SEC Enforcement

Imperial Petroleum Charged by SEC with Defrauding Investors

Published on: September 18, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging Imperial Petroleum and a number of its executives and suppliers with involvement in an alleged renewable fuel production scheme. The complaint names the Indiana-based company, its CEO Jeffrey Wilson, three ex-owners of E-Biofuels, and New Jersey-located companies Cima Green LLC, Caravan Trading LLC, and CIMA Energy Group, as well as their operators.

The SEC is accusing them of presenting themselves to investors as a legitimate biodiesel production business while concealing the illegal activity that was going on, which was the source of 99% of the revenue. Imperial Petroleum bought E-Biofuels as a subsidiary in 2010, and the Commission said that the latter’s owners falsely presented that they were making renewable fuel from raw agricultural products. This let E-Biofuels receive government incentives based on such representations when, actually, contends the regulator, E-Biofuels had middlemen purchase finished biodiesel while making these buys appear on bogus invoices as raw feedstock for producing biodiesel. Imperial Petroleum’s subsidiary later would sell the biodiesel that was bought for up to double what it paid.

The regulator believes that Wilson discovered that E-Biofuels wasn’t making biodiesel from raw matter, he let the fraud continue and Imperial’s yearly revenue rose from $1 million to over $100 million. Meantime, its stock price flew upward as investors were falsely told that E-Biofuels was engaged in environmentally friendly biodiesel production.

SEC Votes to Amend Broker-Dealer Financial Responsibility Rules

Published on: September 2, 2013 | by Shepherd Smith Edwards & Kantas, LLP

By unanimous decision, the Securities and Exchange Commission has agreed to amendments to the Securities Exchange Act or 1934’s rules regarding customer protection, net capital, notification, and record books for broker-dealers. The regulator is seeking to enhance protections for investors and prevent business practices that are not sound.

Under The Act, broker-dealers have to satisfy certain financial requirements so that customers are protected in the event of the firm’s financial failure. The Act offers safeguards so that customer funds and securities being held by a broker are protected.

The Customer Protections Rule

Securities Headlines: UBS to Pay $4.5M Over Unregistered Assistants, $6M Ponzi Scam Allegedly Funded Reality Show, & Cherry Picking Allegations Lead to SEC Charges

Published on: August 30, 2013 | by Shepherd Smith Edwards & Kantas, LLP

UBS Settles Unregistered Assistant Allegations for $4.5M

UBS AG (UBS) has agreed to pay $4.5 million to settle state regulator allegations that its assistants may not have been licensed in the states where they conducted business. The New Jersey Bureau of Securities, which led the securities case, contends that for about six years, the financial had “client service associations” that lacked the necessary state registrations take orders.

An unknown amount of unsolicited trades were reportedly involved in these transactions between 2004 through 2010 when UBS had about 2,277 sales assistants on staff. The fine will be divided between the 50 States, DC, Virgin Islands, and Puerto Rico. By settling, the Zurich-based bank is not denying or admitting to the allegations. However, in late 2010 it modified its order-entry system so that employee state-registration statuses could be validated.

SEC and DOJ Sue Bank of America Over Alleged $850M RMBS Fraud

Published on: August 17, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Bank of America (BAC) and two subsidiaries are now facing SEC charges for allegedly bilking investors in an residential mortgage-backed securities offering that led to close to $70M in losses and about $50 million in anticipated losses in the future. The US Department of Justice also has filed its securities lawsuit over the same allegations.

In its securities lawsuit, submitted in U.S. District Court for the Western District of North Carolina, the Securities and Exchange Commission contends that the bank, Bank of America Mortgage Securities (BOAMS) and Banc of America Securities LLC, which is now known as Merrill Lynch, Pierce, Fenner & Smith, conducted the RMBS offering, referred to as the the BOAMS 2008-A and valued at $855 million, in 2008. The securities was sold and offered as “prime securitization suitable for the majority of conservative RMBS investors.

However, according to the regulator, Bank of America misled investors about the risks and the mortgages’ underwriting quality while misrepresenting that the mortgage loans backing the RMBS were underwritten in a manner that conformed with the bank’s guidelines. In truth, claims the SEC, the loans included income statements that were not supported, appraisals that were not eligible, owner occupancy-related misrepresentations, and evidence that mortgage fraud was involved. Also, says the regulator, the ratio for original-combined-loan-to-value and debt-to-income was not calculated properly on a regular basis and, even though materially inaccurate, it was provided to the public.

Two Investors’ Securities Fraud Lawsuit Against SEC Over Stanford Ponzi Scam is Dismissed

Published on: August 16, 2013 | by Shepherd Smith Edwards & Kantas, LLP

A federal judge has dismissed the securities fraud lawsuit filed by two investors against the Securities and Exchange Commission for failing to report that Allen Stanford was running a $7.2 billion Ponzi scam. According to U.S. District Judge Robert Scola, a Federal Tort Claims Act exemption that does not allow claims from deceit or misrepresentation shields the SEC from such a claim.

The plaintiffs are George Glantz and Carlos Zelaya. They contend that they collectively lost $1.6 million because of Stanford and they wanted class action securities status for investors that the latter bilked.

They argued that following four exams between 1997 and 2004 the regulator considered Stanford’s business a fraud yet did not notify the Securities Investor Protection Corp., which provides compensation to those victimized by brokerages that fail. The SEC did not sue Stanford until 2009. While Scola previously had allowed this securities fraud case against the Commission to move forward, finding that the regulator breached its duty to report Stanford’s wrongdoing, now, he says that the FTCA exemption does not give him jurisdiction over this.

SEC Stops Former Marine’s Hedge Fund Fraud That Targeted Military Folk

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

The Securities and Exchange Commission has secured an emergency order to stop a hedge fund scam run by ex-marine Clayton A. Cohn and his Market Action Advisors, a hedge fund management firm that is registered in Illinois. The regulator contends that Cohn pretended to be a be a successful trader and purposely targeted current military, other veterans, friends, relatives, and other unsophisticated investors, defrauding them of nearly $1.8 million.

Per the SEC, Cohn lied about his trader track record, the hedge fund’s performance, his intended use of investors’ proceeds, and his own stake in the fund. He invested less than 50% of investors’ funds, while using over $400,000 for personal spending, including a luxury vehicle, a mansion in Hollywood, and expensive visits to fancy nightclubs. To conceal his fraud and keep collecting investor money, Cohn allegedly created bogus hedge fund accounts statements reporting yearly returns greater than 200%.

The Commission filed its Illinois hedge fund fraud lawsuit in federal court in Chicago. The regulator says that Cohn ran Market Action Capital Management, which is a hedge fund, via Market Action Advisors. The regulator is charging him and his firm with federal securities law antifraud provision violations. The SEC wants permanent injunctions, financial penalties, and disgorgement of ill-gotten gains.

SEC Adopts Rules to Protect Investors that Have Brokerage Firm-Held Assets

Published on: August 7, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In a 3-2 vote, the SEC adopted rules to provide substantially more protections to investors who have assets held by registered broker-dealers. SEC Chairman Mary Jo White issued a statement saying she was confident the rules would give customers’ assets key “additional safeguards,” including the strengthening of audit requirements and enhanced oversight.

Under the new rules, broker-dealers would have to file reports with the Commission that are supposed to lead to greater compliance with financial responsibility rules. Brokerages have to start filing new quarterly reports with the regulator and yearly reports with the Securities Investor Protection Corporation by year’s end. Effective June 1, 2014, they will have to file yearly reports with the SEC.

These latest rules amend the Securities and Exchange Act of 1934’s Rule 17a-11 and Rule 17a-5. Per the rule amendments, a broker-dealer with custody of customers’ assets will have to file a compliance report with the Commission and work with an independent public accountant that is PCAOB-registered to put together a report based on a study of statements in the compliance report. Brokerage firms without custody of these assets need to submit an exemption report with the regulator noting its exemption from the requirements. Also, whether/not a broker-dealer has custody of clients’ assets, a firm has to let SRO or SEC staff look at the independent public accountant’s work papers if this information is needed to examine the brokerage firm and the accountant is allowed to talk about its findings with examiners.

Securities Case Over Insuring The $160M in Disgorgement Paid to the SEC Goes Back to Trial Court

Published on: July 6, 2013 | by Shepherd Smith Edwards & Kantas, LLP

New York’s highest court has revived a declaratory judgment action against D & Liability insurers after finding that the Securities and Exchange Commission order mandating that Bear Stearns (BSC) pay $160M in disgorgement failed to establish in a conclusive manner that payment could not be insured. The securities lawsuit is J.P. Morgan Securities, Inc., et al. v. Vigilant Insurance Company, et al.

Claiming that Bear Stearns engaged in market timing mutual fund trades and illegal late trading and for certain clients over a four-year period, the SEC wanted $720M in sanctions from the firm. The financial firm, however, argued that the activities only caused it to make $16.9M in revenues. A settlement was reached ordering Bear Stearns to pay $160M in disgorgement and $90M in penalties, with the firm not having to deny or admit to the Commission’s claims.

A declaratory action followed with a plaintiff in the New York Supreme Court seeking to have D & O insurers pay for $150M of the $160M disgorgement. Citing New York law, the insurers argued that the case should be dismissed, noting that under state law disgorgement is not insurable. A lower court turned down these contentions, denying the motion.

SEC Focuses More Attention On Accounting Fraud, Variable Annuities, & Market-Maker Risk

Published on: June 26, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Commission Chairman Mary Jo White says that the agency will direct more resources toward going after financial fraud and accounting fraud. She was, however, clear to point out that this did not mean that a new accounting and financial fraud unit would be created, despite calls for one by some industry members. White spoke at the CFO Network 2013, where she also announced that the Commission was modifying its “neither admit, nor deny” settlement practice. This is an announcement that our stockbroker fraud law firm addresses in a different blog post.

The Commission is currently assessing its Enforcement Division’s specialized units, and this review is expected to result in certain size refinements and mandates, as well as the establishment of maybe one or more new units. Enforcement Division co-director George Canellos, however, said that the same reason why such a unit wasn’t set up three years ago when five specialized units (focusing on market abuse, asset management, the Foreign Corrupt Practices Act, public pensions, and municipal securities) were established still holds.

The SEC said then that nearly every regional office has attorneys and experienced accountants they believed are able to handle such cases. That said, the Commission will give over more resources to surveillance and become even more proactive about identifying where there are risks in accounting issues. This will include the Division of Economic and Risk Analysis’s development of an “Accounting Quality Model” that would let the SEC identify financial statement outliers. There also will be more partnering between the Enforcement Division’s Office of the Chief Accountant and the Division of Corporation Finance to come up with more accounting leads.

SEC Tells Financial Firms That Settling Without Denying or Admitting to Wrongdoing is No Longer Allowed in Certain Securities Cases

Published on: June 26, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Commission Chairman Mary Jo White recently announced that defendants in certain securities cases would no longer be allowed to accompany an agreement to settle with the statement that they are doing so but without admitting or denying wrongdoing. Speaking to a columnist with The New York Times, White said that in certain instances, admissions are necessary for there to be public accountability. However, White also did say that most SEC cases still would be settled under the “nether admit nor deny standard,” which provides the accused incentive to settle while compensation to victims sooner.

The new policy was announced to SEC enforcement staff last week in a memo from George Canellos and Andrew Ceresney, the regulator’s enforcement division co-leaders. They went on to say that in cases that warrant such an admission, if the accused were to refuse then a securities lawsuit might be the next step.

Securities cases that require admissions of wrongdoing will have to satisfy certain criteria, such as intentional misconduct that was egregious, wrongdoing that hurt a lot of investors or put them at risk of serious financial harm, or unlawful obstruction of the Commission’s investigation.

“This policy change is long overdue,” said SSEK Founder and Stockbroker Fraud Lawyer William Shepherd. “Over the past decade, the SEC has accommodated the targets it has been investigating far too often. Only rarely is there the requirement of admission of wrongdoing, and almost never for large financial firms and their management. When one is caught with a hand in the cookie jar, it’s time to say ‘I did it and I’m sorry, rather than “I neither admit nor deny it was my hand.”

The change policy comes in the wake of complaints that the SEC has been to lax with its enforcement, especially when it came to pursuing securities fraud cases against large financial institutions involved in the economic crisis, such as JPMorgan Chase (JPM), Bank of America (BAC) and Citigroup (C), which all settled cases against them without denying or admitting guilt. Having to admit wrongdoing potentially could hurt financial firms because plaintiffs in private securities cases and class action fraud litigation may then cite the acknowledgement of culpability, thereby strengthening their claims. This could force banks to have to pay out millions of dollars than if they hadn’t admitted to doing anything wrong.

S.E.C. Has a Message for Firms Not Used to Admitting Guilt, Stockbroker Fraud Law Firm, NY Times, June 22, 2013

Securities and Exchange Commission

More Blog Posts:
Controversial Democratic Appointee Pushes SEC for Less Talk About Investor and Securities Market Protections and More Action, Stockbroker Fraud Blog, April 28, 2013