Securities and Exchange Commission

“Tone” of SEC Probe Can May Be Affected by Self-Reporting, Says Enforcement Division Official

Published on: November 30, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to Securities and Exchange Commission Stephen Cohen, when an entity self-reports possible wrongdoing, the “tone” of the SEC investigation into the matter may be impacted in a manner that benefits that party. Cohen, who spoke while participating at a Securities Docket’s Securities Enforcement Forum panel in DC last month (he made it clear that his views are his own), said that this is very important to the SEC when figuring out how much of a penalty to impose.

Cohen noted that although in the past the SEC hasn’t done a stellar job about making public what credits are given to the entities that have self-reported violations, he says the regulator has been doing a better job. For example, in 2010 the Commission announced that it had entered into a non-prosecution deal with Carter’s Inc. (CRI) after the kids’ clothing marketing company did a thorough job of self-reporting the insider trading and financial fraud incidents involving its ex-EVP of Sales Joseph M. Elles. Carter’s also implemented complete remedial action and thoroughly cooperated with the SEC’s probe.

There was also the deferred prosecution of Tenaris S.A. (TN) last year over allegations that the steel pipe products manufacturer bribed Uzbekistan officials during a bidding process over supplying pipeline and made nearly $5 million in profits. Such misconduct is a violation of the Foreign Corrupt Practices Act and Tenaris agreed to pay $5.4 million in disgorgement in addition to prejudgment interest.

SEC Roundup: $62M Securities Fraud Award Against Ex-Lancer Group Hedge Fund Manager Stands, Investment Management Division Adopts Risk-Based Approach to Regulatory Initiatives, & Conflicts of Interest Areas Now Are Priority

Published on: November 10, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The US Supreme Court has decided not to review a ruling by the U.S. Court of Appeals for the Eleventh Circuit affirming a $62M award against Michael Lauer, an ex-Lancer Group Hedge Fund manager, in the securities lawsuit filed against him by the Securities and Exchange Commission. The federal appeals court had said that the district court’s decision granting the Commission’s motion for summary judgment on liability and remedies was proper.

Per the SEC fraud lawsuit, Lauer is accused of misrepresenting the hedge funds’ true value by artificially inflating the value of holdings found in shell companies that were thinly traded. The Commission contends that he hid his scam by making false statements in investor newsletters, private placement memoranda, and phone calls. (Lauer has since been acquitted of related criminal charges.)

In his certiorari petition filed earlier, Lauer argued that federal court couldn’t strike a defendant’s motion to dismiss due to lack of subject matter jurisdiction without evaluating whether it had such jurisdiction. He also claimed that the appeal’s court ruling that the district court’s decision was grounded in enough evidence was not de novo review.

Institutional Investor Securities Blog: Putnam Advisory Accused of Massachusetts Securities Fraud in $3B CDO Offerings, SEC Claims Yorkville Advisors Fixed Books To Attract Investors, and FINRA Seeks Comments on Revised Proposal Over Bond Market Research

Published on: October 29, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Massachusetts Securities Division is claiming that Putnam Advisory Co. deceived investors about its actual involvement in Pyxis 2006 and Pyxis 2007, two $1.5 billion collateralized debt obligations comprised of midprime and subprime mortgage-backed securities. In its administrative complaint, the state contends that Putnam represented to investors that it would act as an independent advisor when to the Pyxis CDOs when, in fact, Magnetar Capital, a hedge fund, was also involved creating in and structuring key aspects of both and even recommended that certain collateral to be included in them while then proceeding to take a substantial short position on that collateral. Putnam denies the allegations.

The state says that Magnetar proceeded to benefit from the downgrades of subprime assets in the two CDOs while making a net gain of about $67 million on aggressive positions and equity investments linked to the two of them. Meantime, Putnam earned $8.81 million in collateral management fees for the Pyxis CDOs. Massachusetts Secretary of Commonwealth William F. Galvin says that his office will continue to look at how banks misled the buyers of subprime mortgage-backed securitized debt instruments.

In other securities news, the SEC is accusing Yorkville Advisors LLC, its president and founder Mark Angelo, and CFO Edward Schinik of revising certain books to appeal to potential investors and succeeded in getting pension funds and funds of funds to invest $280 million into two Yorkville hedge funds. This allegedly let Yorkville charge at least $10 million in excessive fees. All three three defendants are denying the allegations.

Institutional Investment Fraud Roundup: Ex-Hedge Fund Managers’ Guilty Plea Over Bilking Investors of Almost $1M Get 3-Year Prison Term, SEC Sues Investment Adviser Over Alleged $37M Ponzi, and SEC Files Lawsuit Over Purported “Fund of Funds” Scam

Published on: September 26, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Ex-hedge fund managers Christopher Fardella and Michael Katz have been sentenced to three years in prison after they pleaded securities fraud and conspiracy charges for defrauding investors of nearly $1 million. Per court documents, between April 2005 and November 2006, the two men, along with two co-conspirators, were partners in KMFG International LLC, which is a hedge fund.

They cold called investors throughout the US and provided them with misleading information about the fund, its principals, and financial performance even though KMFG actually lacked a track record and never generated any profit for investors. The defendants and co-conspirators lost and spent $981,000 of the $1,031,086 that was given to them by investors.

Meantime, another hedge fund manager, Oregon-based investment advisor Yusaf Jawad, is being sued by the Securities and Exchange Commission over an alleged $37 million Ponzi scam. The securities lawsuit against him and attorney Robert Custis was filed in the U.S. District Court for the District of Oregon.

SEC Enforcement Roundup: Commission to Make Closer Examination of Revenue-Sharing Between Brokers and Investment Advisers, NYSE to Pay $5M For Alleged Compliance Issues, and Enforcement Director Khuzami Praises His Division’s Performance

Published on: September 18, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is ramping up its examination of revenue-sharing arrangements between brokers and investment advisers. It made this announcement in a related administrative order involving advisory firms Focus Point Solutions Inc. and H Group Inc. and their owner Christopher Keil Hicks, who have consented to pay $1.1 million to settle charges that they did not disclose to their clients certain revenue-sharing payments that posed possible conflicts of interests.

Hicks and Focus Point Solutions are accused of not telling clients that in return for specific services, they were getting a portion of the revenues from a brokerage firm that managed mutual funds, which were being recommended to investors. Hicks’ other firm, H Group Inc., allegedly improperly voted on its clients’ behalf to make Focus Point a sub-adviser to one mutual fund (most of that fund’s shareholders were clients of H Group.)

Meantime the New York Stock Exchange has consented to pay $5 million to settle compliance failure charges that allegedly gave some customers an advantage over certain trading information. The Securities and Exchange Commission announced the charges, which are the first of its kind, on September 14. This is also the first financial penalty for an exchange.

According to the Commission, under Regulation NMS, market data cannot be sent to proprietary customers before the same information has been sent out in consolidated feeds, which give quote and trade information to the public. Yet, starting in 2008, the NYSE allegedly violated this regulation over a certain time period when it sent the data through its proprietary feeds first. NYSE also allegedly failed to ensure proper compliance when it did not correctly monitor the proprietary feeds’ speed compared to the speed of the consolidated feeds. According to SEC Enforcement Director Robert Khuzami, even just “milliseconds” of a head start in terms of access to market data “disproportionately disadvantages retail and long-term investors.”

Although the NYSE is settling, it is not denying or admitting to wrongdoing. It and parent NYSE Euronext Inc. (NYX), however, have consented to having an independent party examine their market data delivery systems. On its website NYSE said that the SEC did not accuse it of taking part in any intentional misbehavior or that the data delays had hurt any investors.

Khuzami also recently spoke about the SEC’s other enforcement efforts. At a Practicing Law Institute conference, he said that the Division of Enforcement is doing well. He partially credits its performance to an organizational restructuring that took place in 2010, the agency’s whistleblower program, and stronger investigative work. Khuzami noted that the restructuring generated five specialized units, which has let SEC staff become experts in certain enforcement areas, and, with the help of data-driven analytics, allowed the Commission to look into violations.

Khuzami said that contrary to the idea that his division has not been investigating purported violations that allegedly took place during the 2008 economic crisis, these investigations have been taking place and that 75% of them have gone to litigation. Also, he noted that the SEC has begun a number of initiatives to try to identify additional violations, such as private fund analysis for zombie-funds and looking at whether hedge fund performances are aberrational compared to a certain strategy’s benchmark.

Khuzami also spoke about the SEC whistleblower program that was created under the Dodd-Frank Wall Street Reform and Consumer Protection Act, saying that it has already been “successful.” In just one year, August 2011 – 2012, the program has received about 2,870 tips—about 8 a day—with financial fraud, disclosure, market manipulation, and offering fraud among the most common alleged violations named. Khuzami said most tips in the US have from Texas, Florida, New York, and California. Whistleblower fraud tips have also come from abroad.

In re Focus Point Solutions Inc., SEC, Admin. Proc. File No. 3-15011 (PDF)

NYSE fined after some clients got early look at data, Reuters/Yahoo News, September 14, 2012

Division of Enforcement, SEC

More Blog Posts:
SEC Commissioners Paredes and Gallagher ‘Dismayed’ Over Chairman Schapiro’s Announcement Regarding Failed Money Market Mutual Fund Industry Overhaul Proposal, Institutional Investor Securities Blog, September 7, 2012

Institutional Investor Securities Roundup: FHFA Can Start Discovery in MBS Litigation Against Banks, SEC Sues Puerto Rico Man Over Alleged $7M Scam, and Assets of Two Colorado Men are Temporarily Frozen Over Alleged Promissory Note Ponzi Scheme, Institutional Investor Securities Blog, August 31, 2012

SEC Study Reports that Many Retail Investors Are Financially Illiterate, Stockbroker Fraud Blog, September 5, 2012

SEC Commissioners Paredes and Gallagher ‘Dismayed’ Over Chairman Schapiro’s Announcement Regarding Failed Money Market Mutual Fund Industry Overhaul Proposal

Published on: September 7, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In a recent joint statement, Securities and Exchange Commissioners Troy Paredes and Daniel Gallagher expressed dismay over Chairman Mary Schapiro’s announcement regarding a staff proposal to revamp the money market mutual fund industry that she said would no longer move forward because it would have failed to garner the necessary votes. Gallagher and Paredes expressed concern that her announcement made it seem as if they and Commissioner Luis Aguilar are not worried (and may even be dismissive) about “strengthening money market funds.”

Schapiro recently made it known that she would not be able to get three votes needed to move forward the proposal, which includes reforms to the regulations that preside over money market funds. Under the proposal, funds would have had to either lose their $1 fixed net asset value while floating their NAVs or keep up an under 1% capital buffer. Per her statement, Schapiro said the three commissioners told her that they “will not support a staff proposal to reform the structure of money market funds,” which she believes will protect retail investors and decrease need for taxpayer bailouts in the future. She called on policymakers to look at other ways of dealing with the “systemic risks” involving money market funds. A day after her announcement, the Treasury Department and the SEC were already looking at alternative means to reform the money fund industry.

Paredes and Gallagher want to make it clear that even though they rejected the proposal, this does not mean they are abandoning their duty to regulate money market funds, which fall under the SEC’s jurisdiction for regulation, or that they are unsupportive of making improvements to the way the agency performs oversight. The two of them think the proposal lacks the necessary analysis and data as support and that investors and issuers could have been left with “significant costs” while the system would have possibly become burdened with new risks. They also are concerned that the changes put forward by the proposal would not stop a run on funds. Gallagher and Paredes said that they believe that the SEC “can do better.”

SEC Reviewing LIBOR-Related Disclosures by Issuers

Published on: August 10, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to SEC Division of Corporation Finance director Meredith Cross, Corp Fin is now looking at issuers’ closers related to the LIBOR scandal. Cross said that right now we are in the ‘early stages” for these types of disclosures, which could be more material for financial institutions. She also spoke about how companies that issue payments according to the London InterBank Offered Rate would have to consider their own circumstances when determining whether they should/shouldn’t make disclosures to shareholders about how exposed they were to the controversy. Cross, who addressed a Federal Regulation of Securities Committee panel at this year’s American Bar Association meeting in Chicago on August 3, made it clear that the views she is expressing are her own and not that of the SEC or any other staffers.

European and US regulators have been looking into whether a number of financial institutions rigged LIBOR, which is considered the global benchmark interest rate for banks to borrow from other banks in the London interbank market. A couple of months ago, Barclays Bank PLC (BCS) consented to pay $360 million to settle charges made by the Commodity Futures Trading Commission and the US Justice Department that it engaged in the manipulation of its LIBOR submissions.

Cross said that the SEC division would likely look at the disclosures belonging to companies that, per media reports, experienced computer breaches. If any of these companies that were reportedly hacked only reports in its disclosure that it may have been “infiltrated,” Cross said that this would be a potential red flag. Also, while Cross spoke about how issuers need to make sure their disclosures are accurate, she emphasized that Corp Fin isn’t looking for disclosures to reveal too much that they show hackers how to get in. (It was nearly a year ago that Corp Fin put out guidance on how companies should disclose incidents involving data breaches, cyber security, and related expenses.)

Last month, US News said the LIBOR controversy may very well be the “mother of all scandals” and the one that could cause major banks’ insolvency, as well as criminal charges to finally be filed. Meantime, regulators are also being accused of contributing to the rigging of LIBOR when they allegedly disregarded clear indicators that the rates were being fixed. Rather than bringing in law enforcement agencies, regulators were busy looking at how to improve ongoing practices.

SEC Division of Corporation Finance

More Blog Posts:

$1.2 Billion of MF Global Inc.’s Clients Money Still Missing, Stockbroker Fraud Blog, December 10, 2011

FINRA Initiatives Addressing Market Volatility Approved by the SEC

Published on: June 5, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has approved a one-year pilot for a plan meant to shield equity markets from volatile price changes. The plan is based on two initiatives from the Financial Industry Regulatory Authority and the national securities exchanges.

One initiative involves a “limit up-limit down” proposal that would not allow for trades in US listed stocks beyond a certain range to be determined by recent prices. This will replace single-stock circuit breakers.

With the new mechanism, trades in individually listed equity securities wouldn’t be able to take place beyond a certain price band, which would be a percentage level lower and higher than the price of the security in the most recent five minutes. For securities that are more liquid, set levels would be 5% or 10%, with percentages doubling during closing and opening periods. For securities priced at $3/share or lower, there will be wider price bands.

ABA Presses for Self-Funding for SEC and CFTC

Published on: May 31, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The American Bar Association is in strong favor of self-funding for both the Commodity Futures Trading Commission and the Securities and Exchange Commission. It is calling on Congress to quickly deal with this need to increase the agencies’ resources.

In a letter to lawmakers on the House Financial Services Committee and the Senate Banking Committee, ABA Task Force on Financial Markets Regulatory Reform co-chairs William Kroener III and Giovanni Prezioso talked about how not having sufficient funding sources for the SEC and the CFTC is going to substantially hurt the regulators’ ability to complete their assigned regulatory missions. The ABA believes that self-funding would effectively deal with this problem.

Both the CFTC and SEC have acknowledged that they are short on funds. The two regulators have partially attributed this to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which doesn’t authorize self-funding despite the fact that SEC Chairman Mary Schapiro, past SEC chairmen, certain senators, and securities lawyers had pressed for it.

Several Claims in Securities Fraud Lawsuit Against Ex-IndyMac Bancorp Executives Are Dismissed by Federal Judge

Published on: May 30, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In U.S. District Court for the Central District of California, federal judge Manuel Real threw out five of the seven securities claims made by the Securities and Exchange Commission in its fraud lawsuit against ex-IndyMac Bancorp chief executive Michael Perry and former finance chief Scott Keys. The Commission is accusing the two men of covering up the now failed California mortgage lender’s deteriorating liquidity position and capital in 2008. Real’s bench ruling dilutes the SEC’s lawsuit against the two men.

The Commission contends that Keys and Perry misled investors while trying to raise capital and preparing to sell $100 million in new stock before July 2008, which is when thrift regulators closed IndyMac Bank, F.S.B and the holding company filed for bankruptcy protection. They are accusing Perry of letting investors receive misleading or false statements about the company’s failing financial state that omitted material information. (S. Blair Abernathy, also a former IndyMac chief financial officer, had also been sued by the SEC. However, rather that fight the lawsuit, he chose to settle without denying or admitting to any wrongdoing.)

Attorneys for Perry and Keys had filed a motion for partial summary judgment, arguing that five of the seven filings that the SEC is targeting cannot support the claims. Real granted that motion last month, finding that IndyMac’s regulatory filings lacked any misleading or false statements to investors and did not leave out key information.

The remaining claims revolve around whether the bank properly disclosed in its 2008 first-quarter earnings report (and companion slideshow presentation) the financial hazards it was in at the time. The judge also ruled that Perry could not be made to pay back allegedly ill-gotten gains.

Real’s decision substantially narrows the Commission’s securities case against Perry and Keys. According to Reuters, the ruling also could potentially end the lawsuit against Keys because he was on a leave of absence during the time that the matters related to the filings that are still at issue would have occurred.

Before its collapse in 2008, Countrywide spinoff IndyMac was the country’s largest issuers of alt-A mortgage, also called “liar loans.” These high-risk home loans are primarily based on simple statements from borrowers of their income instead of tax returns. Unfortunately, loan defaults ended up soaring and a mid-2008 run on deposits at IndyMac contributed to its collapse. The Federal Deposit Insurance Corp, which places its IndyMac losses at $13 billion, went on to sell what was left of the bank to private investors. IndyMac is now OneWest bank.

Judge dismisses parts of IndyMac fraud case, Los Angeles Times, May 23, 2012

Read the SEC Complaint (PDF)

More Blog Posts:

Citigroup’s $75 Million Securities Fraud Settlement with the SEC Over Subprime Mortgage Debt Approved by Judge, Stockbroker Fraud Blog, October 23, 2010