Articles Posted in SEC Enforcement

SharesPost, its CEO, and Fund Manager Settle with the SEC

Published on: March 17, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission says that it has reached a securities settlement in its administrative proceeding against SharesPost. Along with its Chief Executive Officer Greg Brogger, the online platform that serves as a secondary market for pre-IPO shares will pay $100,000 in penalties.

According to the SEC, SharesPost was matching up the sellers of private company stock and buyers even though it wasn’t a registered broker-dealer. Also, the online service allegedly let other broker-dealers’ registered representatives present themselves as SharesPost employees and make commissions on securities transactions, allowed one of its affiliates to manage pooled investment vehicles that were supposed to buy stock in single private firms and interests in funds that Sharespost made available, and published on the website third-party information about issuers’ financial metrics, research reports, and a valuation index that it created.

The SEC noted that although it is open to innovation in capital markets, products and new platforms have to abide by the rules, including making sure that basic disclosure and fairness occur. The Commission said that that broker-dealer registration is key in helping protect customers—especially considering that there are risks involved in the secondary marketplace for pre-IPO stocks for even the most sophisticated investors.

The Commission also settled its securities case against FB Financial Group and its fund manager Laurence Albukerk. The fund manager is accused of providing offering materials that did not let investors know he was making extra fees because he was buying Facebook shares using an entity that his wife controlled. Albukerk and his financial firm have agreed to pay pre-judgment interest plus disgorgement of $210,499 and $100,000 fine. Sharespost, Brogger, Albukerk, and FB Financial Group agreed to settle without denying or admitting to any wrongdoing.

Meantime, in a related securities fraud lawsuit filed in civil court, the SEC accused Frank Mazzola and his financial firms Facie Libre Management Associates, LLC and Felix Investments of making secret commissions and taking part in improper self-dealing. Mazzola and the firms allegedly made a number of false statements to investors about offerings in Zynga, Facebook, and Twitter while not revealing that certain prices were raised as a result of commissions.

Facie Libre also allegedly sold Facebook interests even though it didn’t own some of these shares. Both of the firms and Mazzola are accused of misleading an investor into thinking they had acquired Zynga stock, as well as of making misrepresentations about Twitter revenue. This case is still open. Felix Investments and Mazzola have, however, settled a related but separate action with the Financial Industry Regulatory Authority with the firm consenting to pay a $250,000 fine and Mazzola a $30,000 fine.

In the wake of electronic markets and Wall Street banks all rushing to present investors with an opportunity to trade stakes in popular technology companies prior to them going public, regulators and lawmakers have been more closely scrutinizing private share trading over the last year. That said, alternative online investment platforms, which are called “shadow markets,” can be very risky.

“The real shock is the lack of problems the SEC finds with such trading in pre-public shares,” says Shepherd Smith Edwards and Kantas, LTD LLP Founder and stockbroker fraud lawyer William Shepherd. “The penalties levied are only for firms not being licensed to sell securities engaging in such practices and/or for ‘self-dealing.’ Meanwhile, this entire practice flies in the face of both the letter and intent of securities laws that have been on the books since the 1930’s. Wall Street screams about new regulations while it ignores current ones. In driving terms, think of this as the police watching as drag races are being held in your neighborhood, ignoring red lights and stop signs on every corner, and being only concerned with whether the drivers are licensed.”

SEC charges SharesPost, Felix over pre-IPO trading, Reuters, March 14, 2012

More Blog Posts:

Securities and Exchange Commission Charges Investment Adviser with Committing Securities Fraud on Linked In, Stockbroker Fraud Blog, January 6, 2012

SEC Chairman Mary Schapiro Stands By Agency’s 2011 Enforcement Record

Published on: March 15, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Batting away criticism that many of the Security and Exchange Commission’s enforcement actions for fiscal year 2011 were actually follow-on administrative proceedings and not new actions, Chairman Mary Schapiro stood by the agency’s record. She also noted that in some instances, follow-ons are key to enforcing federal securities laws. Schapiro made her statements to a House Appropriations panel.

Per recent media findings, over 30% of the SEC’s FY 2011 735 enforcement actions (the agency has never filed this many in a fiscal year before) were follow-on administrative proceedings. Schapiro, who was testifying in front of the House Appropriations Financial Services Subcommittee on the White House’s proposed $1.566 billion FY2013 budget for the SEC, noted that some of the enforcement actions were the most complex to ever occur and included those involving municipal securities market-related bid rigging, misleading sales practices related to structured products, Foreign Corrupt Practices Act-related violations, and insider trading. She also pointed to the number of senior level people that have been the target of many of last year’s SEC enforcements.

Schapiro said that even as the SEC has already proposed or adopted regulations for over three-fourths of the duties it was tasked with under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, the most challenging ones, including proposals to enhance disclosures for companies that use conflict minerals or pay governments for access to natural gas, minerals, and oil, are still on the horizon. So is the SEC’s joint proposal with banking regulators on the Volcker rule, which exempts insurance firms from proprietary trading restrictions while preventing financial institutions and affiliated insurers from being able to invest in private equity and hedge funds. She said stated the SEC is “rethinking” how it deals with its Volcker rulemaking.

SEC Looks Likely to Win Appeal in $285M Securities Settlement that Judge Rakoff Rejected

Published on: March 15, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In a primarily procedural decision, the U.S. Court of Appeals for the Second Circuit has ruled that the Securities and Exchange Commission’s case against Citigroup, which resulted in a proposed $285M securities fred settlement, be stayed pending a joint appeal of U.S. Senior District Judge Jed Rakoff’s ruling that the civil lawsuit proceed to trial. Rakoff had rejected the settlement on the grounds that he didn’t believe that it was “adequate.” He also questioned the Commission’s practice of letting parties settle securities causes without having to admit or deny wrongdoing. The trial in SEC v. Citigroup Global Markets, Inc. had been scheduled for July 2012.

In December, the SEC filed a Notice of Appeal to the 2nd Circuit contending that the district court judge made a legal mistake in declaring an unprecedented standard that the Commission believes hurts investors by not allowing them to avail of “benefits that were immediate, substantial, and definite.” The notice also stated that it considered it incorrect for the district court to require an admission of facts or a trial as terms of condition for approving a proposed consent judgment—especially because the SEC provided Rakoff with information demonstrating the “reasoned basis” for its findings.

The 2nd circuit’s ruling deals a blow to Rakoff’s decision, which other federal judges have cited when asking if the public’s interest is being served when federal agencies propose settlements. The three-judge panel’s appellate ruling, which was a per curiam (unsigned) decision, found that the SEC and Citi would likely win their contention that Rakoff was in error when he turned down the securities settlement. The appeals court justices said that they had to defer to an executive agency’s evaluation of what is best for the public and that there was no grounds to question the SEC’s claim that the $285M securities settlement with Citigroup is in that interest.

The 2nd circuit said that Rakoff “misinterpreted” precedent related to his discretion to determine public interest and went beyond his judicial authority. Also, per the appellate panel, while district court judges should not merely rubber stamp on behalf of federal agencies it is not their job to define the latter’s policies.

It is important to note, however, that the 2nd circuit’s ruling only tackles the preliminary issue of whether the securities case should be stayed pending the completion of the appeal. The panel said it would be up to the justices that hear the appeal to resolve all matters and that this ruling should not have any “preclusive” impact. Counsel would also be appointed to argue Rakoff’s side during the appeal.

Ruling Gives Edge to U.S. in Its Appeal of Citi Case, NY Times, March 15, 2012

Second Circuit: Rakoff, Mind, Wall Street Journal, March 15, 2012

More Blog Posts:
Citigroup’s $285M Settlement With the SEC Is Turned Down by Judge Rakoff, Stockbroker Fraud Blog, November 28, 2011

Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rakoff, Institutional investor Securities Blog, November 9, 2011

Citigroup’s $75 Million Securities Fraud Settlement with the SEC Over Subprime Mortgage Debt Approved by Judge, Stockbroker Fraud Blog, October 23, 2010

US Supreme Court’s Janus Ruling May Compel SEC to File More Aiding, Abetting, and Control Person Liability Securities Claims

Published on: March 7, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to the Securities and Exchange Commission Enforcement Division’s Chief Counsel Joseph Brennan, the US Supreme Court’s ruling in Janus Capital Group Inc. v. First Derivative Traders is impacting the types of violations the federal regulator is now filing against defendants. Brennan says to look out for more possible control person liability and aiding and abetting claims. Speaking at the SEC Speaks conference by the Practising Law Institute in Washington, Brenner said the views he was expressing are his own.

In the high court’s 2011 ruling, the decision honored, under Rule 10b-5 of the 1934 Securities Exchange Act, a narrow perspective of primary liability in a private lawsuit. The majority held that an investment adviser who was a legally separate entity from the mutual fund that submitted an allegedly prospectus couldn’t be held primarily liable in a private action even if that adviser had played a key role in developing the statement. Justice Clarence Thomas wrote that the statement’s maker is the entity or person with final authority over the statement (including its content and how it should be communicated).

The Exchange Act’s SEC Rule 10-b5(b) makes it illegal to either issue any statement of material fact that is untrue or leave out a key fact. The Supreme Court’s ruling establishes an even higher pleading bar in private securities fraud cases where the plaintiff wants to hold defendants liable for other’s misstatements.

The ruling, however, has not had a big impact on who the SEC can charge. It also hasn’t had a big influence on SEC enforcement decisions involving other statutes and provisions.

Also discussing Janus at the same gathering was SEC Deputy Solicitor John Avery. He noted while that the decision signified a significant “change” and the “narrowing” of how primary liability for issuing false or misleading statements is defined, it remains unclear whether SEC actions are covered under the ruling. While some district courts have found that Janus applies to SEC actions, federal appellate courts have not issued any decisions related to this matter.

Avery said that the ruling has, however, changed the way the SEC files charges. The federal agency, which is authorized to pursue aiders and abbettors accused of violative conduct, might now charge those that played a role in creating the statement as abbettors and aiders even though they wouldn’t be liable per Janus. However, in certain cases, this authority won’t work too well.

Meantime, federal courts are starting to deal with whether Janus is applicable beyond the context of Rule 10b-5. In four out of five SEC cases, the courts have ruled against applying Janus outside the rule.

Contact our securities fraud law firm to request your free case evaluation.

Janus Capital Group Inc. v. First Derivative Traders and the Law of Unintended Consequences, Forbes, September 21, 2011

Read the Supreme Court’s Opinion (PDF)

More Blog Posts:
Securities Fraud: Mutual Funds Investment Adviser Cannot Be Sued Over Misstatement in Prospectuses, Says US Supreme Court, Stockbroker Fraud Blog, June 16, 2011

Janus Avoids Responsibility to Mutual Fund Shareholders for Alleged Role in Widespread Market Timing Scandal, Stockbroker Fraud Blog, June 11, 2007

SEC Warning to Investors: Watch Out for Fraudsters Posing As Regulators

Published on: February 27, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission wants investors to watch out for scammers pretending to be SEC employees who are soliciting investments. The warning is an update of a previous alert. The Commission is issuing it once again in the wake of a rise in the number complaints about this type of fraud.

In its alert, the SEC said that it does not endorse financial solicitation offers, help in the sale or purchase of securities, or take part in money transfers. The agency also noted that it isn’t associated with any drawings, sweepstakes, lotteries, or other events involving prizes, winnings, or money windfalls.

Fraudsters have been known to solicit targets by phone, e-mail, and other means, and they are likely to ask for detailed financial and personal information. The SEC says to watch out for anyone claiming to be affiliated with the federal agency and who claims to be looking for help with a fund transfer, wants to send over an investment offer, offers to provide advise about securities or financial assistance (for an upfront fee), or tells you that you are eligible for disbursements from a class action settlement or an investor claim fund.

SEC Chairwoman Defends ‘No Wrongdoing’ Settlements

Published on: February 27, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Commission Chairwoman Mary L. Schapiro said that the agency’s practice of reaching settlements with financial firms without them having to admit wrongdoing has “deterrent value” despite the fact that some of these firms have been charged more than once for violating the same securities laws. Schapiro noted that the commission ends up bringing a lot of the same kinds of securities cases so that people don’t forget their obligations or that they are being watched by an entity that will hold them responsible.

The SEC will often settle securities fraud cases with a financial firm my having the latter pay a fine and not denying (or admit) that any wrongdoing was done. Expensive court costs are avoided and a resolution is reached.

The SEC has said that financial firms won’t settle if they have to acknowledge wrongdoing because this could make them liable in civil cases filed against them over the same matters. Schapiro says the SEC only settles when the amount it is to receive by settling is about the same as it would likely get if the commission were to win the lawsuit in court.

SEC to Concentrate on Financial Firms Where Management is Not Doing Enough to Promote Compliance

Published on: February 18, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to Securities and Exchange Commission’s Office of Compliance Inspections and Examinations director Carlo di Florio, the federal agency will be concentrating “intently” on financial firms with senior management and boards that are failing to set the right tone when it comes to getting behind key control and risk functions to promote compliance. Di Florio addressed his statements to those attending the Compliance Outreach Program for investment companies and investment advisers. Although the gathering was SEC-organized, he noted that the views he was expressing are his own.

The SEC wants boards and management to support compliance-especially as they are responsible for setting a company’s tone and culture. Di Florio said that a chief compliance officer needs the support and involvement of management and the board in order to be effective. He noted that the SEC’s national examination manual has been given to OCIE staff. The manual establishes key standards and policies for the group.

In the last 18 months, the OCIE has undergone restructuring to streamline its processes, set up practices that are being implemented across regional offices, and engaged in greater coordination with other divisions in the SEC. Exams are also now more concentrated on risk.

Other changes include the setting up of a Risk Assessment and Surveillance unit that will identify the financial firms, products, and practices that are the most high-risk. Working groups also have been created in the areas of fixed income products and municipal securities, equity market structure and trading, sales and marketing practices, new and structured products, microcap fraud, and valuation.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, OCIE has been given greater responsibility over municipal advisors, swap market participants, hedge funds, and other firms. For example, while the SEC has been able to examine the average investment adviser every 11 years, the agency hopes to conduct these exams more frequently so that clients are better protected. SEC Commissioner Elisse Walter, who spoke at the same event as Di Florio, said that commission staff are recommending the setting up of at least one self-regulatory body to oversee registered investment advisers (ideally FINRA would be involved) and making the industry pay “user fees” to fund OCIE examinations.

Our stockbroker fraud lawyers have seen way too many investors lose out because the financial firm they entrusted with their money was not in compliance, committed securities fraud, or was negligent in some other way. We are here to help our clients recoup their losses.

Shepherd Smith Edwards and Kantas, LTD LLP represents investors in arbitration and litigation. We work with clients located throughout the US, as well as some investors living abroad who suffered losses because of a US-based financial firm.

We would be happy to offer you a free consultation to help you determine whether you have a securities fraud claim on your hands.

Speech by SEC Staff: Remarks at the Compliance Outreach Program, SEC, January 31, 2012
SEC: Senior Management and Boards That Fail to Support Compliance Face Most Scrutiny, AdvisorOne, January 31, 2012

More Blog Posts:
Securities and Exchange Commission Charges Investment Adviser with Committing Securities Fraud on Linked In, Stockbroker Fraud Blog, January 6, 2012
Texas Securities Fraud: SEC Charges Life Partners Holdings Inc. in Life Settlement Scam, Stockbroker Fraud Blog, January 4, 2012

Despite Tougher Investigations, SEC is Still Letting Wall Street Firms Avoid Punishments for Financial Fraud, Institutional Investor Scurities Blog, January 29, 2012 Continue Reading ›

Despite Tougher Investigations, SEC is Still Letting Wall Street Firms Avoid Punishments for Financial Fraud

Published on: January 29, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to The New York Times, by allowing that there be exemptions to certain regulations and laws, the Securities and Exchange Commission is letting Goldman Sachs, JPMorganChase, Bank of America, and other large financial firms avoid the liability that is supposed to come with losing securities fraud lawsuits while still making it possible for them to avail of the certain advantages that make it easier for them to raise investor money.

The newspaper analyzed investigations conducted by the SEC in the last decade and discovered almost 350 instances involving the federal agency giving Wall Street firms and other financial institutions a break. In one example cited by The New York Times, although JPMorganChase has settled six securities fraud cases in the past 13 years, the financial firm has also been granted at least 22 waivers. (Waivers may grant permission to underwrite certain bond and stock sales and/or manage mutual fund portfolios.) Another example involves Merrill Lynch and Bank of America (The two financial firms merged in 2009) settling 15 securities fraud cases while being granted at least 39 waivers.

Former regulators and securities experts say that granting the Wall Street firms the waivers gave them certain powerful advantages. According to former SEC chairman David S. Ruder, without the waivers a financial firm that agrees to settle securities fraud charges could be faced with “vast repercussions” that could prevent them from staying in operation.

SEC officials say the waivers are to allow for the stock and bond markets to stay accessible to companies that have the actual need to raise capital, which they believe is just as important as protecting investors. While the SEC has taken away certain privileges in securities fraud cases over misleading or false statements that were made about a financial firm’s own business, it doesn’t do the same when a Wall Street firm faces civil charges for allegedly lying about a specific security that it created and it is selling.

Many believe that the government is continuing to be “too soft” on Wall Street—even as the SEC has toughened up its investigations against financial firms accused of alleged fraud. Recently, there have been federal judges that have spoken out against the SEC’s habit of letting financial firm’s settle by letting them promise not to violate the law again. More than half the waivers issued have gone to Wall Street firms that had settled fraud charges at least once before.

The SEC has complained that settling is more affordable for it than going to court. However, even as the Commission has turned to Congress for tougher laws against fraud as well as increased penalties, why have nearly half of the waivers it has granted gone to Wall Street firms that have settled fraud charges in the past with the promise to never violate those laws again? That’s what many want to know.

S.E.C. Is Avoiding Tough Sanctions for Large Banks, The New York Times, February 3, 2011

SEC Seeks to Impose Tougher Penalties for Securities Fraud, Institutional Investor Securities Fraud, December 29, 2011

SEC Issues Emergency Order to Stop $26M “Green” Ponzi Scam, Institutional Investor Securities Fraud, October 13, 2011

Securities and Exchange Commission Charges Investment Adviser with Committing Securities Fraud on LinkedIn, Stockbroker Fraud Blog, January 6, 2012

UBS Global Asset Management to Pay $300,000 to Settle SEC Charges Related to Alleged Mutual Fund Price Violations

Published on: January 19, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission says that UBS Global Asset Management will pay $300,000 to resolve charges that it did not give securities in three mutual fund portfolios the proper price. This alleged failure caused investors to receive a misstatement regarding the funds’ net asset values. By agreeing to settle the charges, UBSGAM is not admitting to or denying the findings.

The SEC start investigating UBSGAM after SEC examiners conducted a routine check of the financial firm. According to its order, in 2008 UBSGAM bought about 54-complex fixed-income securities of $22 million, which was an aggregate purchase price. The majority of the securities were part of subordinated tranches of nonagency MBS with underlying collateral, which were were mortgages that weren’t in compliance with requirements to be part of MBS-guaranteed or to have been issued by Fannie Mae, Freddie Mac, or Ginnie Mae. CDO’s and asset-backed securities were among these securities.

After the securities were bought, 48 of them were priced substantially over the transaction price. This is because the pricing sources that provided the valuations to UBSGAM didn’t appear to factor in the price that the funds paid for the securities. Some quotations were not priced on a daily basis, while others were formulated using ending price from the last month. It wasn’t until over 2 weeks after UBSGAM started getting price-tolerant reports pointing out such discrepancies that it’s Global Valuation Committee finally met.

By using the prices that the 3rd party pricing service or a broker-dealer provided, the SEC contends that the mutual funds did not abide by their own valuation procedures, which mandate that the securities use the transaction price value until the financial firm makes a fair value determination or gets a response to a price challenge based on the discrepancy noted in the price tolerance report. The transaction price can be used for 5 business days, when a decision would have to be made on the fair value. The SEC concluded that by not making sure that these procedures were being followed, the financial firm caused the mutual funds to violate the Investment Company Act’s Rule 38a-1.

The SEC also determined that due to the securities not being timely or properly priced at fair value for a number of days in 2008, the funds were misstated (up to 10 cents in some cases) and they were then purchased, sold, or redeemed based on NAVs that were not accurate and higher than they should have been.

Read the SEC’s Order Against UBS (PDF)

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SIFMA Wants FINRA to Take Tougher Actions Against Brokers that Don’t Repay Promissory Notes, Institutional Investor Securities Blog, January 17, 2012

Raymond James Financial to Buy Morgan Keegan from Regions Financial for $930 Million, Institutional Investor Securities Blog, January 14, 2012

$78M Insider Trading Scam: “Operation Perfect Hedge” Leads to Criminal Charges for Seven Financial Industry Professionals, Stockbroker Fraud Blog, January 18, 2012

Securities and Exchange Commission Charges Investment Adviser with Committing Securities Fraud on Linked In

Published on: January 6, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has charged investment adviser Anthony Fields with selling bogus securities on LinkedIn and other social networking sites. The alleged financial fraud has prompted the agency to put out two alerts warning of the risks that advisory firms and investors must contend with in the social media era.

According to the SEC, Fields used social media sites to offer over $500 billion in fake securities. He used Platinum Securities Brokers and Anthony Fields & Associates, which are his two proprietorships, to make numerous fraudulent offerings. He also allegedly provided misleading and untruthful information about Anthony Fields & Associates’ clients, assets under management, and operational history on the company’s Web site and in filings submitted to the Commission. The SEC claims that Fields did not maintain the necessary records and books, gave the impression that he was a broker-dealer even though he is not SEC-registered, and failed to implement appropriate compliance procedures and policies.

With retail investors turning to LinkedIn, Facebook, Twitter, YouTube, and other online networks to get information about investing, the risks of becoming exposed to fraud are growing. The SEC’s Office of Investor Education and Advocacy is offering investors a number of tips to avoid financial scams online, including:

• Be careful of unsolicited investment opportunities-especially from someone you don’t know.
• Be wary of any investment opportunity that sounds too good to be true.
• Watch out for “guaranteed returns” – there is no such thing.
• Consider it a “red flag” if you experience any pressure to invest or buy immediately.
• Watch out for affinity scams, which usually target group members.
• Make sure that your privacy is always protected online.
• Ask lots of questions about any investment opportunity.
• Do your due diligence.
• Don’t provide your Social Security number, any account information, or other sensitive data to or on social media Web site.
• Watch out for “friend” requests from financial service providers that you don’t know-remember, once you let them “in,” you are giving them access.
• Pick a solid password and don’t use the same one for multiple accounts.
• Deactivate file sharing.
• Be careful when using public computers or Wi-Fi that is accessible to others.
• Arm your computer with a firewall and antivirus software.
• Log out of your social networking accounts when you are not using them.
• Watch out for unfamiliar links sent to you-especially if you don’t know the sender.
• Make sure your mobile device is secure.

Examples of investment scams that have been known to use the Internet and social media:
• Market manipulation schemes • Pump-and-dump scams • Fraud marketed through spam e-mail or online investment newsletters
• High yield investment program scams • Fraud offerings made online
SEC Charges Illinois-Based Adviser in Social Media Scam Agency Issues Alerts on Social Media Risks for Investors and Firms, SEC, January 4, 2012
Read the SEC’s Investor Alert (PDF)

Read the SEC’s investor bulletin on understanding your accounts (PDF)

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FBI Arrests Texas Leader of Pump-and-Dump Scheme, Stockbroker Fraud, March 23, 2011
Lancer Management Group LLC Hedge Fund Manager Acquitted of Charges He Ran Market Manipulation Scam, Institutional Investor Securities Blog, May 5, 2011
Barclays Capital Ordered by FINRA to Pay $3M Fine For Alleged Subprime Mortgage Securitization-Related Misrepresentations, Institutional Investor Securities Blog, December 23, 2011 Continue Reading ›