SEC Enforcement

SEC Restructures Trial Unit in an Effort to Decrease Courtroom Losses

Published on: February 13, 2014 | by Shepherd Smith Edwards & Kantas, LLP

In the wake of recent losses in the courtroom, the Securities and Exchange Commission is changing up the way it gets ready for trial. The Wall Street Journal says that SEC Chairwoman Mary Jo White has retooled the agency’s trial unit. One of the reasons for the restructuring is so litigators and investigators can work more closely together.

The SEC’s victory rate has been dropping. The agency won just 55% of trials in the last four months, which a definite decline compared to the last three years when it had been winning over 75% of the time. Since October, however, juries and judges have ruled in favor of 10 out of 25 persons and firms in securities litigation against the SEC, and the government lost 5 of 11 trials. This is a definite downswing from the 12 months prior when just 5 of 34 defendants beat the regulator. Although the cases that the regulator lost were filed before White took over the helm, defense lawyers believe that the Commission’s current losing trend will compel more people to go up against it instead of settling.

The Commission’s trial unit has now been split into four groups so that this more closely mirrors the work of enforcement officials when they probe cases. Senior officials are also conducting practice openings for trials.

SEC Accuses Private Equity Manager of $9M Securities Fraud

Published on: January 30, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The SEC says that Camelot Acquisitions Secondary Opportunities Management and owner Lawrence E. Penn III of stealing $9 million from a private equity fund. Also named in the securities fraud complaint are Altura Ewers and three entities, two of which are Camelot entities owned by Penn.

The regulator says that Penn, a private equity manager, reached out to overseas investors, public pension funds, and high net worth individuals to raise funds for Camelot Acquisitions Secondary Opportunities LP, a private equity fund that invests in companies that want to become public entities. He was able to get about $120 million of capital commitments.

According to the Commission, Penn paid over $9.3 million of the money to Ssecurion, a company owned by Ewer, as fake fees/ The two of them purportedly misled auditors about the fees that were supposedly related to due diligence, even forging documents up to as recently as last year.

SEC in Action: Finds Nomura Holdings Not Ineligible Issuer Even with Judgment, Will Consider Redrafted Shareholder Proposal Regarding Exelon, & Puts Out Regulation M, Rule 105 Violation Sanctions

Published on: January 8, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission’s Division of Corporation Finance has given relief to Nomura Holdings, Inc. over an entry in the final judgment issued against its subsidiary Instinet, LLC last month. The staff said that Nomura made a good cause showing under 1933 Securities Act Rule 405(2), and now the SEC says it won’t consider the company an ineligible issuer even with the entry of that final judgment.

The SEC opened up an administrative proceeding action against Instinet, accusing it of purposely abetting and aiding and violating sections of the Investment Advisers Act. The claims involved purported soft dollar payments.

J.S. Oliver Capital Management, L.P., an Instinet customer, had asked for the payments for expenses it did not tell clients about. The Commission says that Instinet made the payments per JS Oliver’s request, even though there were red flags indicating that the requests for payment approval were improper. The Nomura subsidiary turned in a settlement offer that led to a cease-and-desist order against the brokerage firm, & the regulator accepted the settlement offer.

SEC Stops Texas Securities Scam Involving Oil and Gas Investments

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

The Securities and Exchange Commission has filed securities charges and ordered an asset freeze against Janniece S. Kaelin and Robert A. Helms, who are both accused of running a Texas-based Ponzi scam involving purported investments in oil and gas projects. The regulator contends that Kaelin and Helms misled investors about their industry experience, even as they raised close to $18 million for what was supposed to be royalty interests in oil and gas. The SEC says that the two of them used most of the money to run a Ponzi scam and pay for business costs and personal spending.

Per the Commission’s complaint, Helms and Kaelin started offering investments through Vendetta Royalty Partners in 2011. They brought in at least 80 investors from numerous states.

In offering documents, they promised that over 99% of investment proceeds would be used to obtain a solid portfolio filled with oil and gas royalty interests. Instead, claims the regulator, the Kaelin and Helms put in only 10% of this money in the projects. The result was very small returns.

SEC Goes After Alleged Ponzi Scammers

Published on: November 15, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is pursuing securities fraud charges against Wendy Ko and Yin Nan Wang and certain entities over their alleged involvement in a Ponzi-like scam. The regulator is asking for an asset freeze against Velocity Investment Group, its managed funds, and Rockwell Realty Management, Inc. These entities are controlled by Wang and Ko.

The SEC claims that the two of them offered and sold over $150 million securities as unsecured promissory notes through Velocity and its unregistered investment funds. The offerings promised a substantial investment return rate. That said, to fulfill these interest obligations the funds needed to make returns higher than the market average.

Wang purportedly ordered that an accountant be given financial information that included material overstatements of fund receivables. He also is accused of publishing false financial data on a website.

SEC Members Discuss Agency’s Core Mission, New Penalty Policy, and Private Offerings in the Wake of General Solicitation

Published on: November 12, 2013 | by Shepherd Smith Edwards & Kantas, LLP

SEC Member Presses Regulator to Stick to Its Core Mission When Figuring Out Priorities

Securities and Exchange Commission member Daniel Gallagher wants the regulator to focus more on its mission when determining its regulatory agenda. He said that the SEC’s three mandates must always be considered: maintaining markets that are efficient and fair, making capital reform happen, and protecting investors.

Speaking at a AICPA/SIFMA Financial Management Society Conference, Gallagher said the agency should remove credit rating references from its rules, start reassessing the US market structure, put into place proxy advice reform, set up a new Regulation A Plus exemption, take a closer look at fixed-income regulatory issues, and reassess its disclosure regime. He believes that excessive credit rating dependence was a central cause for the failure of securitized products that led to the 2008 economic crisis. Gallagher says that the SEC should have taken out the credit ratings references years before the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Advice to Advisors: Financial Advisors Taught Ways to Avoid SEC Scrutiny

Published on: November 11, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to the Securities and Exchange Commission Office of Compliance Inspections and Examinations Director Andrew J. Bowden, next year the regulator intends to examine about 4,000 registered investment financial advisors who have never been visited by its inspectors before. Bowden said that the agency will target about 50% of firms that have yet to be examined. Some of these investment advisers have been registered for over three years.

Of the close to 11,000 financial advisors that the SEC oversees, nearly 40% have never undergone inspection by the regulator. Still, some are questioning whether Bowden’s office even has the resources to perform all these inspections.

In InvestmentNews, Ascendant Compliance Management partner Keith Marks lists the compliance issues that these yet to be inspected RIAs should deal with now so that they are ready should the agency come knocking:

SEC May Propose New Swaps Margins & Title VII Rules

Published on: November 11, 2013 | by Shepherd Smith Edwards & Kantas, LLP

At a Securities Industry and Financial Markets Association conference last month, the Securities and Exchange Commission’s Division of Trading and Markets acting director John Ramsay said that the regulator will likely consider reworking a 2012 proposal that would establish margin requirements on specific swap trades now that international financial supervisors have established new margin requirements. It was The International Organization of Securities Commissions and the Basel Committee on Banking Supervision that issued the document setting up a final framework for margin requirements related to non-centrally cleared derivatives.

Ramsey said that in the wake of this document, the proposed rules that the SEC might withdraw are the ones that affect margin requirements as they pertain to certain swaps. The structure set up by the Basel-IOSCO document partially puts into place specific margin requirements on financial firms and the systematically integral non-financial entities that take part in non-centrally cleared derivatives transactions.

The regulator’s earlier proposal would have established margin requirements for security-based swap dealers and major swap participants while upping the minimum net capital requirements for brokerage firms allowed to implement the alternative internal model-based method to compute net capital. Now, however, said Ramsey, the agency could propose a new rule to make sure there is comment on a “full range of initiatives,” including the ones addressed in the Basel-IOSCO document.

SEC Wants Comments About FINRA’s Proposed Rules About Broker-Dealer Supervision

Published on: October 24, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission wants comments on a proposed amendment to the Financial Industry Regulatory Authority’s broker-deal supervision rules. The latter wants to change the rules by consolidating some of them, including NASD Rule 3010 and NASD Rule 3012 into its proposed Rules 3110 and 3120 that have to do with supervisory controls and the supervision of supervisory jurisdictions’ office and branch offices. The proposed rule change would eliminate NYSE Rule 342, which is related to supervision, approval, and controls, Rule 401 about business conduct, and Rule 354 regarding control persons, Rule 351e about reporting requirements. The consolidation is taking place because the SEC says some of the rules are duplicative.

FINRA also wants to eliminate proposed Rule 3110.03, which is a provision about the supervision and control of registered principals at one-person OSJs by a designated senior principal on the site. The SRO also is proposing to amend rule 3110.05 so that an Investment Banking and Securities Business member doesn’t have to perform detailed reviews of transaction if the member is using risk-based review system that is designed in a way so it can focus on areas that have the greatest risks of violation.

Meantime, proposed Rule 3110(b)(6)(D) will be changed so that it is clear that the rule doesn’t establish a strict liability to identify and get rid of all conflicts as they relate to an associated person that is supervised by supervisory personnel. There will have to be procedures to make sure that conflicts of interest don’t compromise the supervisory system.

SEC Officers Guidance on Liability and Compliance for Brokerage Firms

Published on: October 11, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has published answers to frequently asked questions as guidance about liability that may come out of the Exchange Act related to the responsibilities of chief compliance officers and other legal and compliance staff at broker-dealers. The advisory was issued so firms could consider which circumstances and facts may result in grounds for supervisory liability.

In the FAQ, the SEC notes that for purposes of the Exchange Act Sections 15(b)(4) and (6), a person is a supervisor depending on the specifics of a case and whether he/she had the required ability, responsibility, or authority to impact the behavior of the employee(s) whose conduct is in question. There are, however, legal personnel and compliance staff who can assume a key role without assuming such supervision.

The Commission said that brokerage firms are responsible for establishing compliance programs that make sure compliance with regulations and laws occurs. Firms may want to include processes to identify incidents of noncompliance, a robust monitoring system, and procedures delineating who is tasked with what responsibility and/or supervisory role. The regulator says that compliance and legal staff do play a key part in broker-dealers efforts to create and put into effect a compliance system that works.