Securities Lawyer Blog: 2014

Six federal agencies approved a final rule requiring sponsors of securitization transactions to retain risk in those transactions. The final rule implements the risk retention requirements in the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The final rule is being issued jointly by the Board of Governors of the Federal Reserve System, the Department of Housing and Urban Development, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission. As provided under the Dodd-Frank Act, the Secretary of the Treasury, as Chairperson of the Financial Stability Oversight Council, played a coordinating role in the joint agency rulemaking.

The final rule largely retains the risk retention framework contained in the proposal issued by the agencies in August 2013 and generally requires sponsors of asset-backed securities (ABS) to retain not less than five percent of the credit risk of the assets collateralizing the ABS issuance. The rule also sets forth prohibitions on transferring or hedging the credit risk that the sponsor is required to retain.

As required by the Dodd-Frank Act, the final rule defines a “qualified residential mortgage” (QRM) and exempts securitizations of QRMs from the risk retention requirement. The final rule aligns the QRM definition with that of a qualified mortgage as defined by the Consumer Financial Protection Bureau. The final rule also requires the agencies to review the definition of QRM no later than four years after the effective date of the rule with respect to the securitization of residential mortgages and every five years thereafter, and allows each agency to request a review of the definition at any time. The final rule also does not require any retention for securitizations of commercial loans, commercial mortgages, or automobile loans if they meet specific standards for high quality underwriting.

The final rule will be effective one year after publication in the Federal Register for residential mortgage-backed securitizations and two years after publication for all other securitization types.

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Wednesday, October 22, 2014

Office of Municipal Securities Director John Cross to Leave SEC

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Office of Municipal Securities Director John Cross to Leave SEC

The Securities and Exchange Commission today announced that John J. Cross III, Director of the Office of Municipal Securities, will leave the agency in November.

Since September 2012, Mr. Cross has served as the first Director of the Office of Municipal Securities, which was established under the Dodd-Frank Act to oversee the municipal securities market. The Office of Municipal Securities administers the Commission’s rules for the municipal securities market and oversees rulemaking by the Municipal Securities Rulemaking Board, a self-regulatory organization. The Office of Municipal Securities also advises the Commission and other SEC offices on policy matters, enforcement, current market issues, and other issues affecting the municipal securities area, including municipal disclosure and municipal market structure initiatives.

During his tenure, Mr. Cross was instrumental in efforts to build and develop the Office of Municipal Securities into a standalone office staffed by a team of municipal securities experts. Mr. Cross played a leading role on a final rulemaking project for municipal advisor registration under the Dodd-Frank Act, which the Commission adopted in September 2013. Mr. Cross also led efforts to implement the municipal advisor registration regime, including providing guidance to market participants and participating in the legal review process for municipal advisor registrations. Mr. Cross also supported initiatives to enhance price transparency in the municipal securities market, in furtherance of the Commission’s recommendations in its July 2012 Report on the Municipal Securities Market.

“As the Office of Municipal Securities’ first director, John provided valuable leadership and expertise in the oversight of the municipal securities market that is so vital to financing our public infrastructure,” said Chair Mary Jo White. “John’s efforts to promote investor protection and structural integrity in the municipal securities market and his contributions to building a top-notch office will help us continue to carry out our mission in this important area.”

Mr. Cross said, “It has been an honor and a privilege to serve Chair White and the Commission, and to work with the exceptional dedicated staff in the Office of Municipal Securities and throughout the agency. I really appreciated Chair White’s unwavering commitment to our efforts in the municipal securities area.”

Before joining the SEC, Mr. Cross had a leading role in various positions in the public policy area affecting municipal finance. From 1994 to 2006, he was a partner at the national municipal bond specialty law firm Hawkins, Delafield & Wood LLP. Previously, he also served in the Financial Institutions and Products division of the IRS Chief Counsel’s office, where his work encompassed derivatives used with municipal bonds. From 2006 to 2012, Mr. Cross served as Associate Tax Legislative Counsel in the Office of Tax Policy at the U.S. Treasury Department, where he had significant responsibility for legislative, regulatory, and budgetary tax matters affecting municipal bonds, including significant roles in that agency’s response to municipal bond market challenges in the 2008 financial crisis and the implementation of tax incentives for municipal bonds in the 2009 Recovery Act.

Mr. Cross is expected to rejoin the Office of Tax Policy at the U.S. Treasury Department in November.

Mr. Cross received his B.A. from Brown University in 1978, a J.D. from Vanderbilt University Law School in 1981, where he was a member of the Vanderbilt Law Review, and an LL.M in Taxation from Georgetown University Law Center in 1988.

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Tuesday, October 21, 2014

SEC Charges Current and Former E*TRADE Subsidiaries With Improperly Selling Penny Stocks Through Unregistered Offerings

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SEC Charges Current and Former E*TRADE Subsidiaries With Improperly Selling Penny Stocks Through Unregistered Offerings

The Securities and Exchange Commission today announced an enforcement action against current and former brokerage subsidiaries of E*TRADE Financial Corporation that failed in their gatekeeper roles and improperly engaged in unregistered sales of microcap stocks on behalf of their customers.

An SEC investigation found that E*TRADE Securities and E*TRADE Capital Markets sold billions of penny stock shares for customers during a four-year period while ignoring red flags that the offerings were being conducted without an applicable exemption from the registration provisions of the federal securities laws. E*TRADE Securities remains an E*TRADE subsidiary while E*TRADE Capital Markets was sold earlier this year and is now called G1 Execution Services.

E*TRADE Securities and G1 Execution Services agreed to settle the SEC’s charges by paying back more than $1.5 million in disgorgement and prejudgment interest from commissions they earned on the improper sales. They also must pay a combined penalty of $1 million.

In addition to the enforcement action, the SEC staff today published a Risk Alert and FAQs to remind broker-dealers of their obligations when they engage in unregistered transactions on behalf of their customers.

“Broker-dealers serve an important gatekeeping function that helps prevent microcap fraud by taking measures to ensure that unregistered shares don’t reach the market if the registration rules aren’t being followed,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “Many billions of unregistered shares passed through gates that E*TRADE should have closed, and we will hold firms accountable when improper trading occurs on their watch.”

According to the SEC’s order instituting a settled administrative proceeding, the failures by E*TRADE occurred periodically from March 2007 to April 2011. The securities laws generally require all offers and sales of securities to be registered with the SEC unless those offers and sales qualify for an exemption. When brokers facilitate an unregistered sales transaction on behalf of a customer, they must reasonably ensure that an exemption does indeed apply.

The SEC’s order finds that three customers of E*TRADE routinely deposited to their E*TRADE accounts large quantities of newly issued penny stocks they had acquired through private, unregistered transactions with little-known, non-reporting issuers. The customers claimed that these penny stocks were “freely tradable” and they placed orders for E*TRADE to sell the securities to the public through “resales” without any registration statements in effect. Following the resales, the customers immediately wired the sales proceeds out of their accounts.

According to the SEC’s order, E*TRADE encountered numerous red flags indicating potential improper sales of securities. Nevertheless, the firm relied on a registration exemption for broker-dealers that permits them to execute a customer’s unregistered sales of securities if, after a reasonable inquiry, the broker-dealer is not aware of circumstances indicating that the customer is violating registration requirements. E*TRADE initially failed to identify any exemptions potentially available to these customers. When it later identified the purported exemptions upon which the customers claimed to be relying, E*TRADE failed to perform a searching inquiry to be reasonably certain that such exemptions applied for each unregistered sale executed by the three customers.

“E*TRADE failed to fulfill its obligation to determine whether any exemptions applied to the sale of billions of shares of securities thereby depriving investors of critical protections under the federal securities laws,” said Stephen L. Cohen, Associate Director of the SEC’s Division of Enforcement. “Firms must take their reasonable inquiry obligations seriously and do more than check the box, particularly when red flags are apparent.”

The SEC’s order finds that E*TRADE Securities and G1 Execution Services violated Sections 5(a) and 5(c) of the Securities Act of 1933. In addition to the monetary sanctions and without admitting or denying the SEC’s findings, the two firms agreed to be censured and consented to the order requiring them to cease and desist from committing or causing any future violations of the registration provisions of the Securities Act.

The SEC’s investigation was conducted by Deborah R. Maisel and Richard E. Johnston with assistance from Kyle DeYoung. The case was supervised by Jennifer S. Leete.

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Monday, October 20, 2014

SEC Charges New York-Based High Frequency Trading Firm With Fraudulent Trading to Manipulate Closing Prices

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SEC Charges New York-Based High Frequency Trading Firm With Fraudulent Trading to Manipulate Closing Prices

The Securities and Exchange Commission today sanctioned a New York City-based high frequency trading firm for placing a large number of aggressive, rapid-fire trades in the final two seconds of almost every trading day during a six-month period to manipulate the closing prices of thousands of NASDAQ-listed stocks. This marks the first high frequency trading manipulation case.

An SEC investigation found that Athena Capital Research used an algorithm that was code-named Gravy to engage in a practice known as “marking the close” in which stocks are bought or sold near the close of trading to affect the closing price. The massive volumes of Athena’s last-second trades allowed Athena to overwhelm the market’s available liquidity and artificially push the market price – and therefore the closing price – in Athena’s favor. Athena was acutely aware of the price impact of its algorithmic trading, calling it “owning the game” in internal e-mails.

Athena agreed to pay a $1 million penalty to settle the SEC’s charges.

“When high frequency traders cross the line and engage in fraud we will pursue them as we do with anyone who manipulates the markets,” said SEC Chair Mary Jo White.

According to the SEC’s order instituting a settled administrative proceeding, although Athena was a relatively small firm, it dominated the market in the last few seconds of a trading day for stocks that it otherwise traded only slightly. The manipulative trading described in the SEC’s order occurred from June to December 2009 and made up more than 70 percent of the total NASDAQ trading volume of the affected stocks in the seconds before the market close.

“Traders today can certainly use complex algorithms and take advantage of cutting-edge technology, but what happened here was fraud,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “This action should send a clear message that the Commission and its Division of Enforcement have the expertise to investigate and charge even the most sophisticated fraudulent algorithmic trading strategies.”

The SEC’s order finds that Athena’s manipulative scheme focused on trading in order imbalances in securities at the close of the trading day. Imbalances occur when there are more orders to buy shares than to sell shares (or vice versa) at the close for any given stock. Every day at the close of trading, NASDAQ runs a closing auction to fill all on-close orders at the best price, one that is not too distant from the price of the stock just before the close. Athena placed orders to fill imbalances in securities at the close of trading, and then traded or “accumulated” shares on the continuous market on the opposite side of its order.

According to the SEC’s order, Athena’s algorithmic strategies became increasingly focused on ensuring that the firm was the dominant firm – and sometimes the only one – trading desirable stock imbalances at the end of each trading day. The firm implemented additional algorithms known as “Collars” to ensure that Athena’s orders received priority over other orders when trading imbalances. These eventually resulted in Athena’s imbalance-on-close orders being at least partially filled more than 98 percent of the time. Athena’s ability to predict that it would get filled on almost every imbalance order allowed the firm to unleash its manipulative Gravy algorithm to trade tens of thousands of stocks right before the close of trading. As a result, these stocks traded at artificial prices that NASDAQ then used to set the closing prices for on-close orders as part of its closing auction. Athena’s high frequency trading scheme enabled its orders to be executed at more favorable prices.

The SEC order censures Athena and finds that the firm violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Without admitting or denying the findings, Athena agreed to pay the $1 million penalty and cease and desist from committing or causing any future violations of the securities laws.

The SEC’s investigation was conducted by William Finkel, Peter Lamore, Preethi Krishnamurthy, and Alexander Vasilescu. The case was supervised by Michael Osnato. The Enforcement Division worked closely with the SEC’s Division of Economic Risk and Analysis and the Quantitative Analytics Unit. The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

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Sunday, October 19, 2014

Availability of Staff Analysis on Reporting and Dissemination of Security-Based Swap Information

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Availability of Staff Analysis on Reporting and Dissemination of Security-Based Swap Information

The staff of the Securities and Exchange Commission today made available analyses of data on the reporting and dissemination of security-based swap transaction information.

The analyses are posted on the SEC’s website as part of the comment file for rules proposed by the SEC in November 2010, and re-proposed in May 2013, on the reporting and dissemination of security-based swap transaction information. The analyses were conducted by staff in the SEC’s Division of Economic and Risk Analysis and the Division of Trading and Markets and examine:

The effect of the Commodity Futures Trading Commission’s mandated post-trade transparency in the index credit default swaps (CDS) market on total credit exposure, trading volume, and trade size in the index CDS market

Recent single-name CDS transactions and if and how dealers may hedge any large notional exposures that result from executing trades with their customers

The staff believe that the analyses have the potential to be informative for evaluating rules on the reporting and dissemination of security-based swap transaction information and are making them available to allow the public to consider and comment on them. These analyses may supplement other information considered in connection with the rules. Comments may be submitted to the comment file (File No. S7-34-10) for the proposed rule and should be received by November 14.

Additional studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the SEC’s website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at www.sec.gov to receive notifications by e-mail.

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Saturday, October 18, 2014

SEC Announces Enforcement Action Against Former Wells Fargo Advisors Compliance Officer for Altering Document

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SEC Announces Enforcement Action Against Former Wells Fargo Advisors Compliance Officer for Altering Document

The Securities and Exchange Commission today announced an enforcement action against a former Wells Fargo Advisors compliance officer who allegedly altered a document before it was provided to the SEC during an investigation.

According to the SEC’s order instituting an administrative proceeding against Judy K. Wolf, she was responsible for identifying potentially suspicious trading by Wells Fargo personnel or the firm’s customers and clients and then analyzing whether the trades may have been based on material nonpublic information. Wolf created a document in September 2010 to summarize her review of a particular Wells Fargo broker’s trading, and she closed her review with no findings. The SEC Enforcement Division alleges that Wolf altered that document in December 2012 after the SEC charged the broker with insider trading. By altering the document, Wolf made it appear that she performed a more thorough review in 2010 than she actually had. After Wells Fargo provided the document to the SEC as part of its continuing investigation, SEC enforcement staff spotted the alteration and questioned Wolf specifically about the document. At first she unequivocally denied altering the document after September 2010, but in later testimony she testified that she had done so.

The SEC previously charged Wells Fargo in the case, and the firm agreed to pay $5 million to settle these and other violations of the securities laws. Prior to the enforcement action, Wells Fargo placed Wolf on administrative leave and ultimately terminated her employment.

“We allege that Wolf intentionally altered a trading review document after she knew that the SEC had charged a Wells Fargo employee with insider trading based on facts related to her review,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit. “Regardless of her motivation, her conduct was inconsistent with what the SEC expects of compliance professionals and what the law requires.”

The SEC Enforcement Division alleges that Wolf, who lives in St. Louis, willfully aided and abetted and caused Wells Fargo to violate Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-4(j) as well as Rule 204(a) under the Investment Advisers Act of 1940.

The SEC Enforcement Division’s investigation was conducted by Megan Bergstrom and David S. Brown of the Market Abuse Unit. The case was supervised by Mr. Hawke, Robert A. Cohen, and Diana Tani. The litigation will be led by Donald Searles.

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Friday, October 17, 2014

SEC Charges Staten Island Man With Conducting Fraudulent Offerings and Stealing Investor Funds

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SEC Charges Staten Island Man With Conducting Fraudulent Offerings and Stealing Investor Funds

The Securities and Exchange Commission today charged the operator of an online stock recommendation business with conducting several fraudulent securities offerings and siphoning some of the money raised from investors for a Caribbean vacation and plastic surgery.

An SEC investigation found that Anthony Coronati, who lives on Staten Island, initially held himself out as an investment adviser to a hedge fund that he claimed would invest in equity securities. But the hedge fund was fictitious and Coronati used investor money for other purposes. When the money began drying up, he went on to defraud investors in additional schemes involving his New Jersey-based company Bidtoask LLC. Coronati and Bidtoask sold membership interests in the company for the purpose of investing in promising technology companies that had yet to hold initial public offerings (IPOs). Investors were told that Bidtoask would invest directly in pre-IPO Facebook shares without charging any fees, commissions, or markups to investors. However, Bidtoask’s Facebook-related investments actually did require the payment of significant fees that Coronati and Bidtoask concealed from investors. Bidtoask did not even own the shares of other technology companies in which it was supposedly investing, and these companies were not actually in the process of an IPO.

Coronati and Bidtoask have agreed to settle the SEC’s charges. Coronati must pay back $400,000 in funds stolen from investors, and the money will be deposited into a Fair Fund for distribution to victims of the fraud schemes. Coronati also agreed to be permanently barred from the securities industry.

“Coronati and Bidtoask blatantly lied in order to lure investors into fraudulent schemes, and Coronati then misappropriated large sums of money entrusted to him,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “The Fair Fund will help put money back in investors’ pockets.”

Coronati, who operates the website BidToAsk.com that offers stock recommendations to subscribers, was the subject of a subpoena enforcement action filed by the SEC late last year when he failed to produce documents or appear for scheduled testimony during the SEC’s investigation. As a result of his continued failure to comply with SEC subpoenas in spite of a court order, Coronati was held in contempt of court and arrested earlier this year.

“Despite Coronati’s repeated attempts to defy SEC subpoenas and impede our work, the SEC investigative staff doggedly pursued the case and gathered the necessary evidence to bring this enforcement action that makes it possible to return stolen funds back to investors,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office.

According to the SEC’s order instituting a settled administrative proceeding, Coronati conducted his schemes from at least 2009 to 2013. As the various schemes unraveled, he faced increasing concerns from investors. Coronati placated certain investors by making Ponzi-like payments to them using other investors’ money, and he sent a phony account statement to at least one investor purporting a position in the fake hedge fund that was worth more than $120,000. The account statement also purported that the fictitious hedge fund was more than 80 percent invested in well-known public companies such as Apple. Meanwhile, Coronati used investor funds to pay business expenses and such personal expenses as the Caribbean vacation and plastic surgery, and he also used investor money to purchase securities in a personal brokerage account he held in his own name.

The SEC’s order finds that Coronati and Bidtoask violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Coronati additionally violated Sections 206(1), 206(2), 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8. Without admitting or denying the findings, Coronati and Bidtoask consented to the SEC’s order requiring them to cease and desist from further violations of those provisions of the securities laws and SEC rules. Information about the Fair Fund will be available at: www.sec.gov/litigation/fairfundlist.htm

The SEC’s investigation was conducted by Jess Velona, Kenneth Byrne, and Thomas Feretic. The litigation related to the subpoena enforcement action against Coronati was led by Preethi Krishnamurthy. The case was supervised by Mr. Wadhwa and Sharon Binger.

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Thursday, October 16, 2014

SEC Announces Date for Annual Government-Business Forum on Small Business Capital Formation

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SEC Announces Date for Annual Government-Business Forum on Small Business Capital Formation

The Securities and Exchange Commission today announced that it will hold its annual Government-Business Forum on Small Business Capital Formation at its Washington, D.C. headquarters on November 20.

The morning session of the forum will feature panel discussions on the definition of an accredited investor and secondary market liquidity for securities of small businesses. During the afternoon session, participants will work in groups to formulate specific policy recommendations.

Information on the panel participants and the full agenda for the forum will be announced in November and available on the forum webpage.

The forum, which begins at 9 a.m., is open to the public and will be webcast live on the SEC’s website. The afternoon breakout group sessions will not be webcast but will be accessible by teleconference. Anyone wishing to participate in a breakout group either in person or by teleconference must register online by November 14.

Members of the public are invited to make suggestions for recommendations or topics to be discussed at the forum by e-mailing the SEC’s Office of Small Business Policy at SmallBusiness@sec.gov.

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Wednesday, October 15, 2014

SEC Staff Issue Risk Alert and FAQs on Customer Sales of Securities

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SEC Staff Issue Risk Alert and FAQs on Customer Sales of Securities

The Securities and Exchange Commission today announced publication of a Risk Alert and FAQs to remind broker-dealers of their obligations when they engage in unregistered transactions on behalf of their customers. The publication of the staff guidance was accompanied by the announcement of an enforcement action against two firms for improperly selling billions of shares of penny stocks through such unregistered offerings.

The Risk Alert summarizes deficiencies that were discovered by the SEC’s Office of Compliance Inspections and Examinations (OCIE) during a targeted sweep of 22 broker-dealers frequently involved in the sale of microcap securities. The sweep uncovered widespread deficiencies including:

Insufficient policies and procedures to monitor for and identify potential red flags in customer-initiated sales.

Inadequate controls to evaluate how customers acquired the securities and whether they could be lawfully resold without registration.

Failure to file suspicious activity reports, as required by the Bank Secrecy Act, when encountering unusual or suspicious activity in connection with customers’ sales of microcap securities.

“Broker-dealers are key gatekeepers in addressing potential violations of the securities laws by customers,” said Kevin Goodman, National Associate Director of OCIE’s broker-dealer examination program. “We will continue to assess the controls that firms in this business have in place to monitor for and report any suspicious activities.”

Section 4(a)(4) of the Securities Act of 1933 provides a registration exemption for broker-dealers when executing customers’ unregistered sales of securities if, after reasonable inquiry, the broker-dealer is not aware of circumstances indicating that the customer would be violating the registration requirements of Section 5 of the Securities Act. The SEC’s Division of Trading and Markets published FAQs to remind broker-dealers of the requirements for complying with the exemption.

“Broker-dealers must be vigilant when facilitating sales on behalf of customers in unregistered transactions and remember that reliance on the broker’s exemption requires a reasonable inquiry of the customer and transaction,” said Stephen Luparello, Director of the SEC's Division of Trading and Markets.

The FAQs were prepared by Paula Jenson, Lourdes Gonzalez, Kevin Schopp, and Carl Emigholz of the Division of Trading and Markets. The Risk Alert was prepared by Steven Vitulano and Ellen Hersh of the Office of Compliance Inspections and Examinations.

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Tuesday, October 14, 2014

SEC Announces Insider Trading Charges Against Former Financial Analyst at Pharmaceutical Company

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SEC Announces Insider Trading Charges Against Former Financial Analyst at Pharmaceutical Company

The Securities and Exchange Commission today announced insider trading charges against a Massachusetts man who allegedly tipped his friend with nonpublic information about potential acquisition targets of the pharmaceutical company where he worked.

The SEC alleges that Zachary Zwerko was tasked with evaluating potential acquisitions, and he repeatedly accessed confidential files about his employer’s acquisition targets and passed details onto a friend from business school so he could purchase securities prior to public announcements. Zwerko accessed and shared information about a deal he was assigned to work on as well as a potential acquisition tasked to others. The illegal tips enabled his friend to make approximately $683,000 in illicit profits.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Zwerko.

“Zwerko’s employer entrusted him with confidential information about possible acquisitions, and he was brazen enough to steal that information for his own benefit,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office. “The SEC’s swift enforcement action shows that Zwerko miscalculated the true consequences of his actions.”

The SEC’s complaint was filed after hours on October 10 in U.S. District Court for the Southern District of New York. The complaint charges Zwerko, who lives in Cambridge Mass., with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

The SEC’s investigation, which is continuing, has been conducted by Dominick D. Barbieri, Neil Hendelman, and Charles D. Riely. The case has been supervised by Mr. Wadhwa. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, Federal Bureau of Investigation, and Financial Industry Regulatory Authority.

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Monday, October 13, 2014

Rhea Dignam Named as Senior Counsel To OCIE Director

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Rhea Dignam Named as Senior Counsel To OCIE Director

The Securities and Exchange Commission today announced that Rhea Kemble Dignam has been named as senior counsel to the director of the Office of Compliance Inspections and Examinations (OCIE).

Ms. Dignam will begin her new position when her successor as the regional director of the SEC’s Atlanta Regional Office begins in that position later this fall. Ms. Dignam joined the SEC as the Atlanta Regional Office director in March 2010.

“Rhea is a proven and valued member of the Commission and the National Exam Program,” said Andrew J. Bowden, OCIE director. “I am delighted that she has agreed to serve as senior counsel.”

Ms. Dignam will focus on communicating examination findings to key stakeholders inside and outside the SEC in furtherance of OCIE’s mission to promote compliance, prevent fraud, inform policy, and identify risks.

Andrew J. Ceresney, Director of the SEC’s Enforcement Division, added, “As ARO regional director, Rhea has been a significant contributor to the SEC’s enforcement program. Under her leadership, the ARO has brought many cases of national significance.”

Ms. Dignam said, “It has been a privilege to work with the talented staff of the ARO, whose commitment to the mission of the SEC is unflagging. Their accomplishments in investigations, litigations, examinations, and in defending the interests of investors in bankruptcy proceedings, as well as in conducting outreach about the mission of the SEC to a variety of audiences during the past four plus years have been outstanding. I thank the front line staff as well as the dedicated members of ARO’s support staff. I also look forward to joining the National Exam Program at the national level and helping it communicate what it learns as the eyes and ears of the Commission.”

Key enforcement actions brought during Ms. Dignam’s tenure include:

In re Alderman et al. (action against the former members of the board of directors of various Regions Morgan Keegan bond funds, for their failure, among other things, to fulfill their valuation obligations as board members under the Investment Company Act of 1940 with respect to fair valued securities)

In re Morgan Keegan et al. (action against the broker-dealer, the investment advisor, and two individuals, brought in parallel with actions filed by a task force of state regulators and by FINRA, with a resulting aggregate settlement of $200 million in disgorgement and penalties)

The series of cases (including SEC v. Lee Farkas) against multiple individuals responsible for the more than $1.5 billion fraud at Colonial Bank

SEC v. Bank of America, charging violations in connection with a particular RMBS offering in 2008, and resolved as part of a major global settlement announced in conjunction with the Department of Justice in which the bank would pay a total of $16.65 billion to resolve various investigations brought by DOJ and other federal and state agencies, including the SEC. (The settlement is subject to court approval.)

In re Bank of America Corporation, charging violations in connection with inadequate disclosures in the bank’s Management Discussion and Analysis (MD&A) about uncertainties regarding the potential financial impact of its mortgage loan repurchase obligations. The bank admitted its disclosure failures and agreed to pay a $20 million penalty.

Two “stand alone” actions (SEC v. McCarthy and SEC v. Cleary, against the former CEO and CFO, respectively, of Beazer Homes) brought under Sarbanes-Oxley Section 304 seeking clawbacks for accounting restatements

In re JP Turner, a settled action charging failure to supervise by both the firm and its president and the companion litigated case of In re Bresner et al, against the firm’s executive vice president and three of its former registered representatives. (The administrative law judge found all four had violated the securities laws; the three registered representatives are appealing to the full Commission.)

SEC v. Morgan Keegan, in which the Commission prevailed in a trial relating to misconduct in connection with auction rate securities.

During Ms. Dignam’s tenure, the examination staff in the ARO increased and targeted its registrant coverage through increasing utilization of a risk-based approach. The ARO’s exam program has also been very active in sponsoring and participating in events focused on compliance outreach, as well as industry in-reach. Broadening and deepening its relationship with other federal and state regulators and FINRA has been another priority of ARO’s exam program.

Prior to joining the SEC in 2010, Ms. Dignam was a principal with Ernst & Young LLP, a vice president and deputy general counsel at New York Life Insurance Company, executive deputy comptroller of New York City, chief assistant district attorney in Kings County (Brooklyn), New York, and served in several roles in the U.S. Attorney’s Office for the Southern District of New York, including as the Executive Assistant U.S. Attorney, chief of the Public Corruption Unit, chief of the Narcotics Unit and a member of the Securities and Commodities Frauds Unit. Ms. Dignam began her legal career as an associate at the law firm of Davis Polk & Wardwell. She holds a B.A. from Wellesley College (Phi Beta Kappa) and a J.D. from Harvard Law School.

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Sunday, October 12, 2014

Two Former Wells Fargo Employees Charged With Insider Trading in Advance of Research Reports Containing Ratings Changes

The Securities and Exchange Commission today announced insider trading charges against two former Wells Fargo employees involved in an alleged scheme to profit by buying or short selling a stock before research analyst reports were published containing a ratings change.

Research analysts typically produce reports with a recommendation or rating of a stock or other security they’ve reviewed. When an analyst alters a prior view on the prospects of a security, a new report is issued with a ratings change. The SEC’s Enforcement Division alleges that while Gregory T. Bolan Jr. worked as a research analyst at Wells Fargo, he tipped a trader at the firm, Joseph C. Ruggieri, in advance of several market-moving ratings upgrades or downgrades that he made in certain securities. The tips enabled Ruggieri to generate more than $117,000 in profits.

“Instead of abiding by firm policies that specifically prohibited trading ahead of published research, Ruggieri used information obtained from Bolan to make profitable trades in advance of six separate research reports,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office. “The repeated nature of these violations demonstrates an utter disregard for our insider trading laws.”

According to the SEC’s order instituting a litigated proceeding before an administrative law judge, Bolan also tipped a close friend with nonpublic information about his upcoming ratings changes. The friend, who is now deceased, generated approximately $10,000 in profits in a personal brokerage account by trading ahead of three ratings changes.

“Bolan gave two traders a sneak preview into his upcoming ratings changes and provided them an unfair and illegal advantage on the rest of the markets,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit.

The SEC’s Enforcement Division alleges that after receiving Bolan’s tips, Ruggieri either purchased the relevant company’s stock ahead of Bolan’s upgrades or sold the stock short ahead of Bolan’s downgrades. Ruggieri closed his overnight positions in those securities for a profit shortly after Bolan’s ratings changes were made public and the stock prices had moved. From April 2010 to March 2011, Bolan published a total of eight research reports with a ratings change or initiation of coverage with an “outperform” or “underperform” rating. Ruggieri traded profitably ahead of six of these reports in a manner that did not fit in his typical trading pattern. Aside from this trading ahead, Ruggieri had only a handful of overnight positions in securities that had been rated within the six months prior to his trading.

The SEC’s Enforcement Division alleges that by engaging in the misconduct described in the SEC’s order, Bolan and Ruggieri willfully violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The administrative proceeding will determine what relief, if any, is in the public interest against Bolan and Ruggieri, including disgorgement of ill-gotten gains, prejudgment interest, financial penalties, and other remedial measures.

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Saturday, October 11, 2014

SEC Announces Largest-Ever Whistleblower Award

The Securities and Exchange Commission today announced an expected award of more than $30 million to a whistleblower who provided key original information that led to a successful SEC enforcement action.

The award will be the largest made by the SEC’s whistleblower program to date and the fourth award to a whistleblower living in a foreign country, demonstrating the program’s international reach.

“This whistleblower came to us with information about an ongoing fraud that would have been very difficult to detect,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement. “This record-breaking award sends a strong message about our commitment to whistleblowers and the value they bring to law enforcement.”

Sean McKessy, Chief of the SEC’s Office of the Whistleblower, added, “This award of more than $30 million shows the international breadth of our whistleblower program as we effectively utilize valuable tips from anyone, anywhere to bring wrongdoers to justice. Whistleblowers from all over the world should feel similarly incentivized to come forward with credible information about potential violations of the U.S. securities laws.”

The SEC’s whistleblower program rewards high-quality, original information that results in an SEC enforcement action with sanctions exceeding $1 million. Whistleblower awards can range from 10 percent to 30 percent of the money collected in a case. The money paid to whistleblowers comes from an investor protection fund established by Congress at no cost to taxpayers or harmed investors. The fund is financed through monetary sanctions paid by securities law violators to the SEC. Money is not taken or withheld from harmed investors to pay whistleblower awards.

By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity. The previous high for an SEC award to a whistleblower was $14 million, which was announced in October 2013.

The SEC awarded its first whistleblower under the program following its inception in fiscal year 2012. The program awarded four more whistleblowers in FY 2013, and has awarded nine whistleblowers in FY 2014.

“We’re pleased with the consistent yearly growth in the number of award recipients since the program’s inception,” Mr. McKessy said.

For more information about the whistleblower program and how to report a tip, visit Sallah Astarita & Cox, LLC's whistleblower tips.

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Friday, October 10, 2014

SEC Charges New York-Based Private Equity Fund Adviser With Misallocation Of Portfolio Company Expenses

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The Securities and Exchange Commission today charged a New York-based investment advisory firm with breaching its fiduciary duty to a pair of private equity funds by sharing expenses between a company in one’s portfolio and a company in the other’s portfolio in a manner that improperly benefited one fund over the other.

An SEC investigation found that while Lincolnshire Management integrated the two portfolio companies and managed them as one, the funds were separately advised and had distinct sets of investors. Despite developing an expense allocation policy as part of the integration, it was not followed on some occasions, resulting in the portfolio company owned by one fund paying more than its fair share of joint expenses that benefited the companies of both funds.

Lincolnshire agreed to pay more than $2.3 million to settle the SEC’s charges.

“Lincolnshire’s decision to integrate two portfolio companies owned by separate private equity funds resulted in the misallocation of expenses between the two companies,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Advisers that commingle assets across funds must do so in a manner that satisfies their fiduciary duties to each fund and prevents one fund from benefiting to the detriment of the other.”

According to the SEC’s order instituting a settled administrative proceeding, Lincolnshire Equity Fund acquired the first company in 1997, and Lincolnshire Equity Fund II purchased the second company four years later. Lincolnshire immediately disclosed to limited partners in both funds that it intended to integrate the two companies because they had valuable synergies and could complement each other. From at least 2005 to January 2013, the two portfolio companies each paid Lincolnshire annual consulting fees of $250,000. The two companies integrated a number of business and operational functions, including payroll and 401(k) administration, human resources, marketing, and technology. They also entered into a joint line of credit, formed a joint management team, and had a joint logo.

According to the SEC’s order, the portfolio companies shared numerous annual expenses that generally were allocated between them based on each company’s contributions to their combined revenue. However, there were times when a portion of the shared expenses were misallocated and went undocumented. For example, the company owned by Lincolnshire Equity Fund paid the entire third-party payroll and 401(k) administrative expenses for the employees of both companies. The Singapore subsidiary of Lincolnshire Equity Fund’s portfolio company sold supplies and performed services at cost for Lincolnshire Equity Fund II’s portfolio company even though Lincolnshire Equity Fund II’s portfolio company did not pay any share of the overhead expenses for the Singapore subsidiary. Additionally, there were several employees who performed work that benefited both companies, but their salaries were not allocated between the two. Similarly, when executives were paid bonuses as the companies were sold together in January 2013, Lincolnshire Equity Fund paid a portion of the bonuses to two executives who were solely employed by Lincolnshire Equity Fund II’s portfolio company.

The SEC’s order also finds that Lincolnshire failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940 arising from the integration of the two portfolio companies.

Lincolnshire consented to the entry of the order finding that it violated Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7. Without admitting or denying the findings, Lincolnshire agreed to cease and desist from committing or causing future violations of these provisions and to pay $1.5 million in disgorgement plus $358,112 in prejudgment interest and a $450,000 penalty.

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Thursday, October 09, 2014

SEC Charges Two with Insider Trading on Pershing Square’s Announcement on Herbalife

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SEC Charges Two with Insider Trading on Pershing Square’s Announcement on Herbalife

The Securities and Exchange Commission today announced charges against two individuals for insider trading on a prominent hedge fund manager’s announcement that his hedge fund had formed a negative view of Herbalife Ltd. and taken a $1 billion short position in its securities.

The SEC’s orders find that Filip Szymik of New York City and Jordan Peixoto of Toronto engaged in insider trading in Herbalife securities in advance of hedge fund manager William Ackman’s December 20, 2012 announcement of the views of his hedge fund, Pershing Square Management, L.P.

According to the SEC’s orders, Szymik learned from his roommate, then a Pershing analyst, that Pershing planned to publicly announce its negative view of Herbalife. Szymik tipped Peixoto, who purchased Herbalife put options on December 19, 2012, one day before the announcement. As a result of his unlawful trading, Peixoto reaped $47,100 in illicit profits.

“Szymik and Peixoto chose to engage in illicit tipping and trading in advance of the announcement of market-moving information and today they are being held accountable for those offenses,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office.

In a settled order against Szymik, the Commission found that he violated antifraud provisions in federal securities laws and SEC rules and ordered him to cease and desist from further violations and pay a $47,100 civil penalty.

In the litigated order against Peixoto, the Commission instituted cease-and-desist proceedings against him to determine whether he violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and to determine what relief is appropriate.

The SEC’s investigation has been conducted by Liora Sukhatme, Sheldon Mui, Diego Brucculeri, and Gerald Gross, and the matter is being litigated by Jack Kaufman. The case has been supervised by Mr. Wadhwa.

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Wednesday, October 08, 2014

SEC Names Liban Jama as Director of Atlanta Regional Office

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SEC Names Liban Jama as Director of Atlanta Regional Office

The Securities and Exchange Commission today announced the appointment of Liban Jama as director of the Atlanta Regional Office, where he will oversee enforcement and examinations in a region covering five states.

Mr. Jama currently serves as senior advisor to SEC Chair Mary Jo White, and before that he served as counsel to Commissioner Luis Aguilar. In those capacities, he provided advice and counsel on many major regulatory and enforcement matters before the Commission.

From 2005 to 2011, Mr. Jama served as senior counsel in the Enforcement Division, where he handled enforcement investigations in a variety of areas ranging from insider trading to disclosure fraud, and was a member of the division’s specialized unit devoted to the Foreign Corrupt Practices Act.

“Liban’s broad based experience in enforcement and market regulation has allowed him to play a key role in the Commission’s policy and rulemaking process,” said SEC Chair Mary Jo White. “His consensus-building expertise and sound judgment have been instrumental in the adoption of a number of significant rules, including rules involving cross-border security-based swaps, financial responsibility rules for broker-dealers, and the registration of municipal advisors.”

“Liban’s deep knowledge of the securities laws and wide-ranging experience within the Commission, position him perfectly to lead our Atlanta office’s enforcement efforts,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “We look forward to continued success from that office under his leadership.”

“Having held various positions in the Commission allows Liban to bring a wealth of expertise to the examination program,” said Andrew J. Bowden, Director of the SEC’s Office of Compliance Inspections and Examinations (OCIE). “His focused and detailed-oriented approach to handling matters will make him a valuable asset to the program.”

Mr. Jama said, “It is an honor and a privilege to join the staff of the Atlanta Regional Office. I have a deep respect for the tremendous work of both the examination and enforcement staff, and I look forward to working with them to help carry out the Commission’s mandate to protect investors. ”

Mr. Jama received his law degree from the University of Virginia School of Law. He holds a bachelor’s degree from the University of Michigan. Before coming to the SEC, Mr. Jama was a corporate and securities attorney in private practice.

Mr. Jama succeeds Rhea Kemble Dignam, who announced last May that she has accepted a position as the Office of Compliance Inspections and Examinations’ National Exam Program’s senior counsel.

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Tuesday, October 07, 2014

SEC, FINRA and the MSRB to Hold Compliance Outreach Program for Municipal Advisors

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SEC, FINRA and the MSRB to Hold Compliance Outreach Program for Municipal Advisors

The Securities and Exchange Commission, Financial Industry Regulatory Authority (FINRA), and the Municipal Securities Rulemaking Board (MSRB) today announced the opening of registration for the first Compliance Outreach Program for Municipal Advisors that will take place in Chicago on November 3.

The SEC’s Office of Compliance Inspections and Examinations, in coordination with the SEC's Office of Municipal Securities, is partnering with FINRA and the MSRB to sponsor the program. Similar to the compliance outreach programs for broker-dealers and investment advisers, the municipal advisor program will provide municipal advisor professionals a forum for discussions with regulators about risk management, regulatory issues, and compliance practices.

“The municipal advisor program will be a good opportunity for new municipal registrants to better understand regulatory expectations,” said Kevin Goodman, national associate director of the SEC's broker-dealer and municipal advisor examination programs. “The program will allow registered municipal advisors to interact with all three regulators, which is an important aspect of our overall outreach efforts.”

Mike Rufino, FINRA’s head of member regulation-sales practice said, “This program will provide municipal advisor compliance professionals across the country with the opportunity to hear directly from their collective regulators on the issues and expectations regarding municipal advisors. Compliance Outreach Programs also provide us with an opportunity to hear from municipal advisor firms regarding their day-to-day compliance initiatives.”

Lynnette Kelly, executive director of the MSRB, said, “The outreach program will help reinforce the importance of complying with rules being developed for the municipal advisor community. We are pleased to participate in this event and help educate advisors on their responsibilities.”

There is no cost to attend the program. Registration is open to all municipal professionals with limited seating available and preference given to employees of registered municipal advisors on a first-come, first-served basis. Please visit our registration page if you plan to attend in-person.

This event will also be webcast. It is not necessary to register to view via webcast. Information regarding accessing the webcast will be posted on the SEC website on the day of the event. For additional information visit the SEC, FINRA, or the MSRB website.

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Monday, October 06, 2014

SEC Suspends Trading in Nine Penny Stocks in Ongoing Initiative to Combat Microcap Fraud

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SEC Suspends Trading in Nine Penny Stocks in Ongoing Initiative to Combat Microcap Fraud

The Securities and Exchange Commission today announced suspensions in trading for nine different penny stocks as part of an ongoing enforcement initiative to combat microcap fraud.

Trading suspensions provide the SEC with a means to immediately neutralize potential threats to investors when questions have arisen pertaining to the accuracy and adequacy of information about publicly traded companies.

Under the federal securities laws, the SEC can suspend trading in a stock for 10 days and generally prohibit a broker-dealer from soliciting investors to buy or sell the stock again until certain reporting requirements are met. More information about the trading suspension process is available in an SEC investor bulletin on the topic.

The companies involved in the trading suspension announced today were identified during an SEC analysis of heavily promoted microcap issuers. The SEC’s Enforcement Division last year created a Microcap Fraud Task Force to target abusive trading and fraudulent conduct in securities issued by microcap companies, especially those that do not regularly publicly report their financial results.

“These trading suspensions are part of the SEC’s continued focus on surveying the penny stock market for suspicious activities,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement. “Using various tools at our disposal including trading suspensions, we will persist in our efforts to combat microcap fraud.”

The following companies are subject to the trading suspension announced today:

All Grade Mining Inc. (HYII)

Bluforest Inc. (BLUF)

DHS Holding Co. (DHSM)

Essential Innovations Technology Corp. (ESIV)

Global Green Inc. (GOGC)

Inova Technology Inc. (INVA)

mLight Tech Inc. (MLGT)

Solar Thin Films Inc. (SLTZ)

Xumanii International Holdings Corp. (XUII)

The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

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Sunday, October 05, 2014

SEC Charges Four Insurance Agents in Securities Fraud Targeting Elderly Investors

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SEC Charges Four Insurance Agents in Securities Fraud Targeting Elderly Investors

The Securities and Exchange Commission today announced charges against four insurance agents for unlawfully selling securities in what turned out to be a multi-million dollar offering fraud targeting elderly investors.

The SEC previously charged a Colorado man who allegedly orchestrated the scheme and recruited active insurance agents to help him solicit investors in Colorado and several other states. The scheme raised approximately $4.3 million during a nearly 18-month period. The SEC’s investigation further found that the four insurance agents charged today solicited funds without registering with the SEC as a broker-dealer as required under the federal securities laws.

“When individuals act as a broker and sell securities to the public, they must comply with registration, supervision, and compliance requirements that exist to protect investors,” said Julie K. Lutz, Director of the SEC’s Denver Regional Office. “These insurance agents improperly operated outside of that regulatory framework and thereby placed their clients at risk.”

According to the SEC’s order instituting administrative proceedings, the scheme primarily targeted retired annuity holders by using insurance agents to sell interests in a company called Arete LLC, which was controlled by the Colorado man orchestrating the scheme: Gary Snisky. The insurance agents told investors that their funds would be used by Snisky to purchase government-backed agency bonds at a discount. However, Snisky did not purchase bonds or conduct any such trading, and he misappropriated approximately $2.8 million of investor funds to pay commissions and make personal mortgage payments.

The SEC’s Enforcement Division alleges that the following three brokers raised approximately $1.5 million for Snisky and received almost $90,000 in commissions:

Kenneth C. Meissner of Fair Oaks Branch, Texas

James Doug Scott of Perkasie, Penn.

Mark S. “Mike” Tomich of Belmont, Mich.

The other insurance agent – David C. Sorrells of Linden, Texas – entered into a cooperation agreement with the SEC. Without admitting or denying the findings, Sorrells consented to an order finding that he violated Section 15(a) of the Securities Exchange Act of 1934. He agreed to be barred from the securities industry, cease and desist from future violations of Section 15(a), and pay disgorgement of $207,213.34. He also is subject to an additional financial penalty. The settlement reflects substantial assistance that Sorrells provided in the SEC’s investigation.

The SEC’s Enforcement Division alleges that Meissner, Scott, and Tomich violated Section 15(a) of the Exchange Act, and is seeking disgorgement, penalties, and securities industry bars in the matter, which will be litigated before an administrative law judge. The SEC’s case against Snisky, filed in November 2013, is still pending in federal court in Colorado.

The SEC’s investigation was conducted by Scott Mascianica, Kerry M. Matticks, and Jay A. Scoggins of the Denver office. The SEC’s litigation will be led by Polly A. Atkinson and Leslie Hughes. The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Colorado, Internal Revenue Service, Federal Bureau of Investigation, and U.S. Postal Inspection Service.

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Saturday, October 04, 2014

SEC Announces Cases Targeting International Pyramid Scheme Operators

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SEC Announces Cases Targeting International Pyramid Scheme Operators

The Securities and Exchange Commission today announced charges against the operators of an international pyramid scheme that raised more than $129 million from investors worldwide, primarily in the U.S., China, and Taiwan. The case follows another against a separate pyramid scheme that lured investors in the U.S., China, and Korea with seminars, webinars, and YouTube videos.

The newest case, filed in federal court in San Francisco, charges Hong Kong-based eAdGear Holdings Limited and California-based eAdGear, Inc., along with operators Charles S. Wang and Qian Cathy Zhang, of Warren, N.J., and Francis Y. Yuen, of Dublin, Calif. According to the SEC complaint, even though eAdGear claimed to be a successful Internet marketing company, nearly all of its revenue was generated by investors, not its products or services.

The complaint alleges that eAdGear’s operators used money from new investors to pay earlier investors as well as to repay a personal loan and purchase million-dollar homes for themselves. It alleges the operators concealed and perpetuated the scheme by displaying sham websites on eAdGear’s own site to make it appear as if it had real, paying customers and manipulated revenue distributions to investors to appear profitable.

“eAdGear and its operators falsely claimed that they were running a profitable Internet marketing company when in reality, they were operating a Ponzi and pyramid scheme that preyed on Chinese communities and caused investors to lose millions of dollars,” said Jina L. Choi, director of the SEC’s San Francisco Regional Office.

The eAdGear case follows one filed Monday in federal court in Georgia against Zhunrize Inc. and CEO Jeff Pan for allegedly defrauding investors of more than $105 million since 2012. Despite its claims to be a legitimate multi-level marketing company, Zhunrize derived most of its funds from selling memberships, not products, according to the SEC complaint.

“Zhunrize claimed to offer investors the opportunity to be an ‘e-commerce Business Owner’ selling products to customers through a website. In fact, it was a pyramid and ‘profits’ came from fees paid by later investors,” said William Hicks, associate regional director of the SEC’s Atlanta Regional Office.

In both cases, the courts granted the SEC’s request for an asset freeze and issued a temporary restraining order. In the case of eAdGear, that order bars the defendants from soliciting investors, including through websites they have used until now – www.eadgear.com, www.eadgear.net, www.winteam777.com, and www.winteam168.com. A court hearing has been scheduled for October 10.

Jessica W. Chan, John A. Roscigno, and Jason M. Habermeyer of the SEC’s San Francisco Regional Office conducted the eAdGear investigation. Erin E. Schneider and Cary S. Robnett supervised the investigation. Ms. Chan and Susan F. LaMarca will lead the SEC’s litigation. The SEC appreciates the assistance of the United States Attorney’s Office for the Northern District of California and the Federal Bureau of Investigation. It also appreciates the assistance of the Hong Kong Securities and Futures Commission, the China Securities Regulatory Commission, the Ontario Securities Commission, and the Financial Conduct Authority in the United Kingdom.

Michael E. Mashburn and Kristin Wilhelm of the SEC’s Atlanta Regional Office conducted the Zhunrize investigation, supervised by Peter J. Diskin. Ms. Wilhelm is leading the SEC’s litigation.

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Friday, October 03, 2014

SEC Charges Two Florida Men With Defrauding Investors in Purported Television Network

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SEC Charges Two Florida Men With Defrauding Investors in Purported Television Network

The Securities and Exchange Commission today announced charges against two Florida men for defrauding investors in a purported startup television network and production company by providing false information about its revenues and future prospects, including that former basketball star Michael Jordan planned to invest in the company.

The SEC alleges that Vision Broadcast Network’s then-CEO Erick Laszlo Mathe with assistance from consultant Ashif Jiwa raised at least $5.7 million in startup capital from approximately 100 investors nationwide through the sale of the company’s common stock and convertible debentures. Mathe and Jiwa misrepresented to investors that Vision Broadcast owned low-power television stations as well as 70 broadcast licenses to operate additional low power television stations estimated to be worth $400 million once the television stations became operational. Vision Broadcast meanwhile funneled hundreds of thousands of dollars in investor funds to companies controlled by Mathe or Jiwa in the form of purported professional and consulting services that were never provided. Mathe and Jiwa also misused investor funds to pay personal and travel expenses unrelated to Vision Broadcast’s business.

In a parallel action, the U.S. Attorney’s Office for the Eastern District of Pennsylvania today announced criminal charges against Mathe and Jiwa. Vision Broadcast is now a dissolved company.

“Mathe and Jiwa deliberately misrepresented a company with little to no assets or revenues as a tremendous investment opportunity,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “They also improperly spent investors’ hard-earned money on their personal and travel expenses.”

According to the SEC’s complaint, Mathe lives in North Miami Beach and Jiwa in Miami Beach. They solicited investors from approximately August 2007 to February 2010, and the securities offering was not registered with the SEC as required under the federal securities laws. While attracting investors, Mathe and Jiwa falsely claimed that Michael Jordan was a prospective investor when in fact he had never told anyone he planned to invest in Vision Broadcast. Mathe and Jiwa also falsely told investors that they had a commitment from an institutional investor to invest $25 million in the company.

The SEC alleges that while they were misrepresenting key facts about Vision Broadcast, Mathe and Jiwa also contradicted representations they made to investors about the use of their funds. Together, Mathe and Jiwa received $459,000 in undisclosed commissions from the funds they raised for Vision Broadcast. They also received more than $1.3 million for purported professional or consulting services that they never provided the company. Vision Broadcast reimbursed one of Jiwa’s close relatives $425,000 in personal expenses and $84,000 in travel expenses incurred by Jiwa. Vision Broadcast also paid personal expenses for Mathe and Jiwa that included more than three thousand dollars on golf equipment, lease payments on their luxury cars totaling $47,529, and nearly $2,500 in costs related to Mathe’s boat.

The SEC’s complaint charges Mathe and Jiwa with violating Sections 5(a) and (c) and 17(a) of the Securities Act of 1933 and Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint also charges Mathe with aiding and abetting violations of Section 10(b) of the Exchange Act and Rule 10b-5(b). The SEC seeks financial penalties, disgorgement of ill-gotten gains with prejudgment interest, penny stock bars, officer-and-director bars, and permanent injunctions.

The SEC’s complaint also names a company affiliated with Jiwa called Bluemark Asset Management LLC as a relief defendant for the purposes of recovering investor funds that Vision Broadcast used to pay Bluemark for professional services that were never actually provided.

The SEC’s investigation was conducted by Andre J. Zamorano and Kathleen Strandell of the Miami Regional Office and supervised by Thierry Olivier Desmet. The SEC’s litigation will be led by Patrick R. Costello. The examination that led to the investigation was conducted by Brian Dyer, William Tudor, and George Franceschini, and supervised by Nicholas A. Monaco and John C. Mattimore of the Miami office. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Eastern District of Pennsylvania and the Federal Bureau of Investigation.

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Thursday, October 02, 2014

SEC Charges Tacoma, Wash.-Area Firm for Undisclosed Principal Transactions and Misleading Performance Advertisements

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SEC Charges Tacoma, Wash.-Area Firm for Undisclosed Principal Transactions and Misleading Performance Advertisements

The Securities and Exchange Commission today charged an investment advisory firm located outside Tacoma, Wash., with engaging in hundreds of principal transactions through its affiliated broker-dealer without informing clients or obtaining their consent.

Strategic Capital Group LLC, which is additionally charged with distributing false and misleading advertisements to investors, agreed to pay nearly $600,000 to settle the SEC’s charges. The firm’s CEO N. Gary Price was charged with causing some of the firm’s violations, and agreed to pay a $50,000 penalty to settle the charges against him.

In a principal transaction, a firm acting for its own account or through an affiliated broker-dealer buys a security from a client account or sells a security to it. Principal transactions can pose potential conflicts between the interests of the adviser and the client, and therefore advisers are required to disclose in writing any financial interest or conflicted role when advising a client on the other side of the trade. They also must obtain the client’s consent.

An SEC investigation found that Strategic Capital engaged in more than 1,100 principal transactions through its brokerage affiliate RP Capital LLC without making the required disclosures to clients or obtaining consent beforehand. Strategic Capital also failed to seek best execution for the transactions it executed through RP Capital. Price signed regulatory filings falsely stating that the firm did not engage in principal transactions.

The SEC investigation also found that Strategic Capital provided prospective investors with a pair of false and misleading advertisements. One advertisement failed to disclose that the portrayed results were partially based on returns of an index rather than actual, historical returns achieved by Strategic Capital’s recommendations. The second advertisement did not disclose that the portrayed results did not deduct fees and thus materially overstated Strategic Capital’s investment performance.

“Investment advisers must be fully forthcoming about how they execute client trades and portray past performance,” said Marshall S. Sprung, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Strategic Capital clients were not provided all of the information they needed to evaluate the firm’s potential conflicts of interest and investment management skills.”

According to the SEC’s order instituting a settled administrative proceeding, Strategic Capital also failed to implement proper compliance procedures at the firm.

The SEC’s order finds that Strategic Capital, based in Gig Harbor, Wash., violated the Investment Advisers Act of 1940, specifically the antifraud, principal transactions, advertising, compliance, and reporting provisions. The order finds that Price caused Strategic Capital’s violations of the compliance and reporting provisions. Strategic Capital’s disgorgement amount of $368,459 will be distributed to current and former clients, and the firm also must pay prejudgment interest of $17,831 and a penalty of $200,000. Without admitting or denying the findings in the order, Strategic Capital and Price agreed to cease and desist from committing or causing future violations of these provisions.

The SEC’s investigation was conducted by Jeremy E. Pendrey and Erin E. Schneider, who work in the Asset Management Unit in the San Francisco Regional Office. The SEC examination that led to the investigation was conducted by Tracey Bonner, James Marchi, and Alice Schulman of the San Francisco office’s investment adviser/investment company examination program.

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Wednesday, October 01, 2014

SEC Charges Bank of America With Securities Laws Violations in Connection With Regulatory Capital Overstatements

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SEC Charges Bank of America With Securities Laws Violations in Connection With Regulatory Capital Overstatements

The Securities and Exchange Commission today charged Bank of America Corporation with violating internal controls and recordkeeping provisions of the federal securities laws after it assumed a large portfolio of structured notes and other financial instruments as part of its acquisition of Merrill Lynch.

Bank of America agreed to pay a $7.65 million penalty to settle the charges stemming from regulatory capital overstatements that it made due to its internal accounting control deficiencies and books and records failures.

Regulatory capital refers to the amount of capital that a bank must hold under applicable rules, and it is intended to provide a buffer against adverse market conditions. According to the SEC’s order instituting a settled administrative proceeding, at the time of its Merrill Lynch acquisition, Bank of America permissibly recorded the inherited notes at a discount to par. Bank of America was required to realize losses on the notes as they matured because it redeemed the notes at par. For the purposes of calculating and reporting its regulatory capital, applicable rules required Bank of America to deduct the realized losses as they occurred.

However, according to the SEC’s order, by the time 90 percent of the notes had matured as of March 31, 2014, Bank of America had yet to deduct any of the realized losses from its regulatory capital. Therefore, with each passing fiscal quarter and fiscal year since 2009 as more and more notes matured, Bank of America overstated its regulatory capital by greater and greater amounts in its regulatory filings, eventually reaching billions of dollars. Bank of America internally discovered the regulatory capital overstatements in mid-April 2014. After analyzing the issue, it disclosed the overstatements in a Form 8-K filing on April 28, 2014. Besides correcting its regulatory capital figures in its Form 8-K filing, Bank of America cooperated with SEC staff during the investigation and voluntarily took steps to remediate the insufficiencies that led to the regulatory capital overstatements.

“Bank of America self-reported its regulatory capital overstatements, remediated the issues quickly, and cooperated in our investigation,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “This penalty reflects credit for that cooperation, which allowed us to conduct our investigation efficiently and effectively.”

Michael J. Osnato, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, added, “The federal securities laws require all public companies to maintain accurate books and records as well as a system of internal accounting controls sufficient to assure transactions are recorded as necessary. Bank of America violated these legal requirements, which are specifically geared to ensure the integrity and accuracy of information that eventually is disclosed to investors.”

In addition to the $7.65 million penalty, the SEC’s order requires Bank of America to cease and desist from committing or causing any violations or future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934.

The SEC’s investigation was conducted by Tony Frouge and supervised by Michael Osnato, Reid Muoio, and Daniel Michael. The SEC appreciates the assistance of the Board of Governors of the Federal Reserve System and the Public Company Accounting Oversight Board.

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Tuesday, September 30, 2014

Fee Rate Advisory #2 for Fiscal Year 2015

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Fee Rate Advisory #2 for Fiscal Year 2015

When fiscal year 2015 starts on October 1, 2014, the Securities and Exchange Commission expects to be operating under a continuing resolution that will extend until December 11, 2014. Accordingly, the fees paid under Section 31 of the Securities Exchange Act will remain at their current rate until 60 days after the enactment of a regular appropriation for the SEC.

The SEC is required to publish a revised fee rate 30 days after enactment of the new fiscal year appropriation and the new rate takes effect 60 days after the appropriation is enacted. Until then, the Section 31 fee rate will remain at the current rate of $22.10 per million for securities transactions and the assessment on round turn transactions in security futures will remain at $0.0042 per transaction.

For questions on Section 31 fees, please contact the Office of Interpretation and Guidance in the SEC’s Division of Trading and Markets at (202) 551-5777 or by e-mail at tradingandmarkets@sec.gov.

The Commission will issue further notices on its website as appropriate to keep the public informed of developments relating to the effective dates of the fee rates under Section 31.

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Monday, September 29, 2014

Jim Burns, Deputy Director of Trading and Markets, to Leave SEC

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Jim Burns, Deputy Director of Trading and Markets, to Leave SEC

The Securities and Exchange Commission today announced that James R. Burns, Deputy Director in the Division of Trading and Markets, will leave the agency in October.

Since 2012, Mr. Burns has overseen core regulatory functions within the division, including market supervision, analytics and research, derivatives policy and trading practices, and the chief counsel and enforcement liaison offices.

“During his tenure at the Commission, Jim provided valuable leadership on important rulemaking and policy initiatives. His unwavering commitment to the investing public and his commitment to promoting strong capital markets served the agency well,” said Chair Mary Jo White.

“Jim played an instrumental role in the Division of Trading and Markets’ work on numerous rulemakings, including adoption of the Volcker Rule and other key provisions of the Dodd-Frank Act,” said Stephen Luparello, Director, Division of Trading and Markets. “He also has led the division’s response to significant market events and the development of key equity and fixed income market analytical and policy initiatives.”

Mr. Burns said, “During a period of unprecedented regulatory change, it has been a tremendous privilege to work with incredibly talented and dedicated professionals throughout the agency who set the highest standards of dedication to the SEC’s mission of protecting investors and strengthening our capital markets.”

Prior to joining the division, Mr. Burns served under Chairman Mary L. Schapiro as the agency’s Deputy Chief of Staff, where he advised on the development and execution of the SEC’s rulemaking and policy agenda. He joined Chairman Schapiro’s staff as counsel in 2010, having first come to the SEC as counsel to Commissioner Kathleen Casey in 2008. In these previous capacities, he worked on investment management and trading and markets regulatory and enforcement matters arising from the financial crisis. Before joining the SEC, Mr. Burns was a securities lawyer in private practice, focusing on investment management regulatory and enforcement matters. He previously served as a clerk on the U.S. Court of Appeals for the Fourth Circuit.

Mr. Burns received his J.D., cum laude, from Georgetown University Law Center. He holds masters and doctoral degrees from Oxford University, and graduated with an A.B., magna cum laude, from Harvard College.

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