Articles Posted in SEC Enforcement

Ex-Hedge Fund Exec Pleads Guilty to $1M Investment Fraud

In the U.S. District Court for the Southern District of New York, ex-hedge fund principal Berton Hochfeld pleaded guilty to wire fraud and securities charges over his alleged role in an investment scam that bilked investors of over $1M. He had been the organizer of limited liability Hochfield Capital, the general partner of Heppelwhite Fund LLP, which was set up to invest in publicly traded securities.

According to prosecutors, Hochfeld issued false representations to investors about the investments they made while misappropriating their money. He also is accused of taking money from Heppelwhite. Hochfeld will pay restitution and forfeit illegal profits. He will be sentenced this summer.

The U.S. District Court for the District of Columbia has decided to dismiss the last two counts in the Citizens for Responsibility and Ethics in Washington’s Federal Records Act lawsuit against the Securities and Exchange Commission. The public interest group wants to make the SEC reconstruct about 9,000 documents related to certain enforcement probes.

Judge James E. Boasberg said that to the degree that the act’s section 3106 mandates an affirmative duty to act when I comes to destroying records, the Commission has not taken advantage of its discretion in taking internal remedial steps and, as a result, has satisfied any “duty to imposed.”

It was in August 2011 when allegations surfaced that the SEC may have improperly destroyed files related to MUIs—matters under inquiry. Sen. Chuck Grassley (R-Iowa) began questioning the agency after a whistleblower drew the matter to his attention. SEC General Counsel Mark Cahn then proceeded to order the Enforcement Division to cease from destroying documents from closed cases until notice was given to do otherwise. Then, after a probe, then-SEC Inspector General H. David Kotzlater determined that the division did not behave improperly when it got rid of such files. CREW, however, went on to file its Federal Records Act case in the hopes of obtaining a declaratory judgment noting that the destruction of the documents had violated the FRA.

According to Securities and Exchange Commission Office of the Whistleblower Chief Sean McKessy, the unit will take a more aggressive approach to publicizing its activities and figuring out how to better enforce the anti-retaliation provisions of its bounty program. McKessy spoke at the DC Bar organized enforcement conference earlier this month and noted that his views were his own and not necessarily that of the SEC.

McKessy said that despite the Commission’s efforts to offer whistleblower provisions that incentivize internal reporting, some corporations have still not told employees about the bounty program. Per the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC can now offer 10-30% of a monetary penalty greater than $1 million that is collected because of “original information” voluntarily offered up by an informant.

Also, per the statute, the SEC has the authority to enforce its anti-retaliation provisions, which protects whistleblowers that provide this information, or commit certain other lawful acts, from retaliatory actions—particularly from employers. McKessy, however, noted that it is too soon to know whether the agency will incorporate an anti-retaliation action to its whistleblower program.

Commission to Present Money Funds Reform Proposal

According to SEC Commissioner Daniel Gallagher, staff members are putting together a money market mutual fund reform proposal that will address the problems that occurred in 2008. Another area that will likely be looked at more closely in the proposal would be the floating the net asset value of the funds. Gallagher, who made his comments at a US Chamber of Commerce, said this was important because there are “serious” related issues involving tax, accounting, and operations that need to be tackled.

Meantime, the Financial Stability Oversight Council is looking at three draft money fund reform recommendations that it wants the SEC to deal with, including floating NAVs, a stable NAV that has a capital buffer with a cap of 1% of a fund’s value in addition to delayed redemptions, and a stable NAV along with a 3% capital buffer that could be lowered if applied along with other measures.

Lawmakers Question the SEC About Costs Related to Structural Reform

Per the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 967, the Securities and Exchange Commission has been tasked with assessing how to restructure its operations to better its use of internal communications and resources. The restructuring plan is being referred to as the Mission Advancement Program. However, lawmakers are concerned that this effort may be too expensive—especially because of the costs associated with retaining independent consultant Booz Allen Hamilton Inc. to help with the restructuring.

Earlier this month, House Oversight Committee Chairman Darrell Issa (R-Calif.) asked the SEC for information about how much the Commission expects to save through the Booz Allen-recommended reforms, its 2012 fiscal year budget for Office of the Chief Operating Officer, CEO Jeffery Heslop’s yearly compensation, the May 2011 contract between the agency and Booz Allen, and the payments that have been made to the latter.

Massachusetts Investment Adviser Gets $1.78M Judgment

In a final judgment, the U.S. District Court for the District of Massachusetts says that EagleEye Asset Management LLC and its principal Jeffrey A. Liskov must pay a $1.78M judgment for using a foreign currency exchange trading scam to defraud clients. The Securities and Exchange Commission contends that Liskov fraudulently got several of his investment advisory clients to liquidate securities investments and place the money in forex trading. While EagleEye and Liskov made about $300,000 in performance fees, their clients allegedly lost $4M.

Liskov is accused of perpetuating the investment adviser fraud by issuing material misrepresentations about forex investments, their risks, and his track record. Also per the SEC’s complaint, Liskov more than once took old forms that advisory clients had signed and changed the dates, asset transfer amounts, and other information, and, without their knowledge, opened forex trading accounts.

BNA reports that sources say that the Securities and Exchange Commission will likely widen its corporate filing review process to improve how it scrutinizes financial statements that are publicly filed by registered companies, as well as other documents. The program, referred to as “continuous review,” was set up a few years ago to focus on financial institutions that received Troubled Asset Relief Program support from the government. This focus is likely to grow to include large financial service firms.

The SEC started its process of continuous reviews on a number of companies in the Corporation Finance Division’s Assistant Director Office No. 12 (AD 12). Nine banks that had obtained over $120B in taxpayer funds through the Capital Purchase Program, which is a TARP program, were analyzed. Unlike the regular review process, which examines a company’s Form 10K filings every three years, this program looks at all documents and filings on a continuous basis.

Sarbanes-Oxley Act

Investment advisory firm Aletheia Research and Management, Inc. and its owner hedge fund manager Peter J. Eichler, Jr. are facing Securities and Exchange Commission charges over their alleged involvement in a cherry-picking scam. They are accused of directing winning trades to their trading acocunts, giving preferences to some clients at cost to certain investors, and not revealing in a timely fashion that the firm was in a precarious financial state.

Per the SEC charges, Aletheia and Eichler did a disproportionate job of allocating losing trades to accounts in two of the hedge funds that they managed. This led to investors losing money. Meantime, winning trades were allegedly sent to accounts belonging to company employees, Eichler, and preferred clients.

It was Eichler that allegedly used Aletheia’s discretionary authority over Trading Options accounts to make about “4,891 options trades for an aggregate investment of $238.9M” for these accounts between at least the middle of August 2009 through November 2011. Because most of these trades didn’t happen until over one hour after a trade was made or after the closing of the options positions, Eichler could cherry-pick the losers and winners. Favored accounts then got a disproportionate amount of profitable trades that had been allocated while the disfavored clients received a disproportionate amount of the unprofitable trades.

By participating in this alleged securities scam, contends the Commission, Eichler and his investment advisory firm did not fulfill their fiduciary obligations to certain advisory clients. Aletheia also allegedly failed to put in place procedures, policies or an ethics code that could have stopped the cherry-picking scam from happening and breached federal law and its fiduciary duties when it waited until right before filing for bankruptcy to let its clients know that it was in financial trouble.

Even though Aletheia already was allegedly in financial trouble as early as July of this year, when the state of California filed an over $2M tax lien against it for taxes it hadn’t paid and then on October 1 suspended the company’s corporate status for failing to pay (at this point the investment advisory firm was not legally allowed to be in business), it wasn’t until two days before seeking Chapter 11 protection on November 9that clients were notifies about the firm’s financial woes.

The SEC is accusing Aletheia of violating the Securities Exchange Act of 1934, Section 10(b) and Rules 10b-5(a) and (c) thereunder, as well as numerous sections of the Investment Advisers Act of 1940 and numerous rules thereunder. The regulator wants disgorgement of ill-gotten gains, permanent injunctions, penalties, and prejudgment interest.

Under federal securities laws, an investment advisor has to immediately and completely reveal any financial conditions that might reasonably likely hurt its ability to fulfill its contractual obligations to clients. Unfortunately, this is not always what happens.

SEC CHARGES SANTA MONICA-BASED HEDGE FUND MANAGER IN CHERRY-PICKING SCHEME, SEC, December 14, 2012

S.E.C. Says Asset Firm Manipulated Trades to Enrich Some Clients, NY Times, December 16, 2012


More Blog Posts:

District Court in Texas Dismisses Securities Fraud Case Against Sports Franchisor, Stockbroker Fraud Blog, December 15, 2012

SEC Gets Initial Victory in Lawsuit Against SIPC Over Payments Owed to Stanford Ponzi Scam Investors, Institutional Investor Securities Fraud Blog, February 10, 2012
K.W. Brown & Company, K.W. Brown Investments, & 21st Century Advisors Are Held Liable in $4.5 Million Cherry-Picking Scam, Stockbroker Fraud Blog, January 21, 2008 Continue Reading ›

The U.S. Securities and Exchange Commission has filed civil charges against Morgan Keegan founder Allen Morgan Jr. and several other former mutual fund board members for allegedly failing to supervise the managers accused of inaccurately pricing toxic mortgage-backed assets prior to the financial crisis. According to Reuters, this is a rare attempt by the regulator to hold a mutual fund’s board accountable for manager wrongdoing and it is significant. (Fund manager James Kelsoe hasconsented to pay a $500,000 penalty related to this matter and he is barred from the securities industry in perpetuity. Comptroller Joseph Thompson Weller consented to pay a $50,000 penalty.)

Last year, Morgan Keegan and Morgan Asset Management consented to pay $200 million to settle SEC subprime mortgage-backed securities fraud charges accusing them of causing the false valuations of the securities in five funds and failing to use reasonable pricing methods. (This allegedly led to “net asset values” being calculated for the funds.) The inaccurate daily NAVS would then be published and investors would buy shares at inflated prices. The funds’ value eventually declined significantly.

According to the Commission, the eight ex-board members violated laws mandating that fund directors help decide what a security’s fair value is when market quotations don’t exist. Instead of trying to figure out how fair valuation determinations work, the directors allegedly gave this task to a valuation committee but without providing “meaningful substantive guidance.”

Allen Morgan Jr., who is a Morgan Keegan cofounder, was CEO and Chairman until 2003.The seven other board members facing SEC charges include Kenneth Alderman, Mary S. Stone, W. Randall Pittman, Albert C. Johnson, James Stillman R. McFadden, Jack R. Blair, and Archie W. Willis III.

Already, Morgan Keegan is contending with over 1,000 arbitration lawsuits involving its bond funds that had invested in high risk MBS but were marketed as safe. When the subprime market collapsed, the funds lost up to 80% of their value.

Recently, Morgan Keegan and over 10,000 investors in a closed-end fund reached a $62 class million settlement. Lion Fund LP, the lead plaintiff and a Texas hedge fund, claimed that it had made a $2.1 million investment.

Morgan Keegan is owned by Raymond James (RJF), which bought the firm from Regions Financial Corporation. Other securities lawsuits still pending against it also involve conventional and open-ended funds.

Unfortunately, too many people and entities sustained huge losses because the risks of a number of types of securities leading up to the global crisis and the housing bubble’s implosion were downplayed by financial firms and their representatives. At Shepherd Smith Edwards and Kantars, our subprime mortgage-backed securities lawyers represent investors throughout the US. Contact our securities law firm today.

SEC Charges Eight Mutual Fund Directors for Failure to Properly Oversee Asset Valuation, SEC, December 10, 2012

SEC Order
(PDF)

More Blog Posts:
Judge that Dismissed Regulators’ Claims Against Morgan Keegan to Rule on ARS Lawsuit Again After His Ruling Was Reversed on Appeal, Institutional Investor Securities Blog, November 27, 2012

Morgan Keegan & Company Ordered by FINRA to Pay $555,400 in Texas Securities Case Involving Morgan Keegan Proprietary Funds, Stockbroker fraud Blog, September 6, 2011

Morgan Keegan Ordered by FINRA to Pay RMK Fund Investors $881,000, Stockbroker Fraud Blog, April 24, 2011

Continue Reading ›

According to Securities and Exchange Commission Stephen Cohen, when an entity self-reports possible wrongdoing, the “tone” of the SEC investigation into the matter may be impacted in a manner that benefits that party. Cohen, who spoke while participating at a Securities Docket’s Securities Enforcement Forum panel in DC last month (he made it clear that his views are his own), said that this is very important to the SEC when figuring out how much of a penalty to impose.

Cohen noted that although in the past the SEC hasn’t done a stellar job about making public what credits are given to the entities that have self-reported violations, he says the regulator has been doing a better job. For example, in 2010 the Commission announced that it had entered into a non-prosecution deal with Carter’s Inc. (CRI) after the kids’ clothing marketing company did a thorough job of self-reporting the insider trading and financial fraud incidents involving its ex-EVP of Sales Joseph M. Elles. Carter’s also implemented complete remedial action and thoroughly cooperated with the SEC’s probe.

There was also the deferred prosecution of Tenaris S.A. (TN) last year over allegations that the steel pipe products manufacturer bribed Uzbekistan officials during a bidding process over supplying pipeline and made nearly $5 million in profits. Such misconduct is a violation of the Foreign Corrupt Practices Act and Tenaris agreed to pay $5.4 million in disgorgement in addition to prejudgment interest.

Contact Information