Securities and Exchange Commission

U.S. Chamber of Commerce Wants the SEC to Reform Its In-house Trials

Published on: July 23, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The US Chamber of Commerce is calling on the U.S. Securities and Exchange Commission make reforms to the way it conducts in-house trials. The Chamber wants the regulator to put into place a uniform policy of when such trials should take place, amend its rules to allow for more pretrial discovery, and set up a process that would let defendants challenge the choice of an in-house venue.

Critics believe that the SEC’s administrative trials violate the Constitution because there is limited discovery and no jury. Depositions are not allowed nor are counterclaims. To appeal a ruling by an administrative law judge, the person has to go to the Commission first before it can go to a circuit court of appeals.

The SEC has increased its use of in-house trials, which are presided over by one of its judges, ever since the 2010 Dodd-Frank Act went into effect. The Chamber of Commerce is concerned that this is causing serious issues of fairness. The lobbying group made nearly forty recommendations, including that the SEC revise certain deadlines and update its rules.

The chamber believes that some of the rules that preside over the SEC in-house court are no longer appropriate for certain complex cases, such as those involving insider trading. It wants more streamlining of investigations, modifications to the Wells notice process, less duplicate efforts among regulators, and clarification of the SEC’s policy regarding admission of guilt in enforcement actions.

Oz Management to Settle SEC Charges Over Inaccurate Data by Paying $4.25M

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

Investment adviser Oz Management, LP has agreed to pay a $4.25M penalty to settle SEC charges that it provided inaccurate trading data to four prime brokers. This led to inaccuracies in the books and records of the brokers, including the inaccurate listing of about 552 million shares. Also, the inaccurate trading information resulted in inaccuracies in the information given to the regulator during investigations.

The SEC’s order said that for almost six years, up through the end of 2013, the firm misidentified certain trades in information given to the brokers. Trade settlement was not impacted. However, in addition to the erroneous listings previously mentioned, the wrong information was also woven into the data that the brokers electronically provided to regulators.

Because of this, about 14.4 million shares were inaccurately reported when addressing SEC requests. It was this inaccurate information that the Financial Industry Regulatory Authority used to make a number of referrals to the agency.

The SEC discovered the purported violations during a 2013 probe when it realized that Oz Management’s files didn’t identify trades the same way as was noted on blue sheets. In certain trades the investment adviser did not characterize the sales as short or long in the same way that they were marked when they were sent to the market. Instead, the trades were filtered according to other factors.

Bipartisan U.S. Senate Bill Wants to Up SEC Fines For Securities Law Violations By Almost Ten Times

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

U.S. Senators Chuck Grassley (R-Iowa) and Jack Reed (D-R.I.) introduced a bipartisan bill this week that would allow the Securities and Exchange Commission to impose much higher civil monetary penalties against individuals and financial firms that violate securities laws. The measure is called the Stronger Enforcement of Civil Penalties Act of 2015.

Senator Grassley said that the current SEC fines are “decimal dust,” which don’t serve as much of a deterrent. He said that a penalty “should mean something.” He and Senator Reed said they want to enhance investor protections. As Mr. Reed pointed out, over half of American households own securities, with many dependent on the market for their retirement and their kids’ college education. He said that investors shouldn’t have to incur substantial losses while violators get away with a “slap on the wrist.”

Under the new bill, the SEC would be able to impose up to $1 million against individuals for every serious offense as long as the penalty isn’t already tied to illegal funds that that the person received. Serious offenses would include deceit, fraud, deliberately ignoring regulations, and manipulation. The current maximum penalty for individuals over such offenses is $160,000.

Hedge Fund Advisory Firm to Pay the SEC $5M to Settle Fund Valuation Scam Allegations

Published on: July 1, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging AlphaBridge Capital Management and its two owners with fraudulently inflating the prices of securities in hedge fund portfolios that the firm managed. The feeder funds involved are the private funds AlphaBridge Fixed Income Partners, LP and the AlphaBridge Fixed Income Fund, Ltd.

The securities in question are inverse, interest-only floaters and interest only floaters. Both are tranches of collateralized mortgage obligations. To settle the charges, the Connecticut-based investment advisory firm and its owners, Michael J. Carino and Thomas T. Kutzen, will pay $5M.

According to the regulator, AlphaBridge told investors that broker-dealers provided it with independent price quotes for residential mortgaged-backed securities that were thinly traded and unlisted even though the firm derived these valuations internally. The hedge fund advisory firm purportedly told brokers to say that the valuations came from their brokerage firms.

KKR & Co. Will Pay Nearly $30M to Settle SEC Charges of Misallocating Broken Deal Expenses

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

The U.S. Securities and Exchange Commission announced that Kohlberg Kravis Roberts & Co. (KKR) would pay close to $30 million, including a $10 million penalty, to settle charges that it misallocated over $17 million in “broken deal” expenses to its flagship private equity funds. According to the regulator, over a six-year period ending in 2011, KKR incurred $338 million in diligence expenses, also known as broken deal costs, related to buyout opportunities that were unsuccessful, as well as other similar expenses.

This is the first time the SEC has charged a private equity adviser over the misallocation of broken deal costs. During the period in question, KKR was overseeing two money pools—the private equity funds and its co-investment vehicles. As the private equity funds invested $30.2 billion, KKR co-investors put in $4.6 billion alongside the funds. Yet even though the firm raised billions of dollars of deal capital from co-investors, it was the flagship funds funds that ended up bearing all the costs of these broken deals.

The SEC said that as a result of the firm’s allocation practices, firm insiders and certain major clients who had invested via the co-investment vehicles benefited as none of the broken deal costs were allocated them for years even as they also availed of deal sourcing activities. The regulator said that not notifying investors of its allocation practices was a breach of fiduciary duty by KKR.

Goldman Sachs to Pay $7M Over Market Access Rule Violation Allegations

Published on: June 28, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Goldman Sachs (GS) has agreed to pay a $7 million penalty to settle SEC charges accusing the firm of violating the market access rule on August 20, 2013. According to the SEC, on that day, in under an hour, the firm mistakenly executed thousands of options contracts executions resulting in incorrect orders.

The regulator said that Goldman did not have the adequate safeguards in place that could have prevent it from accidentally sending about 16,000 options orders that were wrongly priced to different options exchanges. According to the SEC, the mistaken transactions occurred after Goldman put into place new electronic trading functionality that was supposed to match client orders with internal options orders.

Because of a configuration error in the software, contingent orders were turned into live orders. All of the orders were given a $1 price.

The orders were sent to options exchanges during pre-market trading. Minutes after regular market trading opened, about 1.5 million options contracts were executed. Because of the rules regarding erroneous options trades, many of the executed trades received price adjustments or were cancelled. The losses might have otherwise cost the firm $500 million.

SEC’s Stein Wants Regulator to Take a Closer Look at Exchange-Traded Funds and Alternative Mutual Funds

Published on: June 22, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Kara Stein, an SEC commissioner, is calling on the Securities and Exchange Commission to examine whether exchange-traded funds and alternative funds are managing to get around certain rules and placing investors at risk. Stein said that both types of funds, which use high-risk complex investment strategies or place their money in illiquid assets, frequently “operate in a gray area” when it comes to regulation.

During a speech at the Brookings Institution, the SEC Commissioner noted that alternative mutual funds, which act like hedge funds and are often called liquid alts, don’t have to abide by the Investment Company Act of 1940 rules regarding leverage and liquidity. Stein said that the promise of benefits like those that come with investing in hedge funds along with liquidity of more traditional mutual funds are part of why alternative mutual funds appeal to investors. However, alternative mutual funds don’t necessarily provide the protections that accompany their more traditional counterparts.

Now, Stein is suggesting that the SEC propose rules regarding liquidity and the use of derivatives in alternative mutual funds. She said that the industry and regulators should ensure that retail investors continue to receive protections.

Earlier this month, the SEC announced that it is open for feedback from the public to help determine how to best review the listing and trading of unusual, new, or complex exchange-traded products. Because investment strategies of ETPs have expanded in recent years, there has been a growth in the amount of new ETPs and kinds of complexities. Meantime, individual and institutional investors continue to seek out these types of products.

Boston Investment Adviser Accused of Losing Over $12M of Investor Funds is Charged with Securities Fraud

Published on: June 19, 2015 | by Shepherd Smith Edwards & Kantas, LLP

According to the Securities and Exchange Commission, Interinvest Corp., a Massachusetts investment adviser, bilked investors of over $12 million, perhaps up to $17 million, when its founder invested their money in Canadian penny stock companies in which he had undisclosed interests. Hans Peter Black, who is a resident of Canada, calls the charges against him “outrageous.”

The SEC claims that Interinvest and Black funneled over $17 million of client funds to four penny stock companies on whose boards he sits. Another entity that he controls received about $1.7 million in Canadian dollars. Black’s relationships to all of these entities were purportedly never disclosed to clients or stated in the firm’s Form ADV. This is the form that investment advisers use to register with the SEC and state securities regulators.

In February, the regulator sent a subpoena to Interinvest requesting documentation of its bank accounts, compliance policies, and trades. The SEC said that Black did not comply with its request. Black also is accused of misrepresenting the nature of the penny stock company’s investments, disregarding client instructions, and purposely deviating from the conservative investment strategy his firm promoted.

SEC Charges Investment Advisory Firm’s Former President With Stealing Client Monies, Including $300,000 from Mike Tyson

Published on: June 15, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging the former president of SFX Financial Advisory Management Enterprises with stealing client funds. The regulator’s Enforcement Division contends that Brian J. Ourand abused his discretionary authority over several clients’ accounts. He allegedly stole about $670,000 over five years by writing himself checks and putting through wire transfers.

The investment advisory firm is owned by Live Nation Entertainment and provides financial management and advisory services to high net worth individuals. SFX has a specialized focus in working with former and current professional athletes. Ex-boxing champion Mike Tyson was an SFX client at one time.

He and his wife sued SFX, Live Nation, and Ourand in 2013 on the grounds of unjust enrichment, fraud, and breach of fiduciary duty. The Tysons accused them of misappropriating over $300,000 and costing him millions more in possible future earnings. They sought over $5 million.

In its order instituting administrative and cease-and-desist proceedings, the SEC said that Ourand served as relationship manager to a number of clients. He was in charge of bank accounts and paid their bills. He also purportedly had unauthorized access to their credit card accounts. Ourand provided investment advice and had discretionary authority to trade in client brokerage accounts.

Canadian Trader Must Pay Over $1M For Short Selling Violations

Published on: June 10, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Andrew L. Evans, a trader living in Canada, has consented to pay over $1 million to resolve charges that he shorted U.S. stocks in companies planning follow-on offerings and then illegally purchased shares in the offerings to generate substantial profits at little to no risk. The Securities and Exchange Commission said that through his firm Maritime Asset Management, Evans violated Rule 105, federal securities laws’ anti-manipulation provision, multiple times.

Under Rule 105, short selling in an equity security is not allowed during the restricted period, which is typically five days leading up to a public offering, nor is buying the security via the offering. By buying the shares at a lower price in the follow-on offerings that could cover his sort sales, Evans allegedly made over $580K in illegal profits.

The SEC said that the short selling violations happened between 12/10 and 5/12. Under the settlement, Evans must pay over $582K in disgorgement, more than $63K in prejudgment interest and a penalty of more than $364K. A court must still approve the settlement.