SEC Enforcement

UBS Puerto Rico To Pay the SEC $15M Over Closed-End Bond Fund Sales

Published on: September 29, 2015 | by Shepherd Smith Edwards & Kantas, LLP

UBS Financial Services Inc. of Puerto Rico (UBS PR) has consented to pay $15 million to resolve the Securities and Exchange Commission’s claims related to the brokerage firm’s supervision of the sale of its closed-end Puerto Rico bond funds (CEFs). The SEC contends that UBS PR did not properly supervise ex-broker Jose Ramirez, who is accused of increasing his compensation by at least $2.8 million when he allegedly had customers improperly borrow funds to invest in Puerto Rico bond funds. UBS fired Ramirez last year.

The funds came from UBS Bank USA, which is a bank affiliated with UBS PR. Under bank and UBS rule, the funds from UBS Bank are not allowed to be used to carry or purchase securities. According to the SEC, not only was using the funds from the Bank a violation, investors were placed at risk of losses while Ramirez profited. The SEC has filed a separate complaint against the ex-UBS broker.

The regulator claims that Ramirez misled customers about how safe the CEFs were, as well as misrepresented the risks involved. He purportedly lied to his branch manager when he was asked about suspect transactions.

To avoid getting caught, Ramirez allegedly told customers to move money from their credit line to an external bank account before placing the funds into their brokerage account at UBS PR and then buying the CEFs. The CEFs, which were heavily invested in Puerto Rico bonds, dropped in value when the Puerto Rican bond market started to decline in the Fall of 2013. Customers then had a choice of either paying down part of the loans or risk liquidation of their investments.

The $15 million settlement will be put into a fund for investors who sustained losses when the funds dropped in value. The Commission’s order instituting a settled administrative proceeding claims that UBS PR did not have the systems and procedures to prevent or detect the misconduct that Ramirez was engaging in. Even though UBS PR was allegedly apprised at least twice that customers of Ramirez might be violating the loan policy, the brokerage firm’s policies did not provide for reasonable follow up. UBS PR also purportedly lacked a system to make sure that credit line proceeds that were moved out of firm accounts were not used to buy securities.
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Father and Sons Charged in $20M Stock Scam

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

The Securities and Exchange Commission is charging a father, three sons, and two other men with bilking people who invested money in Gerova Financial Group. The regulator’s complaint names John Galanis, his sons Derek, Jason, and Jared, Gerova president Gary T. Hurst, and investment adviser Gavin Hamels. John has been a defendant in SEC enforcement actions numerous times over the last four decades. Jason faced SEC charges in 2007.

The SEC contends that Jason and Hirst came up with a securities scam in 2010 to secretly issue $72M of unrestricted shares to a friend in Kosovo. The Galanis’ are accused of redirecting the proceeds from the sales of those shares from the friend’s brokerage accounts and wiring the money to themselves and others. This resulted in about $20 million in illicit profits.

Jason is accused of bribing Hamels to buy stock in Gerovia to help stabilize its price as shares went into liquidation. Hamels is accused of buying the stock for clients according to arrangements made with Jared about prices, times, and how much to buy. He allegedly did not tell clients about Jason’s bribe.

The SEC is charging all of the men with federal securities laws and securities registration violations. It is charging Hamels with investment adviser fraud. Meantime, prosecutors in New York have put out a parallel action filing criminal charges against the six men, as well as Ymer Shahini, who was the family friend in Kosovo.
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SEC Proposes to Modify Rules Regarding The Use of Its In-House Judges in Enforcement Cases

Published on: September 24, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has issued proposals that would amend its rules governing its use of administrative law judges in enforcement proceedings. The proposed amendments come in the wake of criticism and lawsuits contending that having in-house judges preside over SEC cases gives the regulator an unfair advantage over defendants and violates the constitution because of the way the judges are appointed.

According to The Wall Street Journal, from October 2010 through March 2015, the SEC won 90% of its cases that were presided over by an in-house judge. It won just 69% of cases in federal court during that same time period. Every fiscal year since October 2004, the SEC has emerged victorious against at least four out of five defendants in cases that went before its judges.

Billionaire Mark Cuban, who was previously found not liable in the SEC’s insider trading case against him, recently said in a court brief that if his case had been heard by an SEC judge instead of in federal district court, he would have not benefited from certain protections and the outcome would have been very different for him. Cuban filed the brief in support of real estate developer Charles Hill, who also has been accused of insider trading. Hill is seeking to have his case transferred from the SEC’s in-house court to federal court.

Already a federal judge has ruled that the use of an in-house judge in the Commission’s case against Hill was “likely unconstitutional” and a federal judge stayed the case in June pending further review. The SEC is appealing.

Three primary changes to the Commission’s Rules of Practice that have been proposed, including, the

· Modification of the timing of administrative proceedings. such as giving more time before a hearing takes place in certain cases. Currently, defendants have four months to get ready for trial. The modified rules would give them eight months.

SEC Headlines: Regulator Settles Private Equity Fund Fraud Case for $6.8M, Accuses R.T. Jones of Not implementing Cybersecurity Measures, and Files A Securities Case Over Stock Manipulation

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

Men Accused of $6.8M Private Equity Fund Fraud Allegedly Bilked Friends and Family
The Securities and Exchange Commission has settled charges with two men and their unregistered investment advisory firm for allegedly bilking investors in a private equity fund. Under the agreement, William B. Fretz, John P. Freeman, and their Covenant Capital Management Partners, L.P. will owe the regulator about $6.8 million. Any money collected will go to investors that were defrauded.

According to the SEC order instituting administrative proceedings over the alleged private equity fund fraud, the two men, their firm, and Covenant Partners, L.P., which is the fund they managed, sold partnership interests in the fund to friends and family. However, instead of investing the money, they used the cash for themselves and their other business.

Fritz and Freeman are accused of taking more than $1 million and placing it with their brokerage firm, Keystone Equities Group L.P., which was failing. They also purportedly paid close to $600,000 in performance fees they didn’t make and used assets from the fund to pay back personal obligations.

Freeman, Fretz, and CCMP consented to settle charges accusing them of willfully violating federal securities laws and SEC anti-fraud laws. However, they are not denying or admitting to the SEC fraud charges.

Investment Adviser R.T. Jones Capital Settles SEC Charges Related to Cybersecurity
R.T. Jones Capital Equities Management has settled SEC charges accusing it of not putting into placed required cyber security procedures and policies prior to a breach that compromised the personal identifiable (PII) information of thousands of its clients. Without denying or admitting to the findings, the investment adviser agreed to pay a $75,000 penalty and consented to cease and desist from future violations of the Securities Act of 1933’s Rule 30(a) of Regulation S-P.

According to an SEC probe, R.T. Jones violated federal securities laws’ “safeguard rule.” The rule mandates that registered investment advisers put into place written procedures and policies that are designed in a manner reasonable enough that they protect customers’ information and records from security threats. The regulator said that for four years R.T. Jones did not adopt any such policies.
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SEC Charges First Eagle Investment Management With Improper Use of Shareholder Assets

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

The Securities and Exchange Commission is charging First Eagle Investment Management and its distribution arm FEF Distributors with improperly using the assets of mutual fund shareholders to pay two broker-dealers to market and distribute its funds. To settle the charges, both entities will pay $40 million, which will go toward repaying shareholders that were impacted. The SEC said the violations took place from 1/08 to 3/14.

While it is typical for mutual fund managers to pay money to brokerage firms and other financial intermediaries to get funds placement on platforms and distribution through financial advisers, the payments are only allowed to come from the assets of an actual fund if they are part of a 12-1b plan that involves apprising shareholders and fund boards of such payments. Also, while funds are allowed to pay broker-dealers for services rendered, again they can only come out of a fund’s assets for said services and not for access to a brokerage firm’s clients.

The SEC has been looking into whether funds are being illegally paid to broker-dealers under the pretense that their money was going toward other services. The regulator’s efforts are related to its Distribution-in-Guise Initiative, which involves investigating whether certain mutual fund advisers are using fund assets improperly by disguising distribution payments as sub-transfer agency payments. The Commission contends that First Eagle and FEF distributors illegally caused the asset managers to pay close to $25 million for services that were related to distribution as opposed to using its own assets to pay firms for this access.

SEC Denied Request that Temporary Ban on In-House Judges Be Lifted

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

District Court Judge Richard Berman in New York has rejected the Securities and Exchange Commission’s request that a preliminary injunction on its use of administrative law judges in its proceedings be lifted. Berman said that the regulator has not shown “likely success” in its claim that the ALJ process is constitutional.

The judge also turned down the SEC’s contention that its administrative case against ex-Standard & Poor’s Rating Services (S & P) managing director Barbara Duka should proceed. Duka is challenging that securities case, arguing that SEC proceedings with administrative judges violate the Constitution because of how the justices are named and supervised.

Berman wants the SEC to fully probe charges of bias related to in-house judges. Critics have expressed concern that the in-house court presided over by Commission judges places the regulator at an unfair disadvantage over defendants. The SEC disagrees with these concerns, claiming that not only are judges impartial but also its court system is more efficient than that of the federal courts.

SEC Files Fraud Charges in $18M Arizona Securities Scam that Bilked 225 Investors

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

The Securities and Exchange Commission is charging James Hinkelday, Jason Mogler, Brian Buckley, Casimer Polanchek, and James Stevens with bilking millions of dollars from investors. The regulators claims that the Arizona residents misappropriated about 97% of $18 million from 225 investors who thought their money was being used to acquire and develop beachfront property in Mexico, run recycling facilities, and buy foreclosed residential properties to resell. The men are accused of making Ponzi-like payments to investors who threatened to sue them.

In its complaint, the SEC says that the men-none of whom were registered with the agency to sell investments-solicited prospective investors via magazine, radio, and Internet ads, along with cold calls, marketing materials, and investor presentations. Polanchek purportedly looked for investors at cruises, bars, and self-help seminars. The men also were involved in The Investment Roadshow, which is an Arizona radio program that instructed listeners on how to use self-direct IRAs to put money in their companies. Prospective investors were guided to a website where they could schedule appointments and join seminars to find out more about the investment opportunities.
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SEC Moves to Stop Financial Fraud That Bilked Over 100 Investors Of Over $14 Million

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

The Securities and Exchange Commission has filed fraud charges and obtained an asset freeze against three individuals accused of stealing investor money. According to the regulator, David Kayatta, Paul Ricky Mata, and Mario Pincheira raised over $14M from over 100 investors for two unregistered funds. The money was supposed to be placed in real estate.

The SEC’s complaint noted that on a website run by Mata, the alleged fraudsters advertised an “Indestructible Wealth Bootcamp” and promised said wealth when, in truth, both funds never made a profit. Online videos on the website and YouTube marketed this investment seminar and another one titled “Finances God’s Way.” Retirees were encouraged to sell their securities holdings and get involved in the unregistered funds.

The complaint states that Mata is an ex-licensed securities professional with a lengthy disciplinary record that he hid from investors. He and Kaytata allegedly promised guaranteed returns for one fund even though a state regulator had sanctioned them for making such promises. The two men are accused of diluting the investments in the other fund by bringing in new investors while making false assurances to current investors that the two funds were doing well. Pincheira, Kayata, and Matta purportedly charged dinners, entertainment, travel, and other expenses on Pincheira’s credit card and paid off the balances with investor money. Monthly balances on the card were often above $40,000.

Unfortunately, new technologies are making it easier for fraudsters to reach more investors. Well-edited videos and legitimate looking ads can make scammers appear as if they are experienced and qualified to offer financial advice when they are not. At Shepherd Smith Edwards and Kantas, LTD LLP, our securities fraud lawyers are here to help investors who have sustained losses because of financial scams.
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SEC Orders Investment Advisory Firm to pay $21M For Allegedly Retaining Clients’ CDO Fees

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

Taberna Capital Management has consented to pay $21 million to resolve Securities and Exchange Commission charges alleging that it fraudulently kept fees that belonged to collateralized debt obligation clients. According to the regulator, the investment advisor retained “exchange fees” related to restructuring transactions, which was not allowed under the CDOs governing documents. The retention of the fees was purportedly not disclosed to investors.

The SEC maintains that these fees belonged to the CDOs and became a conflict interest that was not revealed. According to the agency’s order instituting administrative proceedings, for three years, from ’09 to ’12, the Pennsylvania-based investment advisory firm sought and kept millions of dollars in exchange fees paid by issuers of the securities that the CDOs held when Taberna recommended exchange transactions to clients. The SEC said that those fees actually belonged to the CDOs and that the firm made its misconduct difficult to identify by improperly labeling the fees as third party costs in documents even though these costs were only a small portion of the total exchange fees.

Also, said the SEC, Taberna did not mention these fees in quarterly reports to investors nor did it identify them in Forms ADV even though they should have been noted. The regulator said the retention of the fees set up a conflict of interest between the firm and investors and CDO clients, even at times giving Taberna incentive to steer issuers toward a particular exchange regardless of what restructuring might benefit it the most.

SEC Gets Asset Freeze in Alleged $125M Fraud Case Involving Chinese Investors Seeking US Immigration

Published on: August 29, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission said that an asset freeze has been imposed on Lobsang Dargey, who is accused of bilking Chinese investors looking to obtain residency in the United States through the EB-5 Immigrant Investor Pilot Program. The regulator contends that Dargey and his Path America companies raised $125 million for two real estate projects in Washington State while diverting $14 million for other real estate projects and using $3 million for personal spending.

With the EB-5 program, foreign citizens can qualify for residency in the country as long as they invest at least $500,000 in a specific project that preserves or creates at least 10 jobs in the U.S. Dargey and his companies purportedly got 250 Chinese investors to invest money under the program.

The SEC said that Darby told U.S. Citizenship and Immigration Services and the Chinese investors that the funds would go toward a downtown Seattle skyscraper and a residential/commercial development with a farmer’s market in Everett. The regulator also claims that Darby misled investors about their chances of getting permanent residency for their investments. For instance, an investor’s application for residency can be denied if his/her funds are used for a project that materially deviates from the plan that was approved by the USCIS.
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