Securities and Exchange Commission

SEC Actions Roundup: Bridge Premium Finance Settles Over Alleged $6M Ponzi Scam, Ex-Lancer Group Hedge Fund Manager’s Lawyer Sues Over FOIA Request, & Private Equity Firm Ranieri Partners Settles Securities Allegations

Published on: March 24, 2013 | by Shepherd Smith Edwards & Kantas, LLP

SEC Settles with Bridge Premium Finance Over Alleged $6M Ponzi

The U.S. District Court for the District of Colorado has approved a proposed settlement between the SEC and Premium Finance LLC, William Sullivan, and Michael Turnock. The three of them are accused of selling financing so that small businesses could cover their insurance premiums. The alleged Ponzi scam purportedly cost investors $6 million, even as they were promised up to 12% in returns.

Judge John Kane had initially rejected the proposed settlement, which came with SEC’s standard language allowing defendants to resolve cases without denying or admitting to the allegations. Pointing to strong federal policy that favors consent judgments and the “limited and deferential” review the courts have over such agreements, last month the Commission asked the court to reconsider. It also noted that such admissions could hurt the regulator’s enforcement program, potentially causing harm to the public. Turnock and Sullivan also filed a response to the complaint and admitted to some of the allegations.

State of Illinois Settles Securities and Exchange Commission Fraud Charges

Published on: March 16, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Without denying or admitting to the charges, the state of Illinois has settled the securities fraud case filed against it by the SEC. The Commission contends that Illinois misled investors about municipal bonds and the way it funds its pension obligations. There will be no fine imposed on the state. Illinois, has, however, implemented numerous remedial actions and put forth corrective disclosures related to the charges over the last few years.

Per the Commission, even as the state offered and sold over $2.2 billion of municipal bonds between 2005 and 2009, it did not tell investors the effect problems with its pension funding schedule might have. Illinois is also accused of not disclosing that it had underfunded its pension obligations, which upped the risk of its overall financial condition.

The regulator’s order contends that Illinois had set up a 50-year pension contribution schedule in the Illinois Pension Funding Act. However, it turns out that the schedule was not sufficient to take care of both a payment amortizing the plans’ actuarial liability, which was unfunded, and the price of benefits accrued during a current year. Also, the statutory plan ended up structurally underfunding the state’s pension duties while backloading most pension contributions into the future. The structure caused stress on both the pension systems and Illinois’s ability to fulfill its competing obligations.

Corporate Reform Coalition Praises SEC for Considering Political Spending Mandate Disclosure Rule

Published on: February 7, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Corporate Reform Coalition is pleased that the SEC has indicated that its staff is looking at whether to proceed with a rule that mandates disclosing corporate political spending. The group says that by including this possible rulemaking in its semi-yearly regulatory agenda, the Commission has made a critical move to protect investors, tackle the influx of secret corporate spending that has occurred since the US Supreme Court’s ruling in Citizens United, and help in the disclosure of key political spending information.

The CRC is comprised of over 80 pension funds, socially conscious investors, and consumer associations that seek greater accountability and transparency in corporate political spending. According to CRC co-chair Lisa Gilbert, that the regulatory agency has indicated that it intends to put out a notice of proposed rulemaking by April is “one step further” toward its commitment to a rule. However, some disclosure attorneys are reportedly skeptical that the SEC will actually take on this rulemaking.

Following the US Supreme Court’s ruling in Citizens United v. Federal Elections Commission in 2010, shareholders have been wanting more transparency related to how companies spend their lobbying money. In 2011, the Committee on Disclosure of Corporate Political Spending turned in a rulemaking petition to the SEC seeking regulations that would mandate disclosures. 322,000 comment letters have since followed—most from investors supporting mandated disclosure.

Federal Records Act Lawsuit Seeking to Make the SEC Reconstruct About 9,000 Enforcement-Related Documents is Dismissed

Published on: February 5, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the District of Columbia has decided to dismiss the last two counts in the Citizens for Responsibility and Ethics in Washington’s Federal Records Act lawsuit against the Securities and Exchange Commission. The public interest group wants to make the SEC reconstruct about 9,000 documents related to certain enforcement probes.

Judge James E. Boasberg said that to the degree that the act’s section 3106 mandates an affirmative duty to act when I comes to destroying records, the Commission has not taken advantage of its discretion in taking internal remedial steps and, as a result, has satisfied any “duty to imposed.”

It was in August 2011 when allegations surfaced that the SEC may have improperly destroyed files related to MUIs—matters under inquiry. Sen. Chuck Grassley (R-Iowa) began questioning the agency after a whistleblower drew the matter to his attention. SEC General Counsel Mark Cahn then proceeded to order the Enforcement Division to cease from destroying documents from closed cases until notice was given to do otherwise. Then, after a probe, then-SEC Inspector General H. David Kotzlater determined that the division did not behave improperly when it got rid of such files. CREW, however, went on to file its Federal Records Act case in the hopes of obtaining a declaratory judgment noting that the destruction of the documents had violated the FRA.

SEC Whistleblower Office Will Place More Emphasis on Anti-Retaliation Provisions and Publicity This Year

Published on: January 29, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to Securities and Exchange Commission Office of the Whistleblower Chief Sean McKessy, the unit will take a more aggressive approach to publicizing its activities and figuring out how to better enforce the anti-retaliation provisions of its bounty program. McKessy spoke at the DC Bar organized enforcement conference earlier this month and noted that his views were his own and not necessarily that of the SEC.

McKessy said that despite the Commission’s efforts to offer whistleblower provisions that incentivize internal reporting, some corporations have still not told employees about the bounty program. Per the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC can now offer 10-30% of a monetary penalty greater than $1 million that is collected because of “original information” voluntarily offered up by an informant.

Also, per the statute, the SEC has the authority to enforce its anti-retaliation provisions, which protects whistleblowers that provide this information, or commit certain other lawful acts, from retaliatory actions—particularly from employers. McKessy, however, noted that it is too soon to know whether the agency will incorporate an anti-retaliation action to its whistleblower program.

SEC News Roundup: Commission to Present Money Market Mutual Fund Reform Proposal, Achieves Record Number of Insider Trading Settlements During FY 2012

Published on: January 24, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Commission to Present Money Funds Reform Proposal

According to SEC Commissioner Daniel Gallagher, staff members are putting together a money market mutual fund reform proposal that will address the problems that occurred in 2008. Another area that will likely be looked at more closely in the proposal would be the floating the net asset value of the funds. Gallagher, who made his comments at a US Chamber of Commerce, said this was important because there are “serious” related issues involving tax, accounting, and operations that need to be tackled.

Meantime, the Financial Stability Oversight Council is looking at three draft money fund reform recommendations that it wants the SEC to deal with, including floating NAVs, a stable NAV that has a capital buffer with a cap of 1% of a fund’s value in addition to delayed redemptions, and a stable NAV along with a 3% capital buffer that could be lowered if applied along with other measures.

SEC Roundup: Lawmakers Question Structural Reform Costs, Enforcement Director Khuzami to Step Down, & New Commission Chairman Names General Counsel is Named

Published on: January 9, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Lawmakers Question the SEC About Costs Related to Structural Reform

Per the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 967, the Securities and Exchange Commission has been tasked with assessing how to restructure its operations to better its use of internal communications and resources. The restructuring plan is being referred to as the Mission Advancement Program. However, lawmakers are concerned that this effort may be too expensive—especially because of the costs associated with retaining independent consultant Booz Allen Hamilton Inc. to help with the restructuring.

Earlier this month, House Oversight Committee Chairman Darrell Issa (R-Calif.) asked the SEC for information about how much the Commission expects to save through the Booz Allen-recommended reforms, its 2012 fiscal year budget for Office of the Chief Operating Officer, CEO Jeffery Heslop’s yearly compensation, the May 2011 contract between the agency and Booz Allen, and the payments that have been made to the latter.

SEC Investor Advisory Members to Deal with Crowdfunding, Fiduciary Standard, and Pay Ratio Disclosures

Published on: January 7, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to the Securities and Exchange Commission Investor Advisory Committee, its subcommittees are try to come up with possible recommendations about crowdfunding, a uniform fiduciary standard, and pay ratio disclosures. Also during the first quarter of this year, the SEC is expected to seek economic data that is supposed to help it decide whether it should establish a uniform fiduciary standard for investment advisers and broker-dealers that gives investment advice to retail investors.

Under Section 911 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the committee has to “advise and consult” with the Commission on its investor protection initiatives and rulemaking priorities. While the SEC is not required to act on the recommendations, it must “promptly” evaluate them and disclose whether it will take related action. The committee’s first set of recommendations, to make the general solicitation ban under the Jumpstart Our Business Startups Act less stringent, was issued last year.

At the SEC Investor Advisory Committee’s January 18 meeting, subcommittee chairpersons talked about current and ongoing efforts. Investor as Purchaser subcommittee chairman Barbara Roper said that her group and the Investor Education subcommittee are working together to figure out where in a possible crowdfunding regime investors may be facing possible risks. Also, the group is trying to figure out where investor education might be most needed.

Morgan Keegan Founder Faces SEC Charges Over Mortgage-Backed Securities Asset Pricing in Mutual Funds

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

The U.S. Securities and Exchange Commission has filed civil charges against Morgan Keegan founder Allen Morgan Jr. and several other former mutual fund board members for allegedly failing to supervise the managers accused of inaccurately pricing toxic mortgage-backed assets prior to the financial crisis. According to Reuters, this is a rare attempt by the regulator to hold a mutual fund’s board accountable for manager wrongdoing and it is significant. (Fund manager James Kelsoe hasconsented to pay a $500,000 penalty related to this matter and he is barred from the securities industry in perpetuity. Comptroller Joseph Thompson Weller consented to pay a $50,000 penalty.)

Last year, Morgan Keegan and Morgan Asset Management consented to pay $200 million to settle SEC subprime mortgage-backed securities fraud charges accusing them of causing the false valuations of the securities in five funds and failing to use reasonable pricing methods. (This allegedly led to “net asset values” being calculated for the funds.) The inaccurate daily NAVS would then be published and investors would buy shares at inflated prices. The funds’ value eventually declined significantly.

According to the Commission, the eight ex-board members violated laws mandating that fund directors help decide what a security’s fair value is when market quotations don’t exist. Instead of trying to figure out how fair valuation determinations work, the directors allegedly gave this task to a valuation committee but without providing “meaningful substantive guidance.”

Allen Morgan Jr., who is a Morgan Keegan cofounder, was CEO and Chairman until 2003.The seven other board members facing SEC charges include Kenneth Alderman, Mary S. Stone, W. Randall Pittman, Albert C. Johnson, James Stillman R. McFadden, Jack R. Blair, and Archie W. Willis III.

Already, Morgan Keegan is contending with over 1,000 arbitration lawsuits involving its bond funds that had invested in high risk MBS but were marketed as safe. When the subprime market collapsed, the funds lost up to 80% of their value.

Recently, Morgan Keegan and over 10,000 investors in a closed-end fund reached a $62 class million settlement. Lion Fund LP, the lead plaintiff and a Texas hedge fund, claimed that it had made a $2.1 million investment.

Morgan Keegan is owned by Raymond James (RJF), which bought the firm from Regions Financial Corporation. Other securities lawsuits still pending against it also involve conventional and open-ended funds.

Unfortunately, too many people and entities sustained huge losses because the risks of a number of types of securities leading up to the global crisis and the housing bubble’s implosion were downplayed by financial firms and their representatives. At Shepherd Smith Edwards and Kantars, our subprime mortgage-backed securities lawyers represent investors throughout the US. Contact our securities law firm today.

SEC Charges Eight Mutual Fund Directors for Failure to Properly Oversee Asset Valuation, SEC, December 10, 2012

SEC Order (PDF)

More Blog Posts:
Judge that Dismissed Regulators’ Claims Against Morgan Keegan to Rule on ARS Lawsuit Again After His Ruling Was Reversed on Appeal, Institutional Investor Securities Blog, November 27, 2012

Morgan Keegan & Company Ordered by FINRA to Pay $555,400 in Texas Securities Case Involving Morgan Keegan Proprietary Funds, Stockbroker fraud Blog, September 6, 2011

Morgan Keegan Ordered by FINRA to Pay RMK Fund Investors $881,000, Stockbroker Fraud Blog, April 24, 2011

Some Private Fund Advisers are Exercising Inadequate Controls, Says SEC Commissioner Elisse Walter

Published on: December 15, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to Securities and Exchange Commissioner Elise Walter, examinations of newly registered private fund advisers has already revealed numerous instances of poor controls by a number of members, especially when expenses and fees are involved. Some of these instances, she reports, are on the border of misconduct. Walter, who President Obama named to take the place of current SEC Chairman Schapiro when she steps down this week, expressed her own views (which may not be the same as the regulator’s) at the Commission’s enforcement panel at the National Law Journal’s Regulatory Summit in DC earlier this month.

Over 1,500 advisers to hedge funds and private funds are now also SEC registered in the wake of rules adopted per the Dodd-Frank Wall Street Reform and Consumer Protection Act. This raises the total number of those that have completed Commission registration to 4,061 private fund advisers and 11,002 investment advisers, with 37% offering advise to hedge funds and other private funds.

The Commission’s Office of Compliance Inspections and Examinations will perform adviser “presence” exams looking at certain risk areas for the next two years. This is a new process for advisers, which is why the SEC has been engaged in outreach to make sure expectations and procedures are clear.