Securities and Exchange Commission

SEC News: Regulator Approves In-House Enforcement Reforms, Adopts Guidance For Security-Based Swap Transaction Reporting, and Will Audit Financial Advisers Over Mutual Fund Shares

Published on: July 14, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Commission to Audit RIAs Over Mutual Fund Share Classes
The SEC has announced that it will audit registered investment advisers so that it can examine the kinds of mutual fund share classes that they sell to clients. Share class recommendations and compliance are of particular interest to the regulator.

Because RIAs are fiduciaries, they have a duty to uphold their clients’ best interests. This includes selecting the lowest-cost share classes and 529 plan investments on a client’s behalf, depending on the latter’s investment goals. The Commission wants to see whether conflicts of interest exist, such as when an adviser is also the brokerage firm or is affiliated with a firm that garners fees from selling certain mutual fund share classes.

The SEC also wants to look at whether RIAs are disclosing if there is anyone getting paid compensation for the sale of either mutual fund share classes or other investment products. The fee might be a charge for the actual sale or a fee incurred according to the assets sold.

SEC Adopts Amendments to Regulation SBSR
The U.S. Securities and Exchange Commission has adopted guidance and amendments for Regulation SBSR, which includes rules for the public dissemination and regulatory reporting of security-based swap transactions. The rules and guidance were created to enhance transparency in the market for security-based swaps. They were mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

SEC Bars Broker From Industry, Orders Her to Pay $4M for Inflating Firm’s Investment Performance to Bring In Rich Investor Clients

Published on: July 11, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has barred broker Dawn J. Bennett from the securities industry. The regulator also ordered and her firm to pay over $4M in fines and disgorgement. The ruling was issued by an SEC administrative law judge.

According to the Commission, Bennett exaggerated her firm’s investment performance and assets under management so she could garner business from rich clients. Bennett is accused of promoting inflated assets to try to get high rankings on Barron’s top advisers list and using these rankings to retain new clients. She was named to that list three times as a manager who oversaw over $1B in client assets.

Bennett and her firm, Bennett Group Financial Services, purportedly claimed to be managing between $1.1B and $2B from at least ’09 through ’11 when, in reality, the firm never had more than $407M under management during that time period. The SEC, along with arbitration claims filed with FINRA, contend that at least two of her firm’s clients lost over $1M when they invested their funds with her.

Securities Fraud News: Andrew Caspersen Pleads Guilty to $40M Fraud, Massachusetts Investment Advisor to Pay $8M to Investors, & CFTC Orders Florida Man and His Companies to Pay Almost $175M in Sanctions in FX Ponzi Scam

Published on: July 6, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Ex-Wall Street Executive Admits to Bilking Friends and Relatives
Andrew Caspersen has pleaded guilty to federal criminal charges accusing him of defrauding relatives, friends, and Moore Charitable Foundation of $40M. Caspersen is an ex-Wall Street executive and a member of the wealthy Caspersen family. The charitable foundation he bilked belongs to billionaire hedge fund manager Louis Bacon and his investment firm Moore Capital Management.

Caspersen, 39, pleaded guilty to one charge of wire fraud and one charge of security fraud. Each criminal charge comes with a maximum term of 20 years behind bars.

Caspersen’s defense team initially argued that he was addicted to gambling and suffered from mental illness, which were what supposedly compelled him to run his multi-million dollar Ponzi-like scam. His mother, close friends, the family of an ex-girlfriend, and others were among those whom he bilked.

Securities Headlines: SEC Announces $17M Whistleblower Lawsuit, Delta Employees File 401(K) Lawsuit Against Fidelity, Blackstone President Says Hedge Funds Could See 25% Asset Loss, and Deutsche Bank is Fined $6M By FINRA

Published on: June 29, 2016 | by Shepherd Smith Edwards & Kantas, LLP

SEC Issues Its Second Largest Whistleblower Award
U.S. Securities and Exchange Commission has awarded the ex-employee of a company more than $17M for a whistleblower tip that helped move the regulator’s probe forward, ultimately resulting in a successful enforcement action against that company. This is the second largest award that the regulator has issued since it started its whistleblower program in 2011.

To date, the program has awarded over $85M to 32 whistleblowers. The largest SEC whistleblower award so far has been $30M and it was issued in 2014. In the last five months alone, five whistleblowers have been awarded over $26M.

Under the SEC whistleblower program, whistleblowers may be entitled to receive a monetary award if the information they’ve voluntarily given the regulator is original and helpful, resulting in an enforcement action, and the monetary sanction arrived at is greater than $1M. In such cases the whistleblower may be entitled to 10-30% of the funds collected. The payments come out of an investor protection fund paid for by monetary sanction payments issued to the SEC for securities law violations.

Delta 401(K) Participants File Lawsuit Against Fidelity
Fidelity Investment units are now defendants in a 401(K) lawsuit filed by participants in a Delta Air Lines Inc. retirement plan. The plaintiffs want class action status.

They claim that Financial Engines, which was retained to give investment advice to the Delta Family-Care Savings Plan, is paying Fidelity a substantial chunk of the fees it receives from the 401(k) plan members. This has purportedly inflated the cost of investment advice services that are essential to the plan and is a violation of Fidelity’s fiduciary duty. They also claim that Fidelity’s management of BrokerageLink, a self-directed brokerage account, acquires share classes with high expense ratios that pay the broker dealer significant revenue-sharing payments. The plaintiffs believe Fidelity is “effectively” utilizing the assets of the plan to its benefit.

Fidelity claims the allegations are meritless.

SEC Bond Cases: Illinois Mayer Settles Municipal Bond Fraud Charges for $10K, Ethiopia’s Electric Utility Pays Over $6M to Resolve Bond Offering Violations, and Miami , Fla. Likely to Come Under Scrutiny in Civil Trial

Published on: June 12, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Mayor of Harvey, Illinois Barred From Future Involvement In Muni Bond Offerings
Eric J. Kellog, the mayor of Harvey, Illinois, will pay $10K to resolve the Securities and Exchange Commission’s case accusing him of municipal bond fraud. As part of the settlement, Kellog has agreed to never take part in a muni bond offering again.

According to the Commission, Mayor Kellogg was tied to a number of fraudulent bond offerings made by the city of Harvey. Investors thought their money would go toward building a Holiday Inn hotel when, instead, at least $1.7M in bond proceeds were diverted to cover the city’s payroll and pay for operational costs that had nothing to do with the hotel construction project.

Kellogg was in charge of Harvey’s operations. His signature was on key offering documents used by the city of Harvey to sell and offer the municipal bonds. The SEC said that the mayor was liable for fraud as a control person under the Securities Exchange Act.

By settling, Kellog is not denying or admitting to the SEC findings.

Ethiopia’s Electric Utility Pays Over $6M to Settle SEC Municipal Bond Case
In other bond fraud news, the SEC has reached a settlement with the Ethiopian Electric Power over charges that the foreign electric utility did not register the bonds that it sold and offered to U.S. residents who were of Ethiopian descent. EEP will pay almost $6.5M to resolve the case accusing it of violating U.S. securities laws.

Tennessee Investment Advisory Firm Accused of Trying to Collect Extra Fees from Hedge Funds

Published on: June 8, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging Hope Advisors Inc. and owner Karen Bruton with scheming to get two hedge funds that they managed to pay them extra fees. The private hedge funds are HDB Investments LLC and Hope Investment LLC.

The purported misconduct was discovered by the regulator’s Atlanta office, which was examining the Nashville, Tennesse-based firm and Bruton. The regulator claims that Hope Advisors and Bruton sought to get around the funds’ fee structure, which lets the firm receive fees from the funds only if their profits for the month exceeds previous losses. The firm and Bruton are accused of orchestrating a number of trades that would let the funds make a bigger gain closer to the end of the month and guarantee a big loss early on at the start of the next month.

The SEC said that if it weren’t for the fraudulent trades, Hope Advisors would have earned almost no incentive fees for close to two years. Instead, claims the Commission, the firm managed to avoid realization of over $50M in losses while making millions of dollars in fees that they should have never been paid.

SEC Reaches $12.7M RMBS Fraud Settlement in Case Involving Ginnie Mae

Published on: June 7, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission said that First Mortgage Corporation (FMC) and six of its executives will pay $12.7M to resolve charges accusing them of running a RMBS fraud scam to bilk investors. The Government National Mortgage Association, also known as Ginnie Mae, guaranteed the residential mortgage-backed securities. The mortgage lending company is the one that issued the Ginnie Mae RMBS and the securities were backed by loans that FMC had originated.

According to the regulator, from 3/11 to 3/15, FMC’s top executives withdrew performing loans from Ginnie Mae residential mortgage-backed securities by making false claims that they were delinquent so that it could sell them into newly issued RMBS and make a profit. The mortgage company’s improper and deceptive use of a Ginnie Mae rule giving issuers the choice to rebuy loans that had been delinquent for at least three months caused the prospectuses of the original RMBS to become misleading and false.

The SEC also claims that FMC purposely held back on depositing the checks of borrowers who were late on their loans by making false claims to Ginnie Mae and investors that these loans had stayed delinquent when they were, in fact, current. In its complaint, the regulator said that FMC’s top management approved these actions.

Ex-Dean Foods Board Member, Pro Golfer Phil Mickelson, and Professional Sports Gambler Are Named in Insider Trading Case

Published on: May 28, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed civil charges against professional sports gambler William Walters. He is accused of making $40M from an illegal stock tip given to him by former Dean Foods Company board member Thomas C. Davis. The regulator said that Davis, who owed Walters money, gave him insider information about the company prior to market-moving events.

Professional golfer Phil Mickelson, who is a relief defendant in the case, allegedly traded in Dean Foods securities based on Walter’s recommendation. Mickelson then purportedly took the nearly $1M he made from the trading to help repay the gambling debt he owed to Walters. As a relief defendant, Mickelson is not being charged with insider trading or accused of wrongdoing. He will, however, have to pay back the money he made from trading in Dean Foods securities.

As to why Mickelson won’t be prosecuted, The New York Times reports in the article “How to Get Away with Insider Trading,” this is because of U.S. insider trading laws, which bars trading on nonpublic information only if the information has been used or obtained wrongly. This allows parties involved later on in the “chain of information” to benefit from such rules.

Walters and Davis, however, are charged in this case. The SEC’s complaint said that the illegal trading took place over five years.

SEC Issues More Whistleblower Awards

Published on: May 27, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has awarded new whistleblower awards to individuals who have come forward with original and helpful information that have allowed the government to pursue significant securities cases against offenders. By law, a whistleblower is entitled to 10-30% of money garnered when a monetary sanction obtained exceeds $1.

Last week, the SEC announced that it would award between $5M-$6M to an ex-company insider who provided information about his employer’s securities violations. The SEC said that the offenses would have been nearly impossible to identify had it not been for the tip. More specifics about the case were not provided in part to protect the whistleblower’s identity.

The award is the third highest that the Commission has issued to a whistleblower since the whistleblower program when into effect in 2011. The two larger whistleblower awards include one of over $30M in 2014 and another of more than $14M in 2013.

SEC Says Pennsylvania Financial Adviser Bilked Professional Athletes

Published on: May 11, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission is filing fraud charges against Louis Martin Blazer III, a Pittsburgh-based financial adviser. Blazer founded Blazer Capital Management—a firm that works with high-net worth individual clients and professional athletes. He allegedly took money out of the accounts of these athletes without their permission so he could issue Ponzi-like payments and invest in movies.

The SEC contends that Blazer took about $2.35M from five clients and invested in two movie projects. One client had even rejected the opportunity to invest in the films and still Blazer purportedly took $550K from this person’s account and invested the funds. After the client found out about the authorized investment and demanded his money back, Blazer allegedly used from another athlete’s account to pay the other client back, forging the second client’s signature on documents to initiate the transfer of $650K. He used $550K of that to pay back the first client. He purportedly used the remaining $100K to invest in a music venture on behalf of Blazer Capital.

When SEC examiners discovered the unauthorized transactions made in clients’ accounts, Blazer allegedly lied about them and turned over false documents that he had created to conceal his misconduct. He said that clients had authorized the transactions.