SEC Settlements

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.

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.

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.

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.