Articles Posted in SEC Enforcement

California Insider Trading Charges Filed by SEC Against Ex-Investment Fund Associate Accused of Making 3000% Profit on Marvel Call Options in Disney Acquisition

Published on: August 23, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed insider trading charges against Toby G. Scammell, who is accused of making more than $192,000 from insider trading information he received from his girlfriend about Walt Disney Company’s impending acquisition of Marvel Entertainment. Scammell, a 26-year-old ex-investment fund associate, made a more than 3000% profit in less than a month after he bought highly speculative Marvel call options for under $5500 and then sold them after the announcement of the acquisition was made on August 31, 2009 and Marvel’s stock price went up by more than 25%.

According to the SEC, Scammell’s girlfriend, who worked on the Marvel deal as an extern with Disney, found out confidential information about the deal, including when it would be announced and that Disney would pay $50/Marvel share. The Commission, however, doesn’t believe that Scammell’s girlfriend ever intended to give him insider tips or that she knew what he was doing with the information. Although the couple would talk about the acquisition as a subject of her business school application, she did not give him specific details. He also allegedly obtained information from confidential documents that he read off her Blackberry and from conversations he overheard regarding Marvel.

Scammell bought Marvel call options at $45 and $50 strike prices even though the highest that Marvel had ever traded at was $41.74. The SEC says that the Marvel options that Scammell bought were scheduled to expire soon after the Disney deal was announced and that in many cases the purchase of options represented 100% of the market. Scammell used his brother’s money to buy most of the Marvel call options. He did not, however, tell him about the alleged insider trading activities. Scammell’s brother had given him authority over his finances before going with the US army to Iraq.

The SEC says that before making the trades, Scammell used his computer to search for the terms “material non-public information,” “insider trading”, and “Rule 10b-5.” The Commission claims that Scammell not only used the insider information to garner an “unfair and illegal” advantage over others in the markets but that he exploited his romantic relationship with his girlfriend. The SEC says that after dating her exclusively for two years, he owed her a fiduciary duty, which he breached. He also allegedly acted with Scienter when he made the trades while having knowledge of the material, nonpublic data. The SEC says that when questioned, Scammell was unable to provide a believable explanation for his Marvell call options purchases.

The SEC is accusing Scammell of violating the Securities Exchange Act of 1934 (Section 10(b)) and Rule 10b-5 thereunder. It is seeking disgorgement of ill-gotten gains, a permanent injunction, prejudgment interest, and civil penalties.

SEC CHARGES FORMER INVESTMENT FUND ASSOCIATE WITH INSIDER TRADING, SEC, August 11, 2011
Read the SEC Complaint (PDF)

SEC Sues 26-Year Old On Charges He Made $200,000 Insider Trading Off Ex-Girlfriend’s Work Project, Business Insider, August 15, 2011

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Janney Montgomery Scott LLC to Pay $850K to Settle Securities Charges Over Alleged Failure to Prevent Inside Trading, Stockbroker Fraud Blog, July 21, 2011
“Poohster” Consultant Found Guilty of Insider Trading, Stockbroker Fraud Blog, June 23, 2011
Insider Trading: Former FrontPoint Partners Hedge Fund Manager Pleads Guilty to Criminal Charges, Institutional Investor Securities Blog, August 20, 2011 Continue Reading ›

Stifel, Nicolaus & Co. and Former Executive Faces SEC Charges Over Sale of CDOs to Five Wisconsin School Districts

Published on: August 10, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The SEC is charging Stifel, Nicolaus & Co. and its former Senior Vice President David W. Noack with securities fraud over the sale of unsuitable, high-risk complex investments to 5 Wisconsin school districts. Stifel and Noack allegedly misrepresented the risks involved in investing $200 million in synthetic collateralized debt obligations (CDOs) and did not disclose certain material facts. The investments proved a “complete failure.”

The Five Wisconsin School Districts:
• Kimberly Area School District • Kenosha Unified School District No. 1 • School District of Waukesha • School District of Whitefish Bay • West Allis-West Milwaukee School District

All five school districts are suing Stifel and Royal Bank of Canada in civil court. Robert Kantas, partner of Shepherd Smith Edwards & Kantas LTD LLP, is one of the attorneys representing the school districts in their civil case against Stifel and RBC. Attorneys for the school districts issued the following statement:

“We believe that Stifel, Royal Bank of Canada and the other defendants defrauded the five Wisconsin school districts, along with trusts set up to make these investments. In 2006, these defendants devised, solicited and sold $200 million ‘synthetic collateralized debt obligations’ (CDOs), which were both volatile and complex, to these districts and trusts. While represented as safe investments, these were in fact very high risk securities, which were wholly unsuitable for the districts and trusts. In an attempt to protect taxpayers and residents, the districts hired attorneys and other professionals to investigate the investments and the potential for fraud. Then, with a goal of seeking full recovery of the monies lost in this scheme, a lawsuit was filed in Milwaukee County Circuit Court in 2008 to seek fully recovery of the losses and maintain and protect valuable credit ratings of these districts. To date, more than 3 million pages of documents have been obtained and examined by the attorneys for the districts. The districts also properly reported to the SEC the nature and extent of the wrongdoing uncovered. Over the past year, they have provided the SEC with volumes of documents and information to facilitate its investigation.”

In its complaint filed in federal court today, the SEC says that Stifel and Noack set up a proprietary program to assist the school districts in funding retiree benefits through the investments of notes linked to the performance of CDOs. The school districts invested $200 million with trusts they set up in 2006. $162.7 million was paid for with borrowed funds.

The SEC contends that Stifel and Noack, who both earned substantial fees even though the investments failed completely, took advantage of their relationships with the school districts and acted fraudulently when they sold financial products that were inappropriate for the latter. The brokerage firm and its executive also likely were aware that the school districts weren’t experienced or sophisticated enough to be able to evaluate the risks associated with investing in the CDOs. Both also likely knew that the school districts could not afford to suffer such catastrophic losses if their investments were to fail. Despite this, says the SEC, Noack and Stifel assured the school districts that for the investments to collapse there would have to be “15 Enrons.” They also allegedly failed to reveal certain material facts to the school districts, including that:

• The first transaction in the portfolio did poorly from the beginning.
• Within 36 days of closing, credit rating agencies had placed 10% of the portfolio on negative watch.
• There were CDO providers who said they wouldn’t participate in Stifel’s proprietary program because they were worried about the risks involved.

The SEC claims that Stifel and Noack violated the:

• Securities Exchange Act of 1934 (Section (10b))
• The Securities Act of 1933 (Section 17(a))
• The Securities Act of 1934 (Section 15(c)(1)(A))

The Commission is seeking, permanent injunctions, disgorgement of ill-gotten gains, financial penalties, and prejudgment interest.

Related Web Resources:
SEC Charges Stifel, Nicolaus & Co. and Executive with Fraud in Sale of Investments to Wisconsin School District, SEC.gov, August 10, 2011
SEC Sues Stifel Over Wisconsin School Losses Tied to $200 Million of CDOs, Bloomberg, August 10, 2011
Read the SEC Complaint (PDF)

School Lawsuit Facts

More Blog Posts:
Wisconsin School Districts Sue Royal Bank of Canada and Stifel Nicolaus and Co. in Lawsuit Over Credit Default Swaps, Stockbroker Fraud Blog, October 7, 2008
SEC Inquiring About Wisconsin School Districts Failed $200 Million CDO Investments Made Through Stifel Nicolaus and Royal Bank of Canada Subsidiaries, Stockbroker Fraud Blog, June 11, 2010 Continue Reading ›

SEC’s Retroactive Approach to Its Proposed Reg D ‘Bad Actor’ Rule Draws Criticism From Law Firms

Published on: August 4, 2011 | by Shepherd Smith Edwards & Kantas, LLP

In comment letters sent to the Securities and Exchange Commission, numerous law firms wrote that the retroactive approach taken in a proposed rule to bar “bad actors” from Regulation D private offerings under the 1933 Securities Act sets up a number of fairness issues. The law firms also cautioned that the Dodd-Frank Wall Street Reform and Consumer Protection Act, which calls for the rulemaking, doesn’t require retroactivity.

The proposed rule would keep recidivist violators and felons from taking part in private offerings under Rule 506 of Reg D. Determining who is barred would be based on disqualifying events, including ones that occurred before the Dodd-Frank statute was passed. Some law firms have even said that a retroactive application would disrupt already negotiated administrative and civil settlements while chancing the “unwarranted disruption to private capital formation.” However, not all lawyers disapprove of applying the proposed Reg D ‘Bad Actor’ Rule retroactively. Shepherd Smith Edwards & Kantas LTD LLP founder and securities fraud lawyer William Shepherd said, “What kind of attorney thinks it is inherently unfair to ‘bar felons and recidivist violators from participating in private offerings’ of securities sold to the public? Stand in front of a mirror and say that to yourself out loud.”

SEC has been divided about the proposed application of the rule and
Commissioners Troy Paredes and Kathleen Casey, who are both Republicans, strongly oppose it. SEC Chairman Mary Schapiro, however, has said that the retroactive approach should help protect investors, which is part of Dodd-Frank’s intent.

Meantime, the New York City Bar Association’s securities regulation committee has said that “inherent fairness” requires a “prospective application” of any rule that would penalize a party on the basis of a past settlement or adjudication. The committee also cautioned that should the SEC move forward with its proposal, so many “waiver requests” might come in that this could place a further strain on the Commission’s already taxed staff resources.

Rule 506 of Regulation D under the 1933 Securities Act
Per the proposed Rule 506 of Regulation D under the 1933 Securities Act, recidivist violators that are subject to specific sanctions and proceedings and parties with felonies or misdemeanors involving the buying or selling of a securities would be barred from the sales and offerings of securities. They also wouldn’t be allowed to seek the benefits of the safe harbor act’s Rule 506. The rule, which allows issuers to get around the 1933 Act’s reporting requirements, also comprises some 93% of private securities offered under Reg. D.

The proposal also wouldn’t allow a private placement to avail of the rule if the person or issuer covered by the rule had a disqualifying event (restraining order, criminal conviction, court injunction, USPS false representation order, certain commission disciplinary orders, commission “stop orders” to suspend exemptions, expulsion or suspension from belonging to an SRO or associating with an SRO member, and/or final orders of insurance, credit union regulators, or state securities banking.)

Related Web Resources:
Attorneys Decry Retroactive Approach Of SEC’s Reg D ‘Bad Actor’ Rule Proposal, BNA Securities Law Daily, July 21, 2011
Comments on Disqualification of Felons and Other “Bad Actors” From Rule 506 Offerings, SEC.gov

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SEC to Propose Rule Banning “Felons and Bad Actors” From Involvement in Private Offerings, Institutional Investor Securities Blog, May 29, 2011
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FINRA Wants Brokers Selling Regulation D Private Placements to Take Part in Tougher Due Diligence Process, Stockbroker Fraud Blog, June 7, 2011 Continue Reading ›

SEC Approves Proposed FINRA Rule Change Subjecting Back Office Personnel of Broker-Dealers to Registration and Qualification Examination Requirements

Published on: June 9, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has approved the Financial Industry Regulatory Authority’s proposed rule change subjecting certain back office personnel of broker-dealers to registration and qualification examination requirements. The changes would be made to FINRA Rule 1230(b)(6).

The SEC says it is approving the proposed change on an expedited basis because it is in line with the 1934 Securities Exchange Act requirement that FINRA rules should protect investors while preventing securities fraud and manipulation. As part of the rule change, registration category and a qualification exam category would be set up for certain operations personnel, who would also be subject to continuing education requirements. The Commission believes that this rule change will take care of certain regulatory gaps that still exist in the industry.

Those subject to the rule change would be three categories of persons:
• Senior management in charge of covered functions (these include customer account data; document maintenance, collection, maintenance and reinvestment of funds; stock loan/securities lending; and delivery and receipt of fund and securities)
• Personnel accountable for authorizing work that advances the covered functions • Persons authorized to commit a member’s capital to directly advance the covered functions
FINRA is recommending that the new requirements be phased in. The SEC is currently soliciting comments.

Related Web Resources:
US SEC Approves Registration of Brokerage Back-Office Employees, Wall Street Journal, June 17, 2011
FINRA to Share Details on New Back-Office Staff Rules, AdvisorOne, June 20, 2011
1934 Securities Exchange Act

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SEC ALJ Finds Several Brokers Liable for Unlawful Penny Stock Sales

Published on: May 9, 2011 | by Shepherd Smith Edwards & Kantas, LLP

A Securities and Exchange Commission administrative law judge has found several brokers liable for their alleged involvement in the unlawful sale of penny stocks to investors. In re Bloomfield, the SEC had filed securities charges against Robert Gorgia, Ronald S. Bloomfield, Victor Labi, John Earl Martin Sr. and Eugene Miller. Labi, Martin, and Bloomfield were Leeb Brokerage Services registered representatives, while Miller and Gorgia were president and chief compliance officer. Leeb is no longer in operation.

The SEC contends that the defendants let customers regularly deliver blocks of privately obtained penny stocks shares into their Leeb accounts. The clients would then sell the securities to the public through unregistered securities transactions.

While Martin, Labi, and Bloomfield allegedly did not conduct reasonable inquiry prior to allowing the public sale of the stock and violated securities law registration requirements, the other two men are accused of failing to reasonably supervise the registered representatives. The SEC claims that the men let the unlawful penny stock sales occur without doing enough to investigate whether they were “facilitating illegal underwriting.” As a result, the defendants allegedly caused Leeb’s failure to submit Suspicious Activity Reports that are mandated under the Bank Secrecy Act.

ALJ Brenda P. Murray noted that the securities fraud resulted in significant financial losses for the investing public. She ordered the three stockbrokers to pay $1.39M in disgorgement. The three brokers were also ordered to pay a $100,000 civil penalty and cease and desist from future misconduct. Miller, who settled the securities charges against him last year, has agreed to supervisory suspension, a cease and desist order, and a $50,000 penalty.

Related Web Resources:
SEC Litigation (PDF)

Brokers Found Liable on Charges They Aided Unlawful Penny Stock Sales, BNA – Securities Law Daily, Alacra Store, April 28, 2011

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Juno Mother Earth Asset Management LLC and Its Founders Face SEC Securities Fraud Lawsuit Over Alleged $1.8M Looting of Hedge Fund Assets

Published on: March 23, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission has filed a securities fraud complaint accusing Juno Mother Earth Asset Management LLC and its founders Arturo Rodriguez and Eugenio Verzilli of looting over $1.8 million in assets from a hedge fund.

The two hedge fund managers allegedly used the assets to cover Juno’s operating expenses, including rent, payroll, entertainment, and travel. They also are accused of submitting false SEC filings, including telling the SEC that it managed $40 million more than what it in fact did.

The SEC says that Juno’s partners falsely claimed that they had placed $3 million of their own capital in a client fund, when in fact, they never used their own money. In addition to selling securities in client brokerage and commodity accounts, Juno allegedly directed 41 separate transfers of cash to Juno’s bank account and made false claims that they were expense reimbursements for costs incurred on the client fund’s behalf. Rodriguez and Verzilli then issued false promissory notes to cover up the fraud and make it seem as if the fund had invested money in Juno.

The SEC further contends that the three defendants marketed investments in the Juno fund but did not reveal that the hedge fund advisor was having financial problems. When offering and selling the securities, Juno would misrepresent and inflate its assets, even claiming at one point that it was managing up to $200 million.

The government is trying to crack down on hedge fund managers who make it appear as if they’ve invested more personal money than what they’ve actually put in. The agency is seeking disgorgement plus prejudgment interests, permanent injunctions, and civil monetary penalties.

Related Web Resources:
SEC Charges Two Hedge-Fund Managers, The Wall Street Journal, March 16, 2011

Read the SEC Complaint (PDF)

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3 Hedge Funds Raided by FBI in Insider Trading Case, Stockbroker Fraud Blog, November 3, 2010

SEC Needs to Keep a Closer Eye on FINRA, Says Report

Published on: March 15, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to the Boston Consulting Group, the US Securities and Exchange Commission should step up its oversight efforts over the Financial Industry Regulatory Authority. The BCG released its findings following a six-month review of the SEC’s internal operations, an examination that was ordered under the new Dodd-Frank law. The consulting group’s job was to examine the SEC’s structure, internal operations, personnel, resources, relationships with self-regulatory organizations, and technology.

BCG notes that with FINRA now providing the majority of market surveillance for most US equity trading, the SEC’s scrutiny of the SRO is now more important than ever. BCG also believes that the SEC should keep a closer watch on FINRA’s member regulation and enforcement units.

Currently, the SEC’s Office of Compliance Inspections and Examinations employs about 50 people tasked with inspecting 12 SROs. Still, BCG says that these SROs are under no obligation to regularly disclose information about their regulatory operations to the SEC. BCG believes that this disclosure of data should become a formal requirement. Also, even though there are over 100 staff attorneys at the SEC’s Division of Trading and Markets looking at SRO filings, the consulting group believes these employees could stand to deepen their understanding of the markets.

FINRA Orders Charles Schwab to Pay $18M to Fair Fund for YieldPlus Investors

Published on: March 12, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulation Authority wants Charles Schwab & Company, Inc. to pay $18 million to a Fair Fund set up by the SEC to payback investors of the Schwab YieldPlus Funds. FINRA found that even after changes to the fund’s portfolio resulted in it being affected by the mortgage-backed securities market crisis, Schwab did not change its marketing of the fund and instead provided inaccurate material.

The FINRA order was announced just as the Securities and Exchange Commission revealed that $119 million settlement was reached with Charles Schwab & Co., Inc. and Charles Schwab Investment Management for their alleged misleading of Schwab YieldPlus Fund investors and failure prevent nonpublic information from being misused. According to the SEC, investors were not adequately told about the risks associated with the Schwab fund. Instead, they were provide with allegedly misleading statements, such as those claiming that investing in the ultra-short bond funds was only slightly riskier than investing in a money market fund. Read our earlier stockbroker fraud blog post for more information.

Schwab has said that it is still facing about 20 individual securities arbitration claims asking for $3 million in damages related to the YieldPlus Fund. Last year, it resolved federal and California state law claims-for $200 million and $35 million, respectively, over the fund.

In other recent Charles Schwab Corp. news, FINRA has announced that it isn’t going to recommend disciplinary action over the firm’s auction-rate securities sales to clients. Charles Schwab had received two Wells notices in 2009 indicating that regulators were recommending enforcement actions.

Related Web Resources:
UPDATE: Finra Won’t Discipline Schwab For Auction-Rate Securities-Filing, The Wall Street Journal, February 25, 2011
SEC Reaches $119 Million Settlement with Charles Schwab, The Blog of Legal Times, January 11, 2011
FINRA Orders Schwab to Pay $18 Million to Investors for Improper Marketing of YieldPlus Bond Fund, FINRA, January 11, 2011

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Texas Congressmen Seek Answers from SEC Chairwoman Regarding Conflict of Interest Related to Madoff Debacle

Published on: March 8, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Texas Congressman Jeb Hensarling is one of four Republican members of the House Financial Services Committee wanting to know more about Securities and Exchange Commission Chairwoman Mary Schapiro’s role in managing the conflict of interest presented by appointing David M. Becker as the SEC’s general counsel. Becker, who is no longer in this post, is with someone with a financial interest in a Bernard Madoff investment account. As a senior policy director for the SEC involved in dealing with Madoff Ponzi scam, he played a role determining how victims would be compensated.

Becker’s ties with Madoff didn’t come to light until trustee Irving H. Picard sued him and his two brothers to get back more than $1million of the $2 million they had inherited from their late mother’s Madoff investment. The former SEC general counsel claims that he told Schapiro and the chief ethics officer of his Madoff-related financial interest. Now, however, SEC inspector general H. David Kotz says he wants to probe possible conflicts of interest related to Becker’s role with the SEC as someone who stood to benefit from decisions involving Madoff Ponzi scam victims. According to the New York Times, two unnamed sources say while the SEC agreed to return to investors only the funds they had placed in their Madoff accounts, Becker had pushed for allowing the victims to keep some of their investment gains.

Lawmakers say they want details of Schapiro’s talks with Becker about his Madoff ties. They also want to know whether she followed all the steps delineated in government ethics rules. Also getting into the mix is Texas Representative and Republican Randy Neugebauer, who is quoted in the New York Times as stating that he believes the SEC should be held to the same high standard of “transparency and disclosure” as it holds other companies.

TD Ameritrade Inc. Settles SEC Securities Fraud Charges Over Reserve Yield Plus Fund Shares for $10M

Published on: February 14, 2011 | by Shepherd Smith Edwards & Kantas, LLP

TD Ameritrade Inc. (AMTD) has settled Securities and Exchange Commission charges that it failed to reasonably supervise its representatives, some who sold shares of the Reserve Yield Plus Fund to clients. As part of the settlement, TD Ameritrade will pay $10 million to eligible customers who are still fund shareholders.

According to the SEC, TD Ameritrade representatives offered and sold Reserve Yield Plus Fund shares to customers before September 16, 2008. The SEC contends that the representatives “mischaracterized” the fund as a money market fund, making it seem as if the fund had guaranteed liquidity while allegedly failing to discloses the risks involved with this type of investment. In September 2008, the fund “broke the buck” when its assets’ value fell lower than the level required to cover each dollar that had been invested in the fund.

The SEC also claims that TD Ameritrade lacked an adequate supervisory system or policies to stop its representatives’ misconduct that led to investors’ losses. Clients eligible to receive money from the settlement should get receive 1.2 cents per share.

The SEC says that it is essential that customers are given adequate information about investment instruments and that broker-dealers must properly train and supervise their representatives to give clients this important information. The SEC said that thousands of TD Ameritrade customers still hold most of the Yield Plus Funds shares. They got approximately 95% of its original investments after the fund liquidated its assets.

By agreeing to settle, the TD Ameritrade Inc. is not denying or admitting to the misconduct.

Related Web Resources:
SEC announces $10M settlement with TD Ameritrade, AP/Yahoo, February 3, 2011
SEC Charges TD Ameritrade for Failing to Supervise Its Representatives Who Sold Shares of the Reserve Yield Plus Fund, SEC, February 3, 2011
Securities Fraud Attorneys

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AXA Rosenberg Entities Settle Securities Fraud Charges Over Computer Error Concealment for Over $240M, Stockbroker Fraud Blog, February 10, 2011
Ex-Portfolio Managers to Pay $700K to Settle SEC Charges that They Defrauded the Tax Free Fund for Utah, Stockbroker Fraud Blog, January 22, 2011
Schwab Settles for $119M SEC Charges It Allegedly Misled YieldPlus Fund Investors, Stockbroker Fraud Blog, January 17, 2011 Continue Reading ›