Securities and Exchange Commission

SEC Proposes to Modify Rules Regarding The Use of Its In-House Judges in Enforcement Cases

Published on: September 24, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has issued proposals that would amend its rules governing its use of administrative law judges in enforcement proceedings. The proposed amendments come in the wake of criticism and lawsuits contending that having in-house judges preside over SEC cases gives the regulator an unfair advantage over defendants and violates the constitution because of the way the judges are appointed.

According to The Wall Street Journal, from October 2010 through March 2015, the SEC won 90% of its cases that were presided over by an in-house judge. It won just 69% of cases in federal court during that same time period. Every fiscal year since October 2004, the SEC has emerged victorious against at least four out of five defendants in cases that went before its judges.

Billionaire Mark Cuban, who was previously found not liable in the SEC’s insider trading case against him, recently said in a court brief that if his case had been heard by an SEC judge instead of in federal district court, he would have not benefited from certain protections and the outcome would have been very different for him. Cuban filed the brief in support of real estate developer Charles Hill, who also has been accused of insider trading. Hill is seeking to have his case transferred from the SEC’s in-house court to federal court.

Already a federal judge has ruled that the use of an in-house judge in the Commission’s case against Hill was “likely unconstitutional” and a federal judge stayed the case in June pending further review. The SEC is appealing.

Three primary changes to the Commission’s Rules of Practice that have been proposed, including, the

· Modification of the timing of administrative proceedings. such as giving more time before a hearing takes place in certain cases. Currently, defendants have four months to get ready for trial. The modified rules would give them eight months.

SEC Charges First Eagle Investment Management With Improper Use of Shareholder Assets

Published on: September 21, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging First Eagle Investment Management and its distribution arm FEF Distributors with improperly using the assets of mutual fund shareholders to pay two broker-dealers to market and distribute its funds. To settle the charges, both entities will pay $40 million, which will go toward repaying shareholders that were impacted. The SEC said the violations took place from 1/08 to 3/14.

While it is typical for mutual fund managers to pay money to brokerage firms and other financial intermediaries to get funds placement on platforms and distribution through financial advisers, the payments are only allowed to come from the assets of an actual fund if they are part of a 12-1b plan that involves apprising shareholders and fund boards of such payments. Also, while funds are allowed to pay broker-dealers for services rendered, again they can only come out of a fund’s assets for said services and not for access to a brokerage firm’s clients.

The SEC has been looking into whether funds are being illegally paid to broker-dealers under the pretense that their money was going toward other services. The regulator’s efforts are related to its Distribution-in-Guise Initiative, which involves investigating whether certain mutual fund advisers are using fund assets improperly by disguising distribution payments as sub-transfer agency payments. The Commission contends that First Eagle and FEF distributors illegally caused the asset managers to pay close to $25 million for services that were related to distribution as opposed to using its own assets to pay firms for this access.

SEC Denied Request that Temporary Ban on In-House Judges Be Lifted

Published on: September 17, 2015 | by Shepherd Smith Edwards & Kantas, LLP

District Court Judge Richard Berman in New York has rejected the Securities and Exchange Commission’s request that a preliminary injunction on its use of administrative law judges in its proceedings be lifted. Berman said that the regulator has not shown “likely success” in its claim that the ALJ process is constitutional.

The judge also turned down the SEC’s contention that its administrative case against ex-Standard & Poor’s Rating Services (S & P) managing director Barbara Duka should proceed. Duka is challenging that securities case, arguing that SEC proceedings with administrative judges violate the Constitution because of how the justices are named and supervised.

Berman wants the SEC to fully probe charges of bias related to in-house judges. Critics have expressed concern that the in-house court presided over by Commission judges places the regulator at an unfair disadvantage over defendants. The SEC disagrees with these concerns, claiming that not only are judges impartial but also its court system is more efficient than that of the federal courts.

SEC Orders Investment Advisory Firm to pay $21M For Allegedly Retaining Clients’ CDO Fees

Published on: September 3, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Taberna Capital Management has consented to pay $21 million to resolve Securities and Exchange Commission charges alleging that it fraudulently kept fees that belonged to collateralized debt obligation clients. According to the regulator, the investment advisor retained “exchange fees” related to restructuring transactions, which was not allowed under the CDOs governing documents. The retention of the fees was purportedly not disclosed to investors.

The SEC maintains that these fees belonged to the CDOs and became a conflict interest that was not revealed. According to the agency’s order instituting administrative proceedings, for three years, from ’09 to ’12, the Pennsylvania-based investment advisory firm sought and kept millions of dollars in exchange fees paid by issuers of the securities that the CDOs held when Taberna recommended exchange transactions to clients. The SEC said that those fees actually belonged to the CDOs and that the firm made its misconduct difficult to identify by improperly labeling the fees as third party costs in documents even though these costs were only a small portion of the total exchange fees.

Also, said the SEC, Taberna did not mention these fees in quarterly reports to investors nor did it identify them in Forms ADV even though they should have been noted. The regulator said the retention of the fees set up a conflict of interest between the firm and investors and CDO clients, even at times giving Taberna incentive to steer issuers toward a particular exchange regardless of what restructuring might benefit it the most.

Citigroup Global Markets to Pay $15M Penalty to the SEC for Surveillance and Compliance Failures

Published on: August 21, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission said that Citigroup Global Markets (C) will pay a $15M penalty to settle charges that it did not enforce procedures and policies that would stop and identify securities transactions potentially involving the wrongful use of material, nonpublic information. Citigroup agreed to the SEC’s order without denying or admitting to the regulator’s findings.

The firm also has paid $2.5 million to advisory client accounts that were affected. That amount is how much Citigroup made from the principal transactions that resulted because of the purported compliance and surveillance failures.

According to SEC, which conducted a probe, over a period of ten years, Citigroup failed to review thousands of trades that were made by a number of trading desks. Even though firm personnel looked at reports to assess trades daily, technological errors caused several information sources regarding thousands of key trades to be left out.

As the SEC noted in its order, advanced computer systems are often now involved in automated trading. Technology oversight is key to making sure that compliance is in effect.

Insider Trading Charges Filed Against 32 Defendants in Hacking Scam Involving Newswire Services

Published on: August 17, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed financial fraud charges against 32 defendants accused of insider trading by using information obtained from newswire services that were hacked. Two Ukrainians and 30 other defendants in the U.S. and abroad are accused of making $100 million in illegal gains.

According to the regulator, for about five years, Oleksandr Ieremenko and Ivan Turchynov, both from Ukraine, hacked in to at least two newswire services and stole hundreds of corporate earnings announcements before they were issued to the public. Bloomberg says the services are Business Wire, Marketwired, and PRNewswire Association LLC.

The suspected hackers are accused of grabbing over 150,000 news releases that allowed them to anticipate movements in the stock market and make trades that would turn a profit. They also purportedly set up a secret web-based location to transmit the stolen information to traders in numerous countries and U.S. states.

The two men are accused of concealing intrusions with proxy servers to hide their identities and pretending to be newswire service employees and customers. Turchynov and Ieremenko are also accused of using a video highlighting the theft of the earnings data prior to public release to recruit traders.

ITG, AlterNet Securities to Pay $20.3M to Settle SEC Charges that it Misused Confidential Dark Pool Data, Ran Secret Trading Desk

Published on: August 13, 2015 | by Shepherd Smith Edwards & Kantas, LLP

ITG Inc. and affiliate AlterNet Securities will pay $20.3M to resolve Securities and Exchange Commission charges accusing them of running a secret trading desk and misusing dark pool subscribers’ confidential trading information. As part of the settlement, ITG admitted to wrongdoing.

According to the regulator, even though it told the public it was an “agency-only” broker with interests that were not in conflict with the interests of customers, the firm ran Project Omega, an undisclosed proprietary trading desk, for over a year. The SEC’s probe found that even though ITG said that it protected dark pool subscribers’ trading information, for eight months, the trading desk accessed feeds of order and execution data and used the information to put into place its strategies for high-frequency algorithmic.

Former Standard & Poor Executive’s Case Against the SEC Over In-House Judge Can Proceed

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

A U.S. district court judge says that Barbara Duka’s lawsuit against the Securities and Exchange Commission can move forward. Duka used to be the head of Standard & Poor’s commercial mortgage-backed securities group. She is challenging the regulator’s decision to appoint an administrative law judge to preside over its securities fraud case against her. Duka wants her case heard in federal court.

The SEC claims that the former S & P executive hid the way the credit ratings agency had relaxed its requirements for calculating certain commercial mortgages. Their lawsuit against her came just as S & P consented to pay $77 million to resolve related charges by the regulator and the attorneys general of Massachusetts and New York.

Issuers and investors were not happy when in 2011 S & P withdrew a preliminary rating on a $1.5 billion security. Following a partial restructuring, that deal later went to market. The SEC would go on to launch probes into why the rating was pulled, and also into six other deals that were rated that year. The SEC’s own internal probe uncovered inconsistencies in the methodologies for the way S & P rated existing and new deals.

Ex-Oppenheimer Employees Resolve SEC Charges Over Unregistered Penny Stock Sales

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

The Securities and Exchange Commission said that Scott A. Einsler, Arthur W. Lewis, and Robert Okin, three former Oppenheimer & Co. (OPY) employees, have settled charges involving the unregistered sales of billions of shares of penny stocks for a customer. The actions are related to part of an enforcement action that the brokerage firm settled with the regulator, as well as with the U.S. Treasury Department’s Financial Crimes Enforcement Network. Under that agreement, the firm paid $20 million to resolve those claims.

In this latest order instituting administrative proceedings that have been resolved, Eisler, who used to be a registered representative at an Oppenheimer Florida branch, is accused, along with former supervisor and branch manager Lewis, of executing the penny stock shares in illegal unregistered distributions. While securities laws grant exemption liability for brokers who make a reasonable inquiry into the facts involving the proposed sale of a customer, the SEC said that the two men did not make the required inquiry even though there were significant warning signs. Also, according to the regulator, Lewis and Okin, previously the head of the private client division, committed supervisory failures when they did not address the warnings.

To resolve the proceedings against him, Eisler consented to pay $50,000 and he will be barred from the securities industry and penny stock sales for a year. Lewis also will pay a penalty for the same amount and his bar from the industry in a supervisory capacity is also for a year. Okin will pay $125,000 and also serve a yearlong supervisory bar from the industry. All three men agreed to settle without denying or admitting to the SEC’s findings.

SEC Awards Over $3M to Whistleblower

Published on: July 24, 2015 | by Shepherd Smith Edwards & Kantas, LLP

In the third highest award that the Securities and Exchange Commission has issued under its whistleblower program, the regulator is giving one individual $3 million for providing information that helped expose a complex fraud. The tip provided by the whistleblower included details and specifics about the scam, which would have been difficult to detect otherwise. Related actions also resulted because of the information this person provided.

Since inception four years ago, the SEC whistleblower program has paid out over $50 million to 18 whistleblower. The biggest award to date was $30 million, issued last year. A $14 million whistleblower award was issued in 2013.

Under the program, whistleblowers that provide the regulator with original information that helps the SEC pursue a successful enforcement action are eligible for 10-30% of the money collected if the sanction exceeds $1 million. The SEC is legally bound to protect the confidentiality and identity of whistleblowers.