SEC Enforcement

SEC Appeals Its In-House Agency Judge’s Decision to Throw Out Charges Against Financial Advisers Paid by Fidelity to Push Specific Mutual Funds

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

Securities and Exchange Commission employees are appealing a ruling by an administrative law judge dismissing charges against two financial advisers accused of not notifying clients that Fidelity Investments (FNF) had paid them to sell specific mutual funds. In the Texas securities case, SEC Administrative Law Judge James E. Grimes rejected claims that The Robare Group and two of its owners violated the law by failing to adequately disclose that they had a financial relationship with the brokerage firm. Grimes said that from listening to Mark L. Robare and his son-in-law Jack L. Jones Jr. testify, he was hard pressed to imagine them attempting to bilk anyone. This is one of the few cases presided over by one of its judges that the SEC has lost.

Fidelity is The Robare Group’s custodian. For the last 11 years, the registered investment advisor has been part of a program in which Fidelity pays it a portion of the revenue earned from the sale of certain third-party mutual funds. The payment goes to the adviser who made the mutual fund sale happen.

Advisors are given access to the funds without any transaction fees. As the custodian, Fidelity refers to payments made to advisers not as commission but as compensation for shareholder administrative fees.

In their appeal, the SEC staffers said that they feared Grimes’ ruling in this case establishes a troubling precedent that shifts the burden of full disclosure of a conflict interest from an investment adviser to a compliance consultant. They said this could allow an investment adviser to be excused from certain securities violations as long as he has a compliance consultant that has not “affirmatively” objected to a “particular disclosure.”
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Hedge Fund Advisory Firm to Pay the SEC $5M to Settle Fund Valuation Scam Allegations

Published on: July 1, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging AlphaBridge Capital Management and its two owners with fraudulently inflating the prices of securities in hedge fund portfolios that the firm managed. The feeder funds involved are the private funds AlphaBridge Fixed Income Partners, LP and the AlphaBridge Fixed Income Fund, Ltd.

The securities in question are inverse, interest-only floaters and interest only floaters. Both are tranches of collateralized mortgage obligations. To settle the charges, the Connecticut-based investment advisory firm and its owners, Michael J. Carino and Thomas T. Kutzen, will pay $5M.

According to the regulator, AlphaBridge told investors that broker-dealers provided it with independent price quotes for residential mortgaged-backed securities that were thinly traded and unlisted even though the firm derived these valuations internally. The hedge fund advisory firm purportedly told brokers to say that the valuations came from their brokerage firms.

KKR & Co. Will Pay Nearly $30M to Settle SEC Charges of Misallocating Broken Deal Expenses

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

The U.S. Securities and Exchange Commission announced that Kohlberg Kravis Roberts & Co. (KKR) would pay close to $30 million, including a $10 million penalty, to settle charges that it misallocated over $17 million in “broken deal” expenses to its flagship private equity funds. According to the regulator, over a six-year period ending in 2011, KKR incurred $338 million in diligence expenses, also known as broken deal costs, related to buyout opportunities that were unsuccessful, as well as other similar expenses.

This is the first time the SEC has charged a private equity adviser over the misallocation of broken deal costs. During the period in question, KKR was overseeing two money pools—the private equity funds and its co-investment vehicles. As the private equity funds invested $30.2 billion, KKR co-investors put in $4.6 billion alongside the funds. Yet even though the firm raised billions of dollars of deal capital from co-investors, it was the flagship funds funds that ended up bearing all the costs of these broken deals.

The SEC said that as a result of the firm’s allocation practices, firm insiders and certain major clients who had invested via the co-investment vehicles benefited as none of the broken deal costs were allocated them for years even as they also availed of deal sourcing activities. The regulator said that not notifying investors of its allocation practices was a breach of fiduciary duty by KKR.

Goldman Sachs to Pay $7M Over Market Access Rule Violation Allegations

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

Goldman Sachs (GS) has agreed to pay a $7 million penalty to settle SEC charges accusing the firm of violating the market access rule on August 20, 2013. According to the SEC, on that day, in under an hour, the firm mistakenly executed thousands of options contracts executions resulting in incorrect orders.

The regulator said that Goldman did not have the adequate safeguards in place that could have prevent it from accidentally sending about 16,000 options orders that were wrongly priced to different options exchanges. According to the SEC, the mistaken transactions occurred after Goldman put into place new electronic trading functionality that was supposed to match client orders with internal options orders.

Because of a configuration error in the software, contingent orders were turned into live orders. All of the orders were given a $1 price.

The orders were sent to options exchanges during pre-market trading. Minutes after regular market trading opened, about 1.5 million options contracts were executed. Because of the rules regarding erroneous options trades, many of the executed trades received price adjustments or were cancelled. The losses might have otherwise cost the firm $500 million.

SEC Charges Unregistered Brokers for Handling Over $79M of Investments in Immigrant Investor Program

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

The SEC is charging Ireeco LLC and Ireeco Limited with serving as unregistered brokers for over 150 foreign investors. The two firms are accused of illegally brokering over $79M of investments by those who wanted to become U.S. residents under the EB-5 Immigrant Investor Program.

The program offers a way for foreigners to invest money in a U.S. enterprise or a designated, private regional center in exchange for legal residency in this country. The SEC contends that the two brokerage firms went online to solicit foreign investors, promising to help them select a regional center. Instead, the firms allegedly directed most of them to the centers that paid commissions of approximately $35,000/investor once the U.S. Citizenship and Immigration Services (USCIS) approved a green card petition. The SEC said that participants invested $79 million in the regional centers.

The SEC said that Ireeco LLC and Ireeco Ltd. raised money for immigrant investment projects without being registered to legally operate as securities brokers. The two firms agreed to settle without denying or admitting to the findings.
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SEC Accuses Chicago Underwriters of Municipal Bond Offerings Fraud

Published on: June 20, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has filed enforcement actions against 36 municipal underwriting firms, most of them located in the Chicago area, for alleged violations involving municipal bond offerings. These are the first cases against underwriters brought under the Municipalities Continuing Disclosure Cooperation Initiative. Goldman Sachs & Co. (GS), Robert W. Baird & Co., J.P. Morgan Securities (JPM), Raymond James & Associates, Inc. (RJF), Morgan Stanley & Co. (MS), Citigroup Global Markets Inc. (C), Stifel, Nicolaus & Company, Inc. (SF), Piper Jaffray & Co. (PJC), Merrill Lynch, Pierce, Fenner & Smith Inc., and RBC Capital Markets, LLC were the firms ordered to pay the largest financial penalty of $500,000, respectively.

The program offers favorable settlement terms to municipal bond issuers and underwriters that voluntarily self-report violations to securities laws, including those involving omissions and material misstatements in muni bond offering documents. In these actions, the SEC contends that between ’10 and ’14, the firms violated federal securities law when they sold muni bonds.

These acts purportedly included using offering documents that omitted or included materially false statements regarding the bond issuers’ compliance with continuing disclosure duties. The firms also are accused of not doing a good enough job of detecting omissions and misstatements before making bond sales to customers.

Continuing disclosure allows muni bond investors to have access to annual financial reports and other data on a continual basis. The SEC said that the issuers’ failure to comply with the duties related to continuing disclosure posed a challenge to investors wanting that information.
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Boston Investment Adviser Accused of Losing Over $12M of Investor Funds is Charged with Securities Fraud

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

According to the Securities and Exchange Commission, Interinvest Corp., a Massachusetts investment adviser, bilked investors of over $12 million, perhaps up to $17 million, when its founder invested their money in Canadian penny stock companies in which he had undisclosed interests. Hans Peter Black, who is a resident of Canada, calls the charges against him “outrageous.”

The SEC claims that Interinvest and Black funneled over $17 million of client funds to four penny stock companies on whose boards he sits. Another entity that he controls received about $1.7 million in Canadian dollars. Black’s relationships to all of these entities were purportedly never disclosed to clients or stated in the firm’s Form ADV. This is the form that investment advisers use to register with the SEC and state securities regulators.

In February, the regulator sent a subpoena to Interinvest requesting documentation of its bank accounts, compliance policies, and trades. The SEC said that Black did not comply with its request. Black also is accused of misrepresenting the nature of the penny stock company’s investments, disregarding client instructions, and purposely deviating from the conservative investment strategy his firm promoted.

SEC File Action Against Company Accused of Offering Security-Based Swaps to Retail Investors

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

The Securities and Exchange Commission said it has brought an enforcement action against Sand Hill Exchange for illegally offering complex derivative products to retail investors. The regulator said that the company, based in in Silicon Valley, was offering and selling security-based swaps contracts to investors who did not qualify as “eligible contract participants” (ECPs) according to the law.

Sand Hill Exchange was started as an online business not unlike a fantasy sports league. It dealt with the valuation of private start up companies in the area. However, its founders Elaine Ou and Gerrit Hall ended up revising the company business model numerous times, with Sand Hill eventually inviting people to use real funds to purchase and sell contracts referencing companies that have not yet had their initial public offering.

To fund accounts, Sand Hill solicited investors to use dollars or bitcoins. Users, however, were not asked about their financial holdings nor were offerings restricted to those who held a certain number of assets. Instead, anyone could qualify.

It was the Dodd-Frank Act that put into place two integral requirements for security-based swaps offered or sold to retail investors who fail to meet the eligible contract participant standards. First, there has to be a registration statement for the offering, and second, the contracts must be sold on a national securities exchange. The requirements give the retail investors full access to key information about the offering while limiting such transactions to platforms that are only subject to the highest regulatory scrutiny.
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SEC Charges Investment Advisory Firm’s Former President With Stealing Client Monies, Including $300,000 from Mike Tyson

Published on: June 15, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging the former president of SFX Financial Advisory Management Enterprises with stealing client funds. The regulator’s Enforcement Division contends that Brian J. Ourand abused his discretionary authority over several clients’ accounts. He allegedly stole about $670,000 over five years by writing himself checks and putting through wire transfers.

The investment advisory firm is owned by Live Nation Entertainment and provides financial management and advisory services to high net worth individuals. SFX has a specialized focus in working with former and current professional athletes. Ex-boxing champion Mike Tyson was an SFX client at one time.

He and his wife sued SFX, Live Nation, and Ourand in 2013 on the grounds of unjust enrichment, fraud, and breach of fiduciary duty. The Tysons accused them of misappropriating over $300,000 and costing him millions more in possible future earnings. They sought over $5 million.

In its order instituting administrative and cease-and-desist proceedings, the SEC said that Ourand served as relationship manager to a number of clients. He was in charge of bank accounts and paid their bills. He also purportedly had unauthorized access to their credit card accounts. Ourand provided investment advice and had discretionary authority to trade in client brokerage accounts.

Canadian Trader Must Pay Over $1M For Short Selling Violations

Published on: June 10, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Andrew L. Evans, a trader living in Canada, has consented to pay over $1 million to resolve charges that he shorted U.S. stocks in companies planning follow-on offerings and then illegally purchased shares in the offerings to generate substantial profits at little to no risk. The Securities and Exchange Commission said that through his firm Maritime Asset Management, Evans violated Rule 105, federal securities laws’ anti-manipulation provision, multiple times.

Under Rule 105, short selling in an equity security is not allowed during the restricted period, which is typically five days leading up to a public offering, nor is buying the security via the offering. By buying the shares at a lower price in the follow-on offerings that could cover his sort sales, Evans allegedly made over $580K in illegal profits.

The SEC said that the short selling violations happened between 12/10 and 5/12. Under the settlement, Evans must pay over $582K in disgorgement, more than $63K in prejudgment interest and a penalty of more than $364K. A court must still approve the settlement.