SEC Settlements

Florida Man Accused of Insider Trading to Return Illegal Profits

Published on: March 11, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission announced this week that Jay Y. Fung, a Florida man accused of insider trading, has agreed to repay over $700K in illegal profits plus over $60K in interest that he made after he bought stock and call options in Pharmasset Inc. prior to its acquisition by Gilead Sciences. Fung made the trades after a friend tipped him about the pending deal.

In addition to buying shares of Pharmasset, he passed the insider tip onto his business partner who bought options, too. That individual has not been charged nor has he been accused of knowing that the information that Fung gave him was non-public and privileged.

Fung has since pled guilty in a parallel criminal case accusing him of conspiracy to commit conspiracy fraud. He could be facing up to five years in prison. His cooperation with authorities, however, will likely lessen his time under his plea deal.

Ex-Deutsche Bank Analyst to Pay $100K Penalty To Resolve SEC Charges Related to Rate Stock Certification

Published on: February 19, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is accusing ex-Deutsche Bank (DB) research analyst Charles P. Grom of certifying a rating on a stock in a manner that was not in line with his personal view. According to the regulator, Grom certified that his research report on 3/29/12 about Big Lots was an accurate reflecting of what he honestly believed about the company and it securities even though in private communications with firm research and sales staff, he indicated that he decided not to downgrade the discount retailer from a “BUY” recommendation because he wanted to keep up his relationship with the company’s management. Now, Grom must pay a $100K penalty.

The SEC contends that Grom violated Regulation AC’s analyst certification requirement, which mandates that research analysts include a certification that the views expressed in a research report are an accurate reflection of what they believe about a company and its securities. The regulator said that Grom became worried about what he considered cautious comments by Big Lot executives when he and his firm hosted them during a non-deal roadshow the day before he certified the report at issue in March 2012.

SEC News: Brokerage Firm Fined $1M to Resolve Anti-Money Laundering Violations, Ocwen Financial to Pay $2M Over Misstated Financial Results, and Software Company is Accused of FCPA Violations

Published on: February 6, 2016 | by Shepherd Smith Edwards & Kantas, LLP

E.S. Financial Accused of Anti-Money Laundering Violations
The Securities and Exchange Commission is charging E.S. Financial Services, now called Brickell Global Markets, with violating anti-money laundering rules. To resolve the charges, the Miami-based firm will pay a $1M penalty.

According to the regulator, on two occasions E.S. Financial did not provide the needed books and records to identify foreign costumers that they were soliciting and providing with investment advice. U.S. law mandates that financial institutions keep a customer identification program (CIP) that is adequate enough to make sure that the institutions know who their customers are so that don’t inadvertently get involved in terrorist financing or money laundering.

An SEC probe found that the firm’s CIP did not procure and keep up documentation to confirm the identities of certain foreign customers who used a brokerage account set up by a Central Bank affiliate. E.S. Financial has consented to hire an independent monitor to assess its CIP policies and anti-money laundering procedures, policies, and practices.

Ocwen Settles SEC Charges for $2M
Ocwen Financial Corp. will settle civil charges accusing the firm of misstating financial results via the use of an undisclosed, flawed methodology to value complex mortgage assets. The SEC found that Ocwen inaccurately disclosed to investors that assets were valued independently at fair value under GAAP when the firm had actually used valuation conducted by a related party that bought the rights to service certain mortgages that were still a financial liability in the company’s accounting.

The SEC that Ocwen’s audit committee did not examine the methodology with an outside auditor or company management and the valuation that occurred strayed from fair value measures. Because of this, Ocwen misstated its net income for four quarters.

Credit Suisse and Barclays Settle Dark Pool Cases for $150M

Published on: January 30, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Credit Suisse Securities (USA) LLC (CS) and Barclays Capital Inc. (BARC) will settle their respective cases brought against them by the U.S. Securities and Exchange Commission and the New York Attorney General. The firms are accused of violating federal securities laws will running dark pools. At issue is whether the banks disclosed enough information to clients about the trading that took place in their dark pools.

Barclays will pay $35M to the SEC and $70M to the NY AG. It has admitted wrongdoing in the Commission’s case. The bank had said that a Liquidity Profiling feature in its LX dark pool was going to “continuously police” the alternative trading system. The firm also stated that it would conduct weekly surveillance reports to look for order flow that was toxic.

Instead, contends the SEC, Barclays did not continuously regulate the dark pool with the tools it promised it would use nor did it conduct the surveillance runs. The firm also failed to properly disclose that it occasionally overrode the Liquidity Profiling feature when it transferred subscribers from categories that were the most aggressive to the ones that were the least aggressive. Because of this, said the regulator, subscribers that chose to block trading with subscribers that were aggressive ended up dealing with them anyways. Barclays is also accused of misrepresenting the kinds and amounts of market data feeds that it utilized to determine the Best Bid and Offer in the dark pool.

Meantime, Credit Suisse, which is not denying or admitting to the charges against it, will pay $84.3M I total—$24.3M to the SEC as disgorgement and prejudgment interest, along with a $30M penalty, and $30M to the NY AG.

SEC Sues Ex-Superior Bank Executives and Board Members

Published on: January 18, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission has filed a lawsuit against eleven ex-Superior Bank executives and board members. The regulator says that the bankers took part in numerous scams to hide just how bad the loan losses were at the bank after the financial crisis struck. Nine of the individuals have consented to settle the SEC’s charges.

The SEC is accusing the directors and officers of purposely misleading regulators and investors by using fake appraisals, straw borrowers, and insider deals to make the bank’s financial health seem more robust than what was actual. Bank officials are accused of improperly renewing, extending, and rolling over loans that were bad, in part to avoid having to report loan and lease losses.

Because of this, Superior Bank overstated its net income by 99% in public filings for 2009 and by 50% in 2010. The bank failed in 2011 and the Office of Thrift Supervision closed it last year. The Federal Deposit Insurance Corporation was appointed as its receiver.

State Street To Pay $12M To Resolve Pay-to-Play Scam Charges Involving Ohio Pension Funds

Published on: January 16, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The SEC said that State Street Bank and Trust Company will pay $12M to resolve civil charges accusing the firm of involvement in a pay-to-play scam. The regulator is accusing State Street of trying to gain contracts so it could do business with Ohio pension funds.

Vincent Debaggis, who helmed the public funds group of State Street Corp., is accused of entering into a deal with the deputy treasurer of Ohio. The arrangement allegedly included both illicit payments and political campaign contributions. In return for the money, State Street is accused of obtaining sub-custodian contracts that involved keeping the investment assets of certain Ohio pension funds safe and effecting the securities transaction settlements of the funds.

DeBaggis and State Street have agreed to the SEC’s order without denying or admitting to the regulator’s findings. The $12M that State Street will pay includes an $8M penalty and $4M in prejudgment interest and disgorgement. Meantime, DeBattis will pay over $174K in disgorgement plus prejudgment interest and a $100K penalty.

SEC Probes High-Yield Funds in the Wake of Third Avenue’s Junk Bond Fund Collapse, Says Reuters

Published on: January 13, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Reuters is reporting that the Securities and Exchange Commission is examining the possible liquidity risks involved in high-yield bond funds. The probe comes following the collapse of the Third Avenue’s Focused Credit Fund (TFCVX) in early December. That has been touted as the largest mutual fund failure since the financial crisis of 2007.

The fund failed because of its inability to meet so many investor redemption request following heavy losses in the junk bond market. When the fund couldn’t find more buyers, it ended up having to suspend the redemptions and liquidate.

Now, regulators want to look into the ways in which mutual funds deal with liquidity risks and how such disruptions can impact not just shareholders but also the wider market. Reuters said that last month the SEC notified mutual funds and exchange-traded funds that it wants information about how securities that are less liquid are priced and whether certain parties have questioned these prices.

In particular, reports the news agency, the Commission has specifically asked for daily internal illiquidity calculations from 8/31/15 to 12/15/15, the names of large fund shareholders, disclosures related to liquidity, redemption activity, portfolio composition quality for each fund, and the daily outflow and inflow of information. Fund mangers were reportedly given only 24 hours to provide a little over half of the information requested and another week to hand over the rest of the documents.

Morgan Stanley to Pay $8.8M in Parking Scam

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

Morgan Stanley Investment Management (MISM) will pay $8.8 million to resolve SEC charges accusing a firm portfolio manager of engaging in a parking scheme that gave preferential treatment to certain client accounts. Also, as part of the settlement, SG Americas, who is accused of helping in the fraud, will pay over $1 million to resolve the charges.

The portfolio manager, Sheila Huang, has consented to an industry bar. According to an SEC probe, while overseeing accounts that had to liquidate certain positions in 2011 and 2012, Huang arranged for the sale of mortgage-backed securities to Yimin Ge, an SG Americas subsidiary, at prices that were predetermined so she could buy back the positions at small markups in other accounts that Morgan Stanley advised.

Huang sold more bonds at prices that were above market so she would not suffer losses for certain accounts. She then bought the positions back at prices that were unfavorable in a fund she oversaw without disclosing this to the client whose fund had been disadvantaged.

Huang is accused of engaging in prearranged transactions for five bond trade sets. As a result of her parking scam, some Morgan Stanley clients benefited more than others. Purchasing clients were generally the ones that profited from the market saving, while buying and selling clients did not.

J.P. Morgan Chase Settles SEC and CFTC Charges Alleging Client Steering for $307M

Published on: December 18, 2015 | by Shepherd Smith Edwards & Kantas, LLP

J.P. Morgan Chase & Co. (JPM) will pay $307M to resolve Securities and Exchange Commission and Commodity Futures Trading Commission charges accusing two of its units of not telling wealthy clients about certain conflicts of interest. The JPM businesses are J.P. Morgan Securities LLC, its wealth management investment advisory business that offers investment products to clients that have a net worth of $250K – $5M, and JPMorgan Chase Bank N.A., its U.S. private bank that deals with clients that have a $5M net worth or greater.

According to the agreement, the investment advisory service did not tell wealth management customers that its Chase Strategic Portfolio, which is a program for wealth management customers, favored mutual funds managed by the firm. For several years, the program put about $10 billion of $32.6 billion in proprietary funds, and until the earlier part of 2012, at least 47% of the assets were in such funds.

The private bank also showed a similar preference toward the bank’s products. It was not until 2011 that it told clients that language in its disclosures noting that it preferred managers affiliated with JPM had been “mistakenly” removed. The language was not put back until last year.

Alleged Immigration Scams Lead to SEC Fraud Charges

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

The Securities and Exchange Commission has filed enforcement actions against a number of attorneys for offering EB-5 investments even though they are not registered brokers. As SEC Enforcement Division Director Andrew J. Ceresney noted, individuals who conduct certain services and get commissions when raising funds for EB-5 projects have to be officially registered.

Under the EB-5 Immigrant Investor Program, foreign investors are given an opportunity to gain U.S. residency if they invest in a designated projected that preserves or establishes at least 10 jobs for workers in this country. In its complaint, the SEC accused Hui Feng and his firm, the Law Offices of Feng & Associates of acting as unregistered brokers when selling EB-5 investments to over 100 investors. The Commission said that they bilked clients by not disclosing that they were paid commissions on the investments, which is a breach of their legal and fiduciary obligations. The regulator also said that they bilked certain entities that do offer such investments. Feng and his law offices are based in New York.

The SEC also filed charges against Mehorn P. Azarmehr and his Azarmehr Law Group, Michael Bander and his Bander Law Firm, Miami, Fla. lawyer Roger Bernstein, Hoboken, NH lawyer Allen Kaye, Los Angeles-based lawyers Taraneh Khorrami, Mike Manesh and this firm Manesh and Mizrahi, and Kefei Wang, who is based on China. All of these individuals and entities have agreed to cease and desist from acting as unregistered brokers. Most of them have consented to pay disgorgement, prejudgment interest, and/or a penalty.