Articles Posted in SEC

FINRA, SEC Need to Employ Better Oversight Over Investor Education Funds, Says District Court

Published on: July 30, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York says that the Securities and Exchange Commission is not a doing a good enough job in providing oversight of $55 million in investor education funds and the way that the money is being disbursed. The funds come from the $1.4 Global Research Analyst Settlement that was reached with top investment banks, including Citigroup (C), JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS), and others, in 2003, over securities research that had been allegedly flawed and biased. The case is SEC v. Bear Stearns & Co.

Now, Judge William H. Pauley III, who is tasked with supervising how the settlement is implemented, is contending that the SEC should have been raising red flags about the FINRA Investor Education Foundation’s “opaque” project spending and operational expenses. The court is asking the foundation and the SEC to turn in certain information, including detailed accounting of receipts and spending for 2011 and 2010, by the end of August. The foundation also has provided additional details about its operating costs.

The court has said that disbursing the funds has been a challenging process. After the Investor Education Entity, which was created to use the funds, failed to take off, in 2005 the court let the SEC move the $55 million to the foundation under the premise that the regulator would provide oversight while turning in quarterly reports.( As of December 31, 2011 the foundation had given out approximately $44.7 million of the funds through education and grant programs.)

However, in an opinion that issued in 2009, the court questioned why the foundation paid $800,000 in administrative expenses while giving just $6.5 million to grantees. And in this most recent decision, the court is once again asking why, considering the type of projects involved, the foundation seems to spend a “disproportionately high” amount. Pauley pointed to several examples, including a daylong seminar involving 130 attendees in West Virginia that cost $58,000 and a financial fraud conference last November that the foundation co-sponsored in DC that took place at a posh hotel.

The court also said that the quarterly reports that it has received are “bereft” of the details that they should provide, and it is wondering why the eight “primary” states that have been the target of the foundation’s educational activities don’t necessarily appear to be the ones with the “greatest investor education needs.”

FINRA Investor Education Foundation spokesperson George Smaragdis has said that the foundation will give over the information that the court is asking for but that it doesn’t agree with the majority of the court’s statements.

SEC v. Bear Stearns

FINRA Investor Education Foundation

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Lawmakers Use Funding Bill for Financial Police as Forum to Express Views on Regulators and their Agencies

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

The Senate Appropriations Committee is recommending that the Commodity Futures Trading Commission and the Securities and Exchange Commission be funded at the same levels that the White House has requested. The $22.9 billion spending bill would allot $308 million for the CFTC and $1.566 billion to the SEC for the next fiscal year. No amendments were offered. Fiscal year 2013 begins on October 1, 2012.

However, Senator Jerry Moran (R-Kan.), a ranking member of this committee’s Financial Services Subcommittee, did express his opposition to the portion of the bill having to do with CFTC funding by voting “no” on that part. He contends that CFTC chairman Gary Gensler has rebuffed efforts to modify the way the agency is run. He also claims that Gensler has neglected to make rulemaking a priority as it relates to implementing key aspects of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

The proposed funding for the CFTC is 50% above its present funding level, which is about $205 million. (Meantime, the proposed spending amount for the SEC is $245 million-a 19% rise from its current spending level.)

“One could argue that taxpayers are not getting their money’s worth from this investment but millions are involved in the securities and commodities markets and trillions of dollars change hands annually,” said Securities lawyer William Shepherd. ” Furthermore, more is lost through financial fraud than all other forms of fraud combined.”

Financial Services Subcommittee Chairman Richard Durbin (D-Ill.) has noted that the CFTC’s job, which includes overseeing the $300 trillion swaps market, is “huge.” Gensler, who supports the funding bill, has said that the CFTC’s proposed funding amount would allow the agency to have enough “cops on the beat” to maintain swaps and futures markets that are fair. He and Durbin also have pointed out that the swaps market is eight times bigger than the futures market.

It is important to note, however, that these funding recommendations are counter to two bills currently making their way through the US House. Both bills would provide funding to the two agencies at financial levels below what President Obama has requested.

“Conservatives stress that private enterprise works better than government,” said Securities fraud attorney Shepherd. ” If investment fraud laws were even as strong as a decade ago, free enterprise could cut the cost of regulation in half. This is because private law suits would then deter most investment fraud at no cost to taxpayers.”

U.S. Senate panel OKs budget boosts for SEC, CFTC, Chicago Tribune/Reuters, June 14, 2012

Obama proposes large budget boosts for SEC, CFTC, Reuters, February 13, 2012

United States Committee on Appropriations

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ABA Presses for Self-Funding for SEC and CFTC, Institutional Investor Securities Blog, May 31, 2012
SEC and CFTC Say They Found Out About JPMorgan’s $2B Trading Loss Through Media, Stockbroker Fraud Blog, May 31, 2012

AARP, Investment Adviser Association, Among Groups Asking the SEC to Make Brokers Abide by 1940 Investment Advisers Act’s Fiduciary Duty, Stockbroker Fraud Blog, April 14, 2012

ABA Presses for Self-Funding for SEC and CFTC, Institutional Investor Securities Blog, May 31, 2012 Continue Reading ›

SEC and CFTC Say They Found Out About JPMorgan’s $2B Trading Loss Through Media

Published on: May 31, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to Commodity Futures Trading Commission Chairman Gary Gensler and Securities and Exchange Commission Chairman Mary Schapiro, the two federal agencies didn’t know that JPMorgan & Chase (JPM) had sustained $2 billion in trading losses until they heard about it through the press in April. Schapiro and Gensler testified in front of the Senate Banking Committee on May 22. Both agency heads noted that trading activities aren’t within the purview of the CFTC and the SEC. They also pointed out that the risky derivatives trading did not happen through JPMorgan’s futures commission merchant arm or broker-dealer arm.

The SEC has no authority over the credit default index derivatives that were involved in the trades, and although, per the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFTC will eventually regulate the swap dealing activities of banks, the rules to make this authority law have not yet been written.

Now, the CFTC is probing JPMorgan’s trading transactions. It recently issued subpoenas asking for the firm’s internal documents related to the financial firm’s massive loss. The probe is being run by the agency’s enforcement division and, according to Reuters, will revolve around what JPMorgan traders told internal management staff and their supervisors as the bets began to sour. (However, per the Wall Street Journal, the inquiry is in the beginning phases and not limited to what traders said or didn’t say. It also doesn’t necessarily mean that JPMorgan or certain individuals will be subject to any civil enforcement action.)

Meantime, Schapiro has said that the SEC is also looking into whether JPMorgan’s financial reporting and public disclosure were accurate in regards to what the financial firm knew and when it had this knowledge. She told Sen. Robert Menendez (D-N.J.) that it was too early to tell whether JPMorgan’s activity would have violated the Volcker rule, which calls for banks to have their proprietary trading activity limited to risk-mitigation hedging. While JPMorgan has said that its transactions were hedges, experts are divided over this assessment. (The Volcker rule, which is part of Dodd-Frank, has not yet been implemented and there are critics fighting its current incarnation.) Menendez, in turn, said that Schapiro should look to JPMorgan’s trading loss as a reason for constructing strong verbiage when implementing the rule. However, Sen. Bob Corker (R-Tenn.), who was also at the hearing, wondered whether employing this approach might backfire-initially causing the legislation to “look good,” while ultimately creating a situation where highly complex institutions would be placed situations to “not appropriately hedge their activity.”

IMPLEMENTING DERIVATIVES REFORM: REDUCING SYSTEMIC RISK AND IMPROVING MARKET OVERSIGHT, Banking.Senate.gov, May 22, 2012

Regulators Say They Learned Of J.P. Morgan Losses from news reports, Los Angeles Times, May 22, 2012

CFTC subpoenas JPMorgan over trading loss: WSJ, The Republic, May 31, 2012

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Senate Democrats Want Volcker Rule’s “JP Morgan Loophole” Allowing Portfolio Hedging Blocked, Institutional Investor Securities Fraud, May 22, 2012

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AARP, Investment Adviser Association, Among Groups Asking the SEC to Make Brokers Abide by 1940 Investment Advisers Act’s Fiduciary Duty

Published on: April 14, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Several industry and consumer groups have written a letter to the Securities and Exchange Commission asking it to put into effect a uniform fiduciary standard for both investment advisers and broker-dealers. The groups are AARP, National Association of Personal Financial Advisors, Fund Democracy, Certified Financial Planner Board of Standards, Inc., Consumer Federation of America, Financial Planning Association, and the Investment Adviser Association. They want the SEC to extend the duty as it exists under the 1940 Investment Advisers Act to brokerage industry members and not just investment advisers.

“This has been my position since the subject arose. No new definition of ‘fiduciary duty’ is warranted. For hundreds of years laws and legal decisions have fully defined the term,” said stockbroker fraud lawyer William Shepherd. ” Why should this not simply apply to Wall Street as it does the rest of us, including lawyers?”

Currently, broker-dealers have to abide by the “suitability” standard, which is considers a less strict standard of care. For example, under the suitability standard, brokers don’t have to reveal the majority of conflicts of interest to a client to get out of any obligation to control investment expenses.

SEC and SIPC Clash Over Standard of Proof Necessary to Insure Investors For Stanford Ponzi Fraud Losses

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

The Securities and Exchange Commission and the Securities Investor Protection Corporation are at odds over what the standard of proof should be used for the SEC’s application to make SIPC start liquidation proceedings for Stanford Group Co. The SEC recently sued the non-profit corporation, which is supposed to provide coverage protection for investors in the event that the brokerage firm they are working with fails. The SIPC has so far refused to provide the defrauded investors of R. Allen Stanford’s $7 billion Ponzi scam with any compensation, contending that the Stanford bank involved in the scam was Stanford International Bank Ltd. in Antigua and not SIPC member Stanford Group. Stanford has been convicted on 13 criminal counts related to the financial fraud.

During a U.S. District Court for the District of Columbia hearing, SC chief litigation counsel Matthew Martens said the probable cause standard is sensible in light of the Securities Investor Protection Act’s structure. SIPC lawyer Eugene Frank Assaf Jr., however, contended that the preponderance of the evidence standard is the one that should be used. Assaf said this should be the standard because this is SIPC’s only chance to seriously challenge the “compulsion issue.”

The SEC and SIPC have been battling it out since June 2011 when the Commission asked the latter to start liquidation proceedings on the grounds that individuals who had invested in the Ponzi scam through SGC deserved protection under SIPA. SIPC, however, did not act on this request. So the SEC went to court to get an order compelling the nonprofit organization to begin liquidating. The Commission was granted a partial win last month when the court found that a summary proceeding would be enough to resolve the SEC’s application.

Some 21,000 clients who purchased CD’s through SGC would be able to file claims for reimbursement through SIPA if the SEC prevails in this case.

Earlier this month, SIPC CEO and President Stephen Harbeck stood by the entity’s decision to not provide loss coverage to the victims of R. Allen Stanford’s Ponzi scam. When giving testimony to the House Financial Services Capital Markets Subcommittee, Harbeck noted that Stanford’s investors made the choice to send their assets to an offshore bank that wasn’t protected by the US government.

He pointed to the SEC’s own statements regarding how the CDs these investors purchased paid return rates that were “excessive” and likely “impossible.” He said that SIPA has never been interpreted to “pay back the purchase price of a bad investment. ”

SEC Suit Pursues Payouts by SIPC, The Wall Street Journal, December 13, 2011

Securities Investor Protection Corporation

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SEC and SIPC Go to Court Over Whether SIPA Protects Stanford Ponzi Fraud Investors, Stockbroker Fraud Blog, February 6, 2012

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SEC Gets Initial Victory in Lawsuit Against SIPC Over Payments Owed to Stanford Ponzi Scam Investors, Institutional Investor Securities Blog, February 10, 2012 Continue Reading ›

SEC Revises Dollar Amount Thresholds Determining Whether to An Advisory Client Would Have to Pay Performance Fees

Published on: February 25, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is adopting changes to the dollar amount thresholds, under the 1940 Investment Advisers Act, that are used to determine whether an advisory clients can be made to pay a performance fee. Per the current provision, an adviser has to be managing at least $750k of the client’s money or the adviser must have reasonable grounds for believing that the client’s net worth is over $1M. However, per the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 418, the SEC has directed that inflation adjustments to the dollar amount tests would be made every five years.

Last year the SEC put out an order modifying the “qualified client” assets management test from $750K to $1M. The test for net worth was changed from $1M to $2M. On February 15, 2012, the SEC said it was adopting these amendments to the Advisers Act’s Rule 205-3.

Per the amended rule, an individual’s primary residence worth and specific debt related to property would not be included when determining the net worth calculation. The amended rule comes with a grandfather provision that lets advisers keep charging clients who were qualified clients prior to the rule change performance fees. The amendments will be in effect 90 days after they are published in the Federal Register.

SEC Modifies Definition of Net Worth Standard for “Accredited Investors” with Final Rule

Published on: December 29, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has adopted a final rule that revises the net worth standard for “accredited investors.” Although the modified definition went into effect once the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted, the SEC still had to adjust its rules to this modification. Per the Dodd-Frank Act’s Section 413(a), the Securities Act of 1933’s definition of “accredited investors” cannot include the value of a primary person’s residence for purposes of determining whether he/she qualifies as one based on possessing a net worth of over $1 million.

The Securities Act states that all sales and offers of securities in the US must be registered unless they are exempt from the criteria. The point of the concept of “accredited investors” is to be able to ID people that can stand the economic risk of investing in a security that is unregistered for an indefinite time frame and, should it come to it, be able to afford losing their entire investment. Because “accredited investors” are usually the only ones that are given the opportunity to invest in private offerings, the opportunity for certain people to invest and the pool of available investors is influenced by whether an investor can be considered an accredited investor.

Before Dodd-Frank, one’s main residence and its fair market value, as well as the indebtedness obtained by the residence, were factored in when calculating net worth to figure out whether or not the individual fulfilled the $1 million threshold. The Act’s Section 413(a), however, took this property out of the equation but only up to the residence’s fair market value when the securities’ sale takes place. This means that if one’s primary residence is “underwater,” it will lower the individual’s net worth according to the amount of indebtedness that goes beyond the fair market value of that person’s primary residence for purposes of determining whether or not that person is an accredited investor. The final rules also include a limited grandfathering provision letting investors that no longer qualify as “accredited investors” because of changes put into effect by Dodd-Frank to be treated as accredited for certain “follow-on” investments.

The final rule will go into effect 60 days after it is published in the Federal register.

Throughout the US, Shepherd, Smith, Edwards, and Kantas, LTD, LLP represents investors who are victims of securities fraud in recovering their losses.

Read the final rule (PDF)

SEC Adopts Net Worth Standard for Accredited Investors Under Dodd-Frank Act, SEC, December 21, 2011

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SEC’s Office of the Whistleblower Received 334 Tips During FY 2011

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

The Securities and Exchange Commission’s Office of the Whistleblower says it has already received 334 tips since becoming operational in August 12. The office issued its fiscal year 2011 report last month.

Per the report, between August 12 and September 30, which was when FYI 2011 ended, most of the complaints received by the office involved the areas of:
• Market manipulation
• Offering fraud
• Corporate disclosures and financial statements
The SEC’s whistleblower office received complaints from 37 states-the most, at 34, came from California-and a number of foreign countries, with the majority from China and the United Kingdom. Officials say that the quality of the tips they’ve been receiving has gotten better.

The SEC’s Office of the Whistleblower has not given out any awards yet. One reason for this is that the 90-day reward application period for applicable cases is not yet over. Eligible tipsters are those that provided information that led to securities cases resulting in monetary sanctions of over $1 million.

According to a survey conducted by one employment and labor law firm, S & P 500 senior executives and top officers at other organizations are worried about this bounty program and its monetary incentive that could convince the more reluctant whistleblowers to come forward. 73% of respondents said that they considered retaliation and whistleblowing to be emerging risk areas. Many said that even as the number of whistleblower tips will likely go up, their companies are only moderately prepared to deal with these claims.

Under Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 922, if the following circumstances apply, the SEC must pay 10-30% of any money the government to the whistleblower:

• The whistleblower voluntarily gave the insider information • The information is original, comes from the tipster’s independent analysis or knowledge, and didn’t come to the Commission from any other source • The information allows the SEC to bring a successful enforcement action
• Monetary sanctions are more than $1 million. Penalties, interest, disgorgement and any other monies are part of this consideration.

Meantime, the Government Accountability Office says in its new report that it found that the financial statements belonging to the SEC’s Investor Protection Fund for FY 2010 and 2011 were materially fair. Whistleblower bounties are paid from that fund.

The GAO also said that in FY 2011 the SEC made significant steps forward in terms of remediating material weaknesses in its internal control for financial reporting, information systems, and account processing. Although these issues are not material anymore, the GAO felt that they should still be addressed in its report. The four areas where the significant deficiencies existed were:

• Budgetary resources • Information security • Accounting processes and financial reporting • Filing fees and registrant deposits
The Securities and Exchange Commission’s Office of the Whistleblower FYI 2011 Report

Companies Anticipate Rise in Whistleblower Claims According to Littler Survey, 96 Percent of Senior Executives Reveal Growing Concern, Littler, November 14, 2011
Securities and Exchange Commission’s Financial Statements for Fiscal Years 2011 and 2010, GAO (PDF)

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SEC is Finalizing Its Whistleblower Rules, Says Chairman Schapiro, Stockbroker Fraud Blog, April 28, 2011 Continue Reading ›

Citigroup’s $285M Settlement With the SEC Is Turned Down by Judge Rakoff

Published on: November 28, 2011 | by Shepherd Smith Edwards & Kantas, LLP

U.S. District Judge Jed S. Rakoff has turned down the proposed $285M settlement between the SEC and Citigroup Global Markets Inc. However, unlike with the SEC’s tentative $33M settlement with Bank of America that he rejected, eventually approving a $150 million settlement between both parties-this time, Rakoff is ordering the SEC and Citigroup to trial.

The SEC claimed Citigroup sold Class V Funding III right as the housing market fell apart in 2007 and then bet against the $1 billion mortgage-linked collateralized debt obligation. Meantime, the financial firm allegedly failed to tell clients about this conflict of interest. Investors would go on to lose nearly $700 million over the CDO, while Citigroup ended up making about $160 million.

To many observers, Rakoff’s decision doesn’t come as a surprise. He has expressed concern with the SEC’s handling of securities cases for some time. In his ruling today, Rakoff was very clear in stating that he didn’t believe the tentative agreement was “fair… reasonable… adequate, nor in the public interest.” He also called for the “underlying facts” and made it clear that the SEC’s typical boilerplate settlement, which usually involves the other party agreeing to the terms but not admitting to or denying wrongdoing, was not going to suffice.

Until now, the SEC’s settlement policy has allowed the Commission to declare a victory while letting defendants get away with not acknowledging any wrongdoing so that private plaintiffs cannot use such an outcome in litigation against them. Now, however, Rakoff wants the court and the public to actually learn whether or not Citigroup acted improperly.

Also in his opinion, Rakoff spoke about how the current settlement doesn’t do anything for the investors that Citigroup allegedly defrauded of hundreds of millions of dollars. Not only that but the SEC isn’t promising to compensate the alleged securities fraud victims.

For now, the trial between Citigroup and the SEC is scheduled for July 2012. However, the Commission could decide to appeal Rakoff’s ruling and ask an appellate court to either make him accept the $285 million settlement or appoint a new judge to the case. According to the New York Times, however, this could prove challenging because a writ of mandamus would be required.

Our securities fraud law firm has had it with financial firms defrauding investors and then getting away with this type of misconduct. It is our job to help our clients recoup their losses whether via arbitration or in court.

Behind Rakoff’s Rejection of Citigroup Settlement, NY Times, November 28, 2011
Judge to SEC: Stop settling, start really suing, OC Register, November 28, 2011
Read Judge Rakoff’s Opinion

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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
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Ex-Goldman Sachs Director Rajat Gupta Pleads Not Guilty to Insider Trading Charges, Stockbroker Fraud Blog, October 26, 2011 Continue Reading ›

SEC’s Proxy Access Rule is Rejected by Appeals Court

Published on: August 5, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the District of Columbia Circuit has struck down a Securities and Exchange Commission rule that would have let company shareholders nominate one or two director nominees to their boards. The proxy access rule would have allowed groups with possession of a minimum 3% voting power of a company’s stock for a minimum of three years to nominate board candidates. Companies would have had to include information about these shareholder-nominated director candidates in their proxy materials.

The SEC had approved the regulation last year. It would have gone into effect in November, but the Commission stayed it after the US Chamber of Commerce and the Business Roundtable filed their legal challenge asking for the stay. The Business groups had said the rule was in violation of the Administrative Procedure Act and would “handcuff directors and boards,” exclude the majority of retail shareholders, and worsen the “short-term focus” considered among the main causes of the economic crisis. There were also concerns that the proxy access rule would let hedge funds, union-connected pension funds, corporate raiders, and hedge funds elect directors who would do as they directed.

The Chamber of Commerce and Business Roundtable also accused the SEC of disregarding studies and evidence that revealed the” adverse consequences of proxy access,” attempting to restrict the ability of shareholders to stop special interest groups from starting up expensive election contests, and not giving full consideration to state laws about access to principles about and related to proxy that already exist.