SEC Enforcement

SEC Says Broker-Dealers Need to Do a Better Job of Monitoring High Risk Products

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

The Securities and Exchange Commission has put out an alert warning brokerage firms that they need to better monitor the sale of high risk complex investments to retail investors. The regulator said that its analysis of 26,600 transactions of $1.25 billion of structured securities products revealed that there has been quite a number of times when the investments were sold to investors for whom they were not appropriate.

According to InvestmentNews, the Commission examined 10 branch offices of brokerage firms. The assessments took place from January 2011 through the end of 2012. In one firm, they discovered $96 million of structured-product sales that were made to conservative investors. At two other broker-dealers, the SEC discovered high concentrations of structure products in the accounts of older investors. One representative purportedly modified a customer’s investment goals without that person’s consent after a sale went through to make the complex product purchases appear justified.

Brokers are required to abide by suitability standards, which mandate that investment products that are sold meet each client’s risk tolerance and investment goals. The SEC said that in exams that were conducted, there were firms that appeared to have weak suitability controls.

The Commission wants broker-dealers to regard this alert as a wake up call so that they will take a closer look at their compliance programs. The regulator noted that while all the broker-dealers that were scrutinized had written procedures and policies for suitability, the controls were not consistently or properly implemented. In some instances, suitability controls differed among the different branches of a firm.
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Citigroup Global Markets to Pay $15M Penalty to the SEC for Surveillance and Compliance Failures

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

The Securities and Exchange Commission said that Citigroup Global Markets (C) will pay a $15M penalty to settle charges that it did not enforce procedures and policies that would stop and identify securities transactions potentially involving the wrongful use of material, nonpublic information. Citigroup agreed to the SEC’s order without denying or admitting to the regulator’s findings.

The firm also has paid $2.5 million to advisory client accounts that were affected. That amount is how much Citigroup made from the principal transactions that resulted because of the purported compliance and surveillance failures.

According to SEC, which conducted a probe, over a period of ten years, Citigroup failed to review thousands of trades that were made by a number of trading desks. Even though firm personnel looked at reports to assess trades daily, technological errors caused several information sources regarding thousands of key trades to be left out.

As the SEC noted in its order, advanced computer systems are often now involved in automated trading. Technology oversight is key to making sure that compliance is in effect.

Insider Trading Charges Filed Against 32 Defendants in Hacking Scam Involving Newswire Services

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

The Securities and Exchange Commission has filed financial fraud charges against 32 defendants accused of insider trading by using information obtained from newswire services that were hacked. Two Ukrainians and 30 other defendants in the U.S. and abroad are accused of making $100 million in illegal gains.

According to the regulator, for about five years, Oleksandr Ieremenko and Ivan Turchynov, both from Ukraine, hacked in to at least two newswire services and stole hundreds of corporate earnings announcements before they were issued to the public. Bloomberg says the services are Business Wire, Marketwired, and PRNewswire Association LLC.

The suspected hackers are accused of grabbing over 150,000 news releases that allowed them to anticipate movements in the stock market and make trades that would turn a profit. They also purportedly set up a secret web-based location to transmit the stolen information to traders in numerous countries and U.S. states.

The two men are accused of concealing intrusions with proxy servers to hide their identities and pretending to be newswire service employees and customers. Turchynov and Ieremenko are also accused of using a video highlighting the theft of the earnings data prior to public release to recruit traders.

ITG, AlterNet Securities to Pay $20.3M to Settle SEC Charges that it Misused Confidential Dark Pool Data, Ran Secret Trading Desk

Published on: August 13, 2015 | by Shepherd Smith Edwards & Kantas, LLP

ITG Inc. and affiliate AlterNet Securities will pay $20.3M to resolve Securities and Exchange Commission charges accusing them of running a secret trading desk and misusing dark pool subscribers’ confidential trading information. As part of the settlement, ITG admitted to wrongdoing.

According to the regulator, even though it told the public it was an “agency-only” broker with interests that were not in conflict with the interests of customers, the firm ran Project Omega, an undisclosed proprietary trading desk, for over a year. The SEC’s probe found that even though ITG said that it protected dark pool subscribers’ trading information, for eight months, the trading desk accessed feeds of order and execution data and used the information to put into place its strategies for high-frequency algorithmic.

SEC Cases: Pennsylvania Lawyer is Charged with Insider Trading, San Diego Investment Adviser is Accused of Stealing Client Funds, and New York Man is Arrested for Fraud

Published on: August 2, 2015 | by Shepherd Smith Edwards & Kantas, LLP

SEC Accuses Pennsylvania Attorney of Insider Trading
The U.S. Securities and Exchange Commission is charging Herbert K. Sudfeld with insider trading ahead of the announcement that Nationwide Mutual Insurance Company and Harleysville were about to merge in a $760 million deal. The regulator contends that the Pennsylvania attorney illegally traded on the information, which caused Harleysville’s stock price to rise 87% when the announcement went public.

Sudfeld, who was a real estate partner at a law firm that gave Harleysville counsel on the merger, learned about the impending deal from a conversation involving a lawyer and the legal assistant they shared. That attorney was involved in the deal.

Sudfeld is accused of stealing the information and buying Harleysville stock. After the merger was announced, he purportedly sold the share he had bought, making about $79,000 in illegal profits. Prosecutors in Pennsylvania have filed a parallel criminal action against him.

San Diego Investment Adviser Accused of Stealing Client Money, Running Ponzi Scam
Paul Lee Moore and his now defunct investment advisory firm are charged with bilking client funds and operating a Ponzi scheme. According to the complaint filed by the SEC, Moore and Coast Capital Management raised $2.6 million from clients, and he allegedly siphoned almost $2 million for his personal spending.

The regulator said that Moore took the rest of the money and, in Ponzi scam-fashion, paid earlier clients with funds brought in by new clients. He is accused of sending out bogus account statements to clients, as well as sharing these statements with prospective clients. The California investment adviser purportedly lied about his educational background, employment history, as well as about how much Coast Capital managed in assets.
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Ex-Oppenheimer Employees Resolve SEC Charges Over Unregistered Penny Stock Sales

Published on: July 25, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission said that Scott A. Einsler, Arthur W. Lewis, and Robert Okin, three former Oppenheimer & Co. (OPY) employees, have settled charges involving the unregistered sales of billions of shares of penny stocks for a customer. The actions are related to part of an enforcement action that the brokerage firm settled with the regulator, as well as with the U.S. Treasury Department’s Financial Crimes Enforcement Network. Under that agreement, the firm paid $20 million to resolve those claims.

In this latest order instituting administrative proceedings that have been resolved, Eisler, who used to be a registered representative at an Oppenheimer Florida branch, is accused, along with former supervisor and branch manager Lewis, of executing the penny stock shares in illegal unregistered distributions. While securities laws grant exemption liability for brokers who make a reasonable inquiry into the facts involving the proposed sale of a customer, the SEC said that the two men did not make the required inquiry even though there were significant warning signs. Also, according to the regulator, Lewis and Okin, previously the head of the private client division, committed supervisory failures when they did not address the warnings.

To resolve the proceedings against him, Eisler consented to pay $50,000 and he will be barred from the securities industry and penny stock sales for a year. Lewis also will pay a penalty for the same amount and his bar from the industry in a supervisory capacity is also for a year. Okin will pay $125,000 and also serve a yearlong supervisory bar from the industry. All three men agreed to settle without denying or admitting to the SEC’s findings.

SEC Awards Over $3M to Whistleblower

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

In the third highest award that the Securities and Exchange Commission has issued under its whistleblower program, the regulator is giving one individual $3 million for providing information that helped expose a complex fraud. The tip provided by the whistleblower included details and specifics about the scam, which would have been difficult to detect otherwise. Related actions also resulted because of the information this person provided.

Since inception four years ago, the SEC whistleblower program has paid out over $50 million to 18 whistleblower. The biggest award to date was $30 million, issued last year. A $14 million whistleblower award was issued in 2013.

Under the program, whistleblowers that provide the regulator with original information that helps the SEC pursue a successful enforcement action are eligible for 10-30% of the money collected if the sanction exceeds $1 million. The SEC is legally bound to protect the confidentiality and identity of whistleblowers.

Oz Management to Settle SEC Charges Over Inaccurate Data by Paying $4.25M

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

Investment adviser Oz Management, LP has agreed to pay a $4.25M penalty to settle SEC charges that it provided inaccurate trading data to four prime brokers. This led to inaccuracies in the books and records of the brokers, including the inaccurate listing of about 552 million shares. Also, the inaccurate trading information resulted in inaccuracies in the information given to the regulator during investigations.

The SEC’s order said that for almost six years, up through the end of 2013, the firm misidentified certain trades in information given to the brokers. Trade settlement was not impacted. However, in addition to the erroneous listings previously mentioned, the wrong information was also woven into the data that the brokers electronically provided to regulators.

Because of this, about 14.4 million shares were inaccurately reported when addressing SEC requests. It was this inaccurate information that the Financial Industry Regulatory Authority used to make a number of referrals to the agency.

The SEC discovered the purported violations during a 2013 probe when it realized that Oz Management’s files didn’t identify trades the same way as was noted on blue sheets. In certain trades the investment adviser did not characterize the sales as short or long in the same way that they were marked when they were sent to the market. Instead, the trades were filtered according to other factors.

Bipartisan U.S. Senate Bill Wants to Up SEC Fines For Securities Law Violations By Almost Ten Times

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

U.S. Senators Chuck Grassley (R-Iowa) and Jack Reed (D-R.I.) introduced a bipartisan bill this week that would allow the Securities and Exchange Commission to impose much higher civil monetary penalties against individuals and financial firms that violate securities laws. The measure is called the Stronger Enforcement of Civil Penalties Act of 2015.

Senator Grassley said that the current SEC fines are “decimal dust,” which don’t serve as much of a deterrent. He said that a penalty “should mean something.” He and Senator Reed said they want to enhance investor protections. As Mr. Reed pointed out, over half of American households own securities, with many dependent on the market for their retirement and their kids’ college education. He said that investors shouldn’t have to incur substantial losses while violators get away with a “slap on the wrist.”

Under the new bill, the SEC would be able to impose up to $1 million against individuals for every serious offense as long as the penalty isn’t already tied to illegal funds that that the person received. Serious offenses would include deceit, fraud, deliberately ignoring regulations, and manipulation. The current maximum penalty for individuals over such offenses is $160,000.

SEC Stops Ponzi Scam that Targeted Portuguese and Spanish Communities

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

The Securities and Exchange Commission is filing fraud charges against DFRF Enterprises for running a Ponzi scheme and pyramid scam that targeted investors belonging to Portuguese and Spanish-speaking communities. According to the regulator, the company claimed to run over 50 gold mines in Africa and Brazil even though its revenues came solely from selling membership interests to investors.

The alleged scammers raised over $15 million, bilking at least 1,400 investors. The owner of DFRF, Daniel Fernandes Rojo Filho, allegedly took over $6 million of this money to pay for personal expenses, including luxury vehicles and other lavish spending.

The regulator contends that in 2014, Filho and others started selling memberships in DFRF. Investors were recruited through a pyramid-like scam, with commissions paid to earlier investors for recruiting new members, much like a Ponzi scheme.

Many of these sales took place through meetings with prospective investors in hotel conference rooms, businesses, and homes, mostly in Massachusetts. The investment opportunity was also promoted on video through the Internet. In less than a year, membership sales rose from under $100,000 in June 2014 to over $4 million for the month of March 2015.
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