SEC Enforcement

Regulator Headlines: SEC Commissioner Stein Wants Updated Capital Rules for Brokerage Firms, FINRA’s BrokerCheck Link Proposal Faces Opposition, & CFTC Appoints New Enforcement Head

Published on: June 12, 2014 | by Shepherd Smith Edwards & Kantas, LLP

SEC Commissioner Wants Big Broker-Dealers To Hold More Capital

Securities and Exchange Commissioner Kara M. Stein wants the regulator to modify its capital rules for large brokerage firms so that they would be required to hold more capital in the event of a funding crisis. Stein wants the regulation to better factor the risk involved in short-term funding markets on which brokers depend. She also would like the latter to protect against failures that could upset the financial system.

Right now, the SEC is looking at new funding rules for brokers and placing limits on leverage, not unlike what regulators require for banks. However, Stein believes that the agency’s current approach, which is to protect customers but without considering how to keep companies in operation, needs work. The SEC Commissioner believes that the agency’s capital rules for big brokers should be based on preventing the failure of “systemically significant” firms. Stein also wants the SEC to finally implement the rules that were called for by the 2010 Dodd Frank Ac, including those that would limit the risks involving swap contracts.

SEC Charges Chicago Investment Advisory Founder With Real Estate Investment Fraud

Published on: June 11, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging Attorney Robert C. Acri with Illinois securities fraud related to a real estate venture. Acri is the founder of Kenilworth Asset Management, LLC, a Chicago-based investment advisory firm. He has agreed to settle by disgorging the funds that were misappropriated from investors, as well as commissions, interest, and a penalty. Monetary sanctions total about $115,000.

The SEC brought the real estate investment fraud charges after detecting possible misconduct when it examined the firm. The regulator’s Enforcement Division was alerted and a probe followed.

According to the findings of the investigation, Acri misled investors over promissory notes that were issued to supposedly redevelop an Indiana shopping center, misappropriated $41,250 for other purposes, and failed to tell investors that the firm received a 5% on every note sale. This amount would total $13,750. He also purportedly did not let investors know a number of material facts, including that the reason there even was an investment offer is that he was trying to rescue funds that other clients had invested earlier in the same real estate developer.

SEC Files Order Against New Mexico Investment Adviser Over Allegedly Secret Commissions

Published on: June 10, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has submitted an order against Dennis J. Malouf accusing him of investment adviser fraud. The regulator says that he allegedly took trading commissions that he wasn’t entitled to for himself. He was in charge of UASNM’s bond trading operation between 2008 and May 2011. Malouf, who was the CEO of UASNM Inc. is now with M Wealth Management.

According to the Commission, he set up a secret verbal deal with someone at a broker-dealer branch to send him the commissions generated by the broker for bond trades that this person did with Malouf’s firm. The regulator claims that rather than look for the best way to make the bond trades happen, UASNM worked only with the broker-dealer. Over the approximately three-year period, the investment advisory firm made over 200 bond trades through the unnamed branch. This was about $30 million to $40 million in trades every year, for which Malouf obtained about $1.1M in commissions.

In 2011, UASNM fired Malouf, who was a majority owner,because of misconduct allegations. He then sued for wrongful termination and that is when the firm’s attorneys discovered the purported commission deal.

SEC To Tackle High-Speed Trading, Dark Pools With New Initiatives

Published on: June 6, 2014 | by Shepherd Smith Edwards & Kantas, LLP

U.S. Securities and Exchange Commission Chairman Mary Jo White said that the regulator is working on new rules that would target dark pools, high-speed traders, order-routing practices, and trading venues that don’t offer much transparency. Her proposed regulations mark the first time she has spoken about her plans to overhaul equity market structure rules since becoming head of the SEC last year.

Included in White’s proposals are an “anti-disruptive trading” regulation to curb high-frequency traders from making aggressive short-term trades when the market is vulnerable, as well as a strategy to make proprietary trading shops register with the regulators and share their books for inspection. The SEC chairman also said that her team is working on enhancing the way trading firms handle the risks involved with computer algorithms.

To improve oversight over high-speed traders, White wants to shut a loophole that lets trading firms get out of registering with the Financial Industry Regulatory Authority if they trade off traditional exchanges. Also, while noting that it wasn’t the job of the SEC to forbid algorithmic trading, White said that the Commission is trying to determine if there is anything about a computer-driven trading environment that works against the best interests of investors.

SEC Temporarily Shuts Down Investment Adviser Over Alleged $8.8M NY Securities Fraud

Published on: June 4, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission is temporarily shutting down investment adviser Scott Valente and his ELIV Group LLC. The regulator is charging both with defrauding about 80 investors of $8.8 million. The regulator says that Valente promised huge returns to customers, who are mostly from the Warwick and Albany areas.

However, rather than earning positive returns, he took close to $3 million of investor money and spent the funds on his own expenses, including mortgage payments and jewelry. Meantime, he charged these unsophisticated investors a 1% yearly fee for assets under management.

The SEC said that Valente kept the fraud going by issuing bogus investment statements every month that showed returns and assets under management that had been inflated. In fact, contends the regulator, in its few years of operation the investment firm lost $1.2 million and placed client money in illiquid and speculative privately held-companies. Also, while Valente said he had $17 million in assets under management, that amount was actually just $3.8 million.

SEC Charges Chicago Charter School Operator in $3.75M Bond Offering Fraud

Published on: June 2, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging United Neighborhood Organization of Chicago and UNO Charter School Network Inc. with bilking investors in a $37.5 million bond fraud offering. The SEC contends that the charter school operator made statements that were materially misleading about transactions where there was a conflict of interest.

The bond fraud offering involves school construction. According to the SEC, UNO did not disclose that it had a multi-million-dollar with a windows company that belonged to the brother of one of its senior officers. Investors also were not told that the conflict might impact the repayment of the bonds.

UNO had entered into grant agreements with the Illinois Department of Commerce and Economic Opportunity to construct three schools. Each agreement had provisions mandating that UNO certify that there were no conflicts. Breach of this provision could lead to grant payment suspension and recovery of money paid to UNO already.

SEC Takes Action to Stop Alleged Fraud Involving Transfer Agent

Published on: May 28, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The SEC announced that it is filing fraud charges against IST Shareholder Services, a transfer agent based in Illinois, and its owner Robert G. Pearson. The regulator also obtained an emergency asset freeze in this matter. IST Shareholder Services is registered with the SEC under the name Illinois Stock Transfer Company.

The transfer agent and Pearson are accused of a misappropriation scam that bilked clients of over $1.3 million. The fraud was discovered when the Commission examined the firm. Pearson eventually admitted to the scam during questioning by SEC examiners.

Stock issuers usually use transfer agents to keep track of the entities and individuals that own the bonds and stocks. The agents document changes to securities ownership, keep up the security holder records for issuers, give out dividends and issue/cancel securities certificates. Now, the SEC is claiming that Pearson and his company misused money that belonged to clients and their shareholders to pay for their own business obligations and fund payroll.

SEC Files Charges in Penny Stock Scams

Published on: May 27, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission has filed charges in a number of penny stock scams involving microcap companies, promoters, and officers. As of March 22, the regulator had charged 25 companies and 48 individuals in probes that originated out of its regional office in Miami. The agency has been working with the Federal Bureau of Investigation and the U.S. Attorney’s Office for the Southern District of Florida to expose the financial fraud. Many of those charged by the SEC are also contending with criminal charges.

Two of those facing SEC charges are stock promoters Stephen C. Bauer and Kevin McKnight of Boca Raton. They are accused of market manipulation fraud involving Environmental Infrastructure Holdings Corp.’s (EIHC) penny stock. According to the regulator, they made it seem as if there was market interest EIHC to get investors to buy the stock, which artificially raised trading volume and price.

Also named in an SEC complaint is Richard A. Altmare from Boca Raton for market manipulation involving Sunset Brands Inc. (SSBN) stock. In an unrelated penny stock case, the SEC is charging Jeffrey M. Berkowitz, who is from Jupiter, Florida with participating in a market manipulation scheme, this one over Face Up Entertainment Group (FUEG) stock.

SEC Warns About Investment Scams Involving Marijuana

Published on: May 24, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission has put out a an investor alert warning about possible fraud involving microcap companies claiming they are involved in the marijuana industry. Scammers are using the latest growth in the pot industry to get investors to fork over their money in exchange for supposed high returns.

Already, the SEC has suspended five companies for allegedly committing this fraud, including Fusion Pharm Inc., which claims to make a professional cultivation system for cannabis cultivators to use. The Denver-based company was suspended because, according to the regulator, there are doubts about the accuracy of statements it made about assets, financial statements, revenues, financial condition, and business transactions. Other companies in which trading was suspended include: Cannabusiness Group Inc., GrowLife Inc., Petrotech Oil and Gas, and Advanced Cannabis Solutions Inc. Two of the companies were also suspended because of possibly illegal activity, including market manipulation and unlawful securities sales.

According to federal securities laws, the Commission can suspended trading in a stock for 10 days and prohibit a brokerage firm from soliciting investors to sell or buy the stuck until reporting requirements are fulfilled. Unfortunately, it is not uncommon for fraudsters to exploit the latest product, innovation, growth industry, or technology. Marijuana-related companies are typically not required to report to the SEC, which means investors usually have limited access to the kind of information they can get about management, products, services, and finances. This can make it easier for scammers to spread bogus information about a company, allowing them to profit.

Insider Trading Headlines: Principal of Wynnefield Capital Now On Trial, Ex-Vitamin Company Board Member Settles His Case, and Clinical Drug Trial Doctors Face Charges Related to New Cancer Drug

Published on: May 23, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Wynnefield Capital Inc. Principal On Trial in SEC Insider Trading Case

Nelson Obus, the principal of Wynnefield Capital Inc., is accused of engaging in insider trading to make his hedge fund $1.3 million. The U.S. Securities and Exchange Commission says that he confessed twice that he received a tip that SunSource Inc. was going to be put up for sale. One of the confessions was purportedly to the CEO of SunSource.

In 2001, SunSource announced it was going to be bought by Allied Capital Corp. It’s stock price then doubled. Obus, who had purchased stock in the company, made $1.3 million.