investment management firm is accused of accepting F-Squared’s misrepresentations as fact while disregarding the red flags that raised doubts about these statements.

Six years ago Virtus recommended that shareholders of specific mutual funds and the boards of trustees approve a modification in strategy and management to AlphaSector and F-Squared. This recommendation was made because of the false historical data on AlphaSector.

SEC Headlines: Regulator Warns Investment Advisors About Outsourcing Compliance, Chairwoman White Talks About Private Placement Fundraising, Criticizes Bill Seeking to Place Limits on BDCs

Published on: November 14, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is reminding advisory firms to stay aware of their own compliance functions. After about 20 examinations of advisers that utilized compliance firms, the regulator found that external compliance officers sometimes were not aware of a firm’s business access, did not communicate regularly with firm principals, nor did they have access to company documents.

Issuing a risk alert, the SEC said that whether a chief compliance officer is a direct employee of a registrant, a consultant, or a contractor, this employee should be given adequate information and authority to be able to do the job. The Commission said that it is the job of the registrant to put into place and execute a compliance program that works. It also warned that firms that do outsource their compliance function might be at risk of not comprehending their own possible shortcomings in this matter. The SEC said that outsourced CCOs should be careful about using “standardized checklists” to get information from advisory firms.

In other SEC news, Commission chairwoman Mary Jo White said that even though private placement issuers, private equity managers, and hedge funds are raising more funds from investors now more than before, the incidents of related fraud is not rising. Some people worried that when the 2012 Jumpstart Our Business Startups Act got rid of the ban on the general solicitation of certain kinds of private placements, there would be those that would use this as an opportunity to take advantage of less sophisticated investors. However, even with the new regulations, not that many private equity managers, hedge funds, and private placement issuers are taking advantage of the opportunity to advertise directly to investors.
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Republican Rep. Introduces Bill to Place Limits on SEC’s Use of In-House Judges

Published on: November 9, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Rep. Scott Garrett (R-N.J.) recently introduced legislation that would let defendants choose the option of having their case tried in federal court instead of by a Securities and Exchange Commission administrative law judge. Garrett believes that the regulator has been overusing its in-house courts, practically turning itself into “judge, jury, and executioner” in enforcement cases.

Garrett, along with others who oppose the use of SEC in-house judges, says that defendants have greater latitude when their cases go to a jury. His bill would also up the evidence standards for cases that are presided over by an SEC judge.

Several parties have filed lawsuits opposing the SEC’s administrative court process. They claim that the system is a constitutional violation. Some feel that the SEC has the upper hand when it comes to the outcome of enforcement cases because its own judges are deciding the rulings.

Securities Headlines: FINRA Seeking to Fine MetLife Over Variable Annuity Sales, SEC Accuses Scottish Trader of Sending Fake Tweets, Market Rigging, and Judge Orders Man to Stop Crowdfunding Fraud

Published on: November 7, 2015 | by Shepherd Smith Edwards & Kantas, LLP

FINRA Plans to Fine MetLife for Purported Variable Annuities Violations
The Financial Industry Regulatory Authority is looking to impose a significant fine against MetLife’s broker-dealer unit related to possible violations involving variable annuities. The company is cooperating with the regulator’s probe, which is looking at alleged suitability, misrepresentation, and supervision issues related to the selling and replacements of variable annuities.

According to MetLife’s quarterly regulatory filing, FINRA told the insurance giant that it plans to recommend disciplinary action. InvestmentNews reports that in an e-mailed statement, MetLife spokesperson John Calagna said that the company did not agree with the conclusions reached by the regulator and plans to defend itself.

SEC Charges Scottish Trader with Over Market Rigging Involving False Tweets
The Securities and Exchange Commission has filed securities fraud charges against James Alan Craig of Scotland for allegedly filing false tweets that caused sharp declines in the stock prices of two companies, even causing one of them to experience a trading halt. The regulator said that Craig sent out false statements via Twitter on accounts that he deceptively set up to make them look like legitimate Twitter accounts of known securities research firms.

According to the SEC’s complaint, Craig’s first bogus tweets caused the share price of one company to drop 28% until Nasdaq temporarily stopped trading. The next day, he sent out false tweets about another company that led to a 16% drop in the share prices of that company. Both days he purchased and sold shares of the companies he targeted to try to profit from the sharp price changes. He was mostly successful in his efforts.
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Fenway Partners to Pay Over $8M For Not Disclosing Conflicts of Interest

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

The Securities and Exchange Commission has filed charges against Fenway Partners LLC and four of its executives. According to the regulator, when fund and portfolio company assets were used to pay ex-firm employees and an entity to which the New York-based private equity firm is affiliated the parties did not disclose to a fund client and investors that there were conflicts of interest.

The SEC says that Fenway Partners, principals William Gregory Smart and Peter Lamm, CFO Walter Wiacek, and ex-principal Timothy Mayhew Jr. did not fully disclose to the client and investors that a number of transactions involving over $20M in payments had come out of portfolio companies or fund assets. SEC Enforcement Division Director Andrew Ceresney said that the investors and the fund client were not told that the firm and its principals had rerouted the portfolio company fees to affiliate Fenway Consulting Partners, LLC for services and that they failed to give the fund client the benefits of those fees via fee offsets for management.

Also, according to the SEC’s order, which institute a resolved administrative proceeding, Fenway Partners went into contracts with the certain portfolio companies that were held by Fenway Capital Partners Fund III L.P. Through these contracts, the companies paid Fenway Consulting Partners the fees at issue.

Securities Cases: More Brokers Identified by SEC in Stock Rigging Case, Former Ameriprise Broker Gets Prison Term for Fraud, and Boeing Settles 401K Case for Almost $57M

Published on: November 4, 2015 | by Shepherd Smith Edwards & Kantas, LLP

SEC Names More Brokers in Penny Stock Rigging Case Filed Last Year
The Securities and Exchange Commission is charging three more people related to a $300M penny stock rigging case that it filed last year. In federal court, the regulator sought to lift the stay in its civil case to submit an amended lawsuit and now also name brokers Ronald Heineman and Michael Morris, as well as lawyer Darren Ofsink.

The SEC says that Morris and Heineman executed the scam through their brokerage firm awhile Ofsink made money illegally by selling unregistered shares even though no exemption for registration was valid. Meantime, the U.S. Attorney’s Office in New York is fling criminal charges against Ofsink ad Morris.

Per the amended SEC complaint, in 2013 Abraxas Discala, Marc Exler, and brokers Craig Josephburg and Matthew Bell were involved in a scam to raise the price of CodeSmart Holdings stock. The men intended to make money at the expense of Josephberg’s customers and Bell’s clients. Heineman and Morris, who own Halcyon Cabot Partners-the firm where Josephberg was employed-allegedly were involved in the securities scam. The two men are accused of secretly consenting to buy shares of CodeSmart at pre-set prices so that Discala could liquidate his positions at prices that were artificially raised. Meantime, Ofsink, who played a part in the execution of the company’s reverse merger into a public shell company, made money by illegally selling securities of CodeSmart that were not registered.

Trading in CodeSmart has been suspended because the company hasn’t submitted periodic reports since late 2014 and due to purportedly suspect market activity.

Former Ameriprise Adviser Gets Prison Term for Defrauding Clients of Over $1M
Former Ameriprise (AMP) adviser Susan Elizabeth Walker wills serve more than seven years behind bars for defrauding at least 24 retirement accounts of over $1.1M. Walker was convicted of tax evasion and mail fraud. She pled guilty last year to the criminal accounts.

Walker offered financial planning services through the firm from October 2008 through March 2013. She also was registered with the Financial Industry Regulatory Authority and was a securities agent under the Minnesota Department of Commerce.
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