Securities and Exchange Commission

Virtus Investment Advisers to Pay $16.5M to Settle False Performances Claims Related to ETF Portfolio Strategy

Published on: November 16, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission says that Virtus Investment Advisers will pay $16.5M to resolve charges accusing the investment management firm of misleading mutual fund investors and others using ads with false historical performance information about exchange-traded fund portfolio strategy AlphaSector. According to the regulator, the firm publicized a performance track record that it got from F-Squared that was substantially overstated. Virtus had hired F-Squared as a mutual fund subadvisor as well as a subadvisor for those that followed AlphaSector.

The SEC, following its probe, said that Virtus falsely stated in SEC filings, client presentations, marketing collateral, and other communications that the AlphaSector’s strategy had a performance history going as far back as 2001 and had for a number years outperformed the S & P 500 Index. The investment management firm is accused of accepting F-Squared’s misrepresentations as fact while disregarding the red flags that raised doubts about these statements.

Six years ago Virtus recommended that shareholders of specific mutual funds and the boards of trustees approve a modification in strategy and management to AlphaSector and F-Squared. This recommendation was made because of the false historical data on AlphaSector.

Republican Rep. Introduces Bill to Place Limits on SEC’s Use of In-House Judges

Published on: November 9, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Rep. Scott Garrett (R-N.J.) recently introduced legislation that would let defendants choose the option of having their case tried in federal court instead of by a Securities and Exchange Commission administrative law judge. Garrett believes that the regulator has been overusing its in-house courts, practically turning itself into “judge, jury, and executioner” in enforcement cases.

Garrett, along with others who oppose the use of SEC in-house judges, says that defendants have greater latitude when their cases go to a jury. His bill would also up the evidence standards for cases that are presided over by an SEC judge.

Several parties have filed lawsuits opposing the SEC’s administrative court process. They claim that the system is a constitutional violation. Some feel that the SEC has the upper hand when it comes to the outcome of enforcement cases because its own judges are deciding the rulings.

Fenway Partners to Pay Over $8M For Not Disclosing Conflicts of Interest

Published on: November 5, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed charges against Fenway Partners LLC and four of its executives. According to the regulator, when fund and portfolio company assets were used to pay ex-firm employees and an entity to which the New York-based private equity firm is affiliated the parties did not disclose to a fund client and investors that there were conflicts of interest.

The SEC says that Fenway Partners, principals William Gregory Smart and Peter Lamm, CFO Walter Wiacek, and ex-principal Timothy Mayhew Jr. did not fully disclose to the client and investors that a number of transactions involving over $20M in payments had come out of portfolio companies or fund assets. SEC Enforcement Division Director Andrew Ceresney said that the investors and the fund client were not told that the firm and its principals had rerouted the portfolio company fees to affiliate Fenway Consulting Partners, LLC for services and that they failed to give the fund client the benefits of those fees via fee offsets for management.

Also, according to the SEC’s order, which institute a resolved administrative proceeding, Fenway Partners went into contracts with the certain portfolio companies that were held by Fenway Capital Partners Fund III L.P. Through these contracts, the companies paid Fenway Consulting Partners the fees at issue.

SEC Issues Over $325K Whistleblower Award to Ex-Investment Firm Employee Who Provided Fraud Tip

Published on: November 4, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is awarding over $325K to an ex-investment firm employee who notified the regulator about misconduct that had been going on at his former employer. The information he provided allowed the SEC’s enforcement staff to investigate and discover the extent of the fraud.

In addition to providing specific details about the misconduct, the whistleblower identified who was involved in the fraud. However, said the Commission, if the whistleblower had come forward with the information sooner rather than waiting until after departing the investment firm, the award for exposing the fraud may have been greater.

In a statement, SEC Enforcement Division Director Andrew Ceresney spoke about how it is important for corporate insiders who are aware that there have been securities law violations to report what they know right away so that the misconduct can be stopped and investors are protected from any or further harm. He noted that the Dodd-Frank Act provides whistleblowers with substantial protections and incentives for tipping the agency about suspected wrongdoing.

Securities News: J.P. Morgan Face Restrictions on Raising Clients Funds In the Wake of Improper Product Disclosures to Investments, Intel Sued Over Improperly Investing 401K Funds, and Citigroup, Bank of America, Other Big Banks Get New Bailout Rules

Published on: October 30, 2015 | by Shepherd Smith Edwards & Kantas, LLP

SEC Seeks to Limit JP Morgan’s Ability to Raise Client Money
An Over $200K settlement between J.P. Morgan Chase & Co. (JPM) and regulators has stalled because of efforts by federal regulators to limit the firm’s ability to raise money for clients. The move is an attempt to place a wider variety of consequences on financial firms accused of breaking regulations.

J.P. Morgan had settled allegations accusing it of failing to make proper disclosures when marketing its investment products to clients over the products offered by competitors. Now, the SEC wants the firm to say yes to limits on its ability to sell bonds or stocks through private placements for several years. Such a restriction could hamper its private bank’s efforts to raise funds for hedge funds and other clients through a key channel or sell bonds or stocks privately to rich investors and other sophisticated investors.

While banks are allowed to conduct private placement offerings, firms that violate the rules that these securities are under will lose privilege unless they are given a waiver.

Lawsuit Accuses Intel of Investing 401K Monies Improperly
An ex-Intel Corp. employee is suing company officials for breach of fiduciary duty. According to Christopher M. Sulyma, the company invested defined 401K participants’ retirement funds in high risk, costly private equity funds and hedge funds.

Securities Enforcement: DBSR to Pay Almost $6M to Settle SEC Related to Ratings Methodology for RMBSs and Re-REMICs, FINRA Censures NFP Advisor Services for Inadequate Supervision of Private Securities Transactions

Published on: October 25, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Credit Rater Accused of Misrepresenting Surveillance Approach for Complex Securities
Credit rating agency DBSR Inc. will pay nearly $6 million to settle Securities and Exchange Commission charges. The regulator is accusing the credit rater of misrepresenting the surveillance method it used for rating certain kinds of complex financial instruments over a three-year period.

In its yearly examination of DBSR, The agency’s Office of Credit Ratings found that the credit rating agency misrepresented that it would each month monitor its current ratings of re-securitized real estate mortgage investment conduits and residential mortgage-backed securities. DBSR said it did this via a three-step quantitative analysis and a surveillance committee review of each rating.

However, said the SEC, the firm failed to perform this monthly scrutiny and did not have its committee look at each rating every month. Instead, when the committee would get together it would only examine a limited subset of outstanding Re-REMIC and RMBS ratings. The credit rater lacked the sufficient technological resources and staffing for performing surveillance for all outstanding Re-REMIC ratings and RMBS each month. The SEC also said that DBRS failed to disclose modifications to specific surveillance assumptions even though its methodology said that is what it would do.

As part of the settlement, DBRS consented to disgorge over $2.7M in rating surveillance fees that it received from ’09 to ’11 in addition to prejudgment interest. It consented to paying a $2.925M penalty and will hire an independent consultant to look at its internal controls, make recommendations for how to improve them, and other matters.

NFP Advisor Services to Pay $500K to FINRA Over Inadequate Supervision
The Financial Industry Regulatory Authority has censured NFP Advisor Services for failing to properly supervise its registered representatives when they conducted private securities transactions. These representatives were registered not just with the firm but also with a registered investment advisor.

SEC Charges Against Six Firms For Stock Offering-Related Short Sale Violations Results In Over $2.5M in Sanctions

Published on: October 14, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed charges against J.P. Morgan Investment Management Inc., War Chest Capital Partners LLC, Harvest Capital Strategies LLC, Omega Advisors, Inc., Auriga Global Investors, Sociedad de Valores, S.A., and, Sabby Management LLC. All six firms settled the enforcement actions, which allege short selling violations ahead of stock offerings. They will collectively pay over $2.5 million in sanctions.

Under rule 105, firms are not allowed to participate in public stock offerings after they’ve sold short the same stock. The prohibition is for five days. To do otherwise could lead to illicit profits for the trader while lowering the offering proceeds for a company via the artificial depression of the market price right before that company puts a price on the stock. The SEC contends that all six firms took part in short selling certain stocks right before buying shares from a broker, underwriter, or dealer that participated in a follow-on public offering.

Per the settlements:

• Auriga Global Investors will pay disgorgement of nearly $437K, a penalty of over $179K, and a prejudgment interest of over $2K.

• War Chest Capital Partners will pay disgorgement of over $169K, prejudgment interest of over $22K, and a penalty of $150K.

• Harvest Capital Strategies will pay over 418K of disgorgement, prejudgment interest of $619, and a $65K penalty.

• Sabby Management will pay disgorgement of over $184K, prejudgment interest of over $2300, and a penalty of over $91,600.

• JPMorgan Investment Management will pay disgorgement of over $662K, prejudgment interest of over $56,700, and a penalty of over $364K.

• Omega Advisors will pay disgorgement of $68K, prejudgment interest of $686K, and a penalty of $65K.

Securities Headlines: Halcyon Cabot Partners is Expelled from Industry by FINRA, Blackstone Settles Disclosure Failure Charges for Nearly $39M, SEC Approves Proposal to Improve Transparency for OTC Equity Securities

Published on: October 8, 2015 | by Shepherd Smith Edwards & Kantas, LLP

FINRA Expels Halcyon Cabot, Bars Chief Executives
Halcyon Cabot Partners, Ltd. has been expelled by FINRA. The regulator also has barred its CEO Michael Morris and CCO Ronald Heineman from the securities industry. The reasons for the expulsion and bars include fraud, abusive sales practices, the concealment of private placement fee kickbacks, and other purported acts.

According to the self-regulatory organization, Halcyon, the two men, and previously barred former registered rep. Craig Josephberg hid the discount the issuer gave to a venture capital firm when it bought a private placement in a company. The scam was executed using a fake placement fee deal after the venture capital firm agreed to buy all the offerings. However, FINRA said, because there already was a buyer, Halcyon didn’t conduct any work and gave back nearly all of its $1.75M fee to the investor via bogus consulting agreements. As a result, the company was able to hide that its shares were sold at a reduced rate.

FINRA contends that Halcyon did not properly supervise Josephberg, who was making unauthorized trades and churning retail accounts. The regulator is accusing Morris of falsifying Halcyon’s records to hide the securities sales that Josephberg made in states where he wasn’t registered, including Texas.

Blackstone Group to Pay Almost $39M Over Disclosure Failures
The Securities and Exchange Commission said that three private equity fund advisers that belong to The Blackstone Group have consented to pay close to $39 million to resolve charges that they did not fully inform investors about the benefits they received from discounts on legal fees and accelerated monitoring fees. While Blackstone is settling and has consented to the entry of the regulator’s order stating that it breached its fiduciary duty, failed to put into place policies and procedures that were reasonably designed, and failed to correctly disclose information to investors of the funds, it is not denying or admitting to allegations.

The three fund advisers are:

• Blackstone Management Partners
• Blackstone Management Partners IV
• Blackstone Management Partners II

SEC Regulation News: Commission Proposes Mutual Fund, ETF Liquidity Management Rules, Requests Regulation S-X Comments, and Takes Out Credit Ratings References in Money Market Fund Form and Rule

Published on: October 4, 2015 | by Shepherd Smith Edwards & Kantas, LLP

SEC to Propose Reforms to Improve Liquidity Management for Open-End Funds
The Securities and Exchange Commission voted to propose a package of rule reforms to improve effective liquidity risk management for open-end funds, including exchange-traded funds and mutual funds. If approved, both would have to put into place liquidity risk management programs and improve disclosure about liquidity and redemption practices. The hope is that investors will be more able to redeem shares and get assets back in a timely fashion.

The liquidity risk management program of a fund would have to include a number of elements, including classification of the fund portfolio assets liquidity according to how much time an asset could be converted to cash without affecting the market, the review, management, and evaluation of the liquidity risk of a fund, the set up of a fund’s liquidity asset minimum over three days, as well as board review and approval. The proposal also seeks to codify the 15% limit on illiquid assets that are found in SEC guidelines.

Commission Looks for Comment on Regulation S-X
The SEC announced last month that it is looking for public comment regarding the financial disclosure requirements in Regulation S-X and their effectiveness. The comments are to focus on form requirements and the content contained in financial disclosure that companies have to submit to the regulator about affiliated entities, businesses acquired, and issuers and guarantors of guaranteed securities.

Latour Trading Faces SEC Charges Over Market Structure Rule Violations, Will Pay Over $8M

Published on: September 30, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging Latour Trading LLC with violating the agency’s rules regarding market structure. To resolve the case, the high-frequency trading firm will pay over $8M, including more than $3 million of disgorgement of gross trading profits, rebates it received from exchanges, and prejudgemenet interest, as well as a $5 million civil penalty.

According to the SEC, Latour violated the SEC’s Market Access Rule and Regulation National Market System for almost four years, sending millions of orders that were non-compliant to US exchanges. The Commission noted that because the firm shares parts of its electronic trading infrastructure with parent company Tower Research, some of the employees from that company could modify the computer code without the firm’s approval or knowledge.

In 2011, Tower Research made a coding modification that produced an error in the infrastructure, causing Latour to transmit millions of orders to exchanges that were not in compliance with Regulation NMS’s requirements. Specifically, from 10/10 through 8/14, Latour sent about 12.6 million intermarket sweep orders for over 4.6 billion shares.

With ISOs, trade centers may execute them at prices that might otherwise seem to violate Regulation NMS’s Rule 611, which usually mandates that trades be done at the best available price displayed. Also, trade centers can execute them right away according to the ISO router’s obligation to transmit additional orders against better price displayed quotes.