SEC Charges Former Credit Suisse Investment Bankers in Subprime Bond Pricing Scheme During Credit Crisis

Posted on February 2, 2012 by Klayman & Toskes

On February 1, 2012, the Securities and Exchange Commission charged four former veteran investment bankers and traders at Credit Suisse Group for engaging in a complex scheme to fraudulently overstate the prices of $3 billion in subprime bonds during the height of the subprime credit crisis.

The SEC alleges that Credit Suisse’s former global head of structured credit trading Kareem Serageldin and former head of hedge trading David Higgs along with two mortgage bond traders deliberately ignored specific market information showing a sharp decline in the price of subprime bonds under the control of their group. They instead priced them in a way that allowed Credit Suisse to achieve fictional profits. Serageldin and Higgs periodically directed the traders to change the bond prices in order to hit daily and monthly profit targets, cover up losses in other trading books, and send a message to senior management about their group’s profitability. The SEC alleges that the mispricing scheme was driven in part by these investment bankers’ desire for lavish year-end bonuses and, in the case of Serageldin, a promotion into the senior-most echelon of Credit Suisse’s investment banking unit.

“The stunning scale of the illegal mismarking in this case was surpassed only by the greed of the senior bankers behind the scheme,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “At precisely the moment investors and market participants were urgently seeking accurate information about financial institutions’ exposure to the subprime market, the senior bankers falsely and selfishly inflated the value of more than $3 billion in asset-backed securities in order to protect their bonuses and, in one case, protect a highly coveted promotion.”

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Serageldin oversaw a significant portion of Credit Suisse’s structured products and mortgage-related businesses. The traders reported to Higgs and Serageldin. As the subprime credit crisis accelerated in late 2007 and 2008, Serageldin frequently communicated to Higgs the specific profit & loss (P&L) outcome he wanted. Higgs in turn directed the traders to mark the book in a manner that would achieve the desired P&L. However, under the relevant accounting principles and Credit Suisse policy, the group was required to record the prices of these bonds to accurately reflect their fair value. Proper pricing would have reflected that Credit Suisse was incurring significant losses as the subprime market collapsed.

The SEC alleges that the scheme reached its peak at the end of 2007, when the group recorded falsely overstated year-end prices for the subprime bonds. Just days later in a recorded call, Serageldin and Higgs acknowledged that the year-end prices were too high and expressed a concern that risk personnel at Credit Suisse would “spot” their mispricing. Despite acknowledging that the subprime bonds were mispriced, Serageldin approved his group’s year-end results without making any effort to correct the prices. When the mispricing was eventually detected in February 2008, Credit Suisse disclosed $2.65 billion in additional subprime-related losses related to the investment bankers’ misconduct.

The SEC’s complaint alleges that Serageldin, Higgs, and the traders Faisal Siddiqui and Salmaan Siddiqui violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13b2-1 thereunder, and aided and abetted pursuant to Section 20(e) of the Exchange Act violations of Sections 10(b) and 13(a) and 13(b)(2) of the Exchange Act and Rules 10b-5 12b-20 and 13a-16 thereunder.

Under the SEC’s Statement on the Relationship of Cooperation to Agency Enforcement Decisions (Seaboard Report) and the Enforcement Division’s Cooperation Initiative, entities can benefit from acting swiftly to detect, report, and remediate misconduct and cooperate robustly with the SEC’s investigation. The SEC’s decision not to charge Credit Suisse was influenced by several factors, including the isolated nature of the wrongdoing and Credit Suisse’s immediate self-reporting to the SEC and other law enforcement agencies as well as prompt public disclosure of corrected financial results. Credit Suisse voluntarily terminated the four investment bankers and implemented enhanced internal controls to prevent a recurrence of the misconduct. Credit Suisse also cooperated vigorously with the SEC’s investigation of this matter, providing SEC enforcement officials with timely access to evidence and witnesses. The SEC’s investigation also was assisted by cooperation provided by Higgs, Faisal Siddiqui, and Salmaan Siddiqui.

Posted in Credit Suisse, Enforcement, Fraud, SEC, Subprime | Leave a comment

FINRA sues David Lerner founder for misleading investors

Posted on January 31, 2012 by Klayman & Toskes

The following story appeared on Reuters on January 30, 2012:

David Lerner, who owns a brokerage that regulators say misled investors in its marketing of real estate securities, is now charged with similar misdeeds for statements he made to quell anxious customers, according to a complaint.

The Financial Industry Regulatory Authority recently filed an enforcement complaint against Lerner for allegedly misleading investors about risk and valuation when marketing a $2 billion non-traded real estate investment, or REIT.

Eight months ago, FINRA began a similar proceeding against his brokerage, David Lerner Associates Inc, of Syosett, New York.

FINRA, the retail brokerage industry’s self-watchdog, disclosed the allegations on Lerner’s personal BrokerCheck report, a public regulatory filing, on Jan 13. The complaint was dated December 13.

The regulator’s allegations against Lerner and his firm relate to a non-traded REIT known as Apple REIT Ten. FINRA, in May, alleged the firm did not perform “adequate due diligence” to determine if the REIT was appropriate for its investors, according to the original complaint.

The regulator also alleged that Lerner management “inappropriately valued the REITs’ shares at a constant artificial price” despite years of real estate market fluctuations.

REITs invest in commercial real estate, such as hotels and strip malls, offering a way to profit from rises in property values. Non-traded REITs, however, do not trade on securities exchanges. They can be illiquid or difficult to sell in secondary markets. Non-traded REITs also often have higher fees for investors than publicly traded REITs.

FINRA’s recent complaint against Lerner as an individual stems from statements he made to investors in the wake of the regulator’s action against his firm, according to the complaint.

Lerner sent letters to more than 50,000 customers in July to “counter negative press” about the action, according to the amended complaint. The letter also discussed a possible opportunity for Apple REIT shareholders to participate in a sale or listing on a national exchange to dispose of their shares at a reasonable price, according to the complaint.

Lerner also made misleading, exaggerated statements to investors at a seminar his brokerage hosted, including that closed REITs are a potential “gold mine,” according to FINRA.

David Lerner Associates is the sole distributor of Apple REITs, according to regulatory documents. Lerner, whose firm markets its services through frequent seminars about investing, is well known for a radio advertising campaign in which he tells listeners to “take a tip from Poppy.”

The brokerage has six offices in the Northeast and Florida.

A spokesman for Lerner, David Chauvin, said FINRA’s allegations against Lerner “lack any focus.” The Apple REIT programs, including several offerings that are already closed, have returned about $3 billion to their investors, he said in a statement emailed to Reuters.

“For years, the Apple REIT products sold through David Lerner Associates have proven to be excellent investments backed by the bricks and mortar of properties run by nationally recognized hotel brands,” Chauvin said.

“Mr. Lerner and the firm deny all allegations of violations and expect to vindicate themselves when the facts are heard in an impartial forum,” he said.

Posted in Apple REITS, Arbitration, Enforcement, FINRA, Misrepresentation, Omission | Leave a comment

The Securities Arbitration Law Firm of Klayman & Toskes Launches Investigation on Behalf of Alpha Natural Resources Shareholders Who Held Concentrated Stock Positions in Alpha Natural Resources With Full-Service Brokerage Firms

Posted on January 30, 2012 by Klayman & Toskes

The Securities Arbitration Law Firm of Klayman & Toskes (“K&T”), announced today that it is investigating potential claims on behalf of Alpha Natural Resources, Inc. (NYSE: ANR) shareholders who held concentrated positions in Alpha Natural Resources stock with full-service brokerage firms. For the year 2011, Alpha Natural Resources declined about 64% ending the year at $20.43 per share. It had traded as high as $68.05 per share in January 2011. As a result of this decline, Alpha Natural Resources shareholders who held concentrated stock positions in Alpha Natural Resources have sustained substantial losses.

Unfortunately, many Alpha Natural Resources shareholders who held concentrated positions in Alpha Natural Resources stock were never advised by their full-service brokerage firms of the risks associated with owning a concentrated account. Investors who held concentrated stock positions on margin faced even greater risks. Additionally, despite having a duty to do so, many firms failed to explain how the use of risk management strategies, like a zero-cost collar, protective put options, stop loss orders and/or an exchange fund, could have been utilized to protect the concentrated Alpha Natural Resources stock positions.

Alpha Natural Resources shareholders who sustained investment losses as a result of holding a concentrated stock position in Alpha Natural Resources can contact K&T to explore their legal rights and options. The attorneys at K&T are dedicated to pursuing claims on behalf of investors who have suffered substantial investment losses. K&T, an experienced, qualified and nationally recognized securities litigation law firm, practices exclusively in the field of securities arbitration and litigation. It continues its representation of investors throughout the world in securities arbitration and litigation matters against major Wall Street brokerage firms.

If you wish to discuss this announcement or have investment losses of $1,000,000 or more in Alpha Natural Resources stock, please contact Klayman & Toskes, at 888-997-9956.

Posted in Arbitration, Concentration, FINRA, Risk Management Strategies | Leave a comment

FINRA Fines Citigroup Global Markets $725,000 for Failure to Disclose Conflicts of Interest in Research Reports

Posted on January 23, 2012 by Klayman & Toskes

The Financial Industry Regulatory Authority (“FINRA”) announced that it has fined Citigroup Global Markets, Inc. $725,000 for failing to disclose certain conflicts of interest in its research reports and research analysts’ public appearances.

Citigroup failed to disclose potential conflicts of interest inherent in their business relationships in certain research reports it published from January 2007 through March 2010. Citigroup and/or its affiliates managed or co-managed public securities offerings, received investment banking or other revenue from, made a market in the securities of and/or had a 1 percent or greater beneficial ownership in covered companies, and did not make these required disclosures in certain research reports. In addition, Citigroup research analysts failed to disclose these same potential conflicts of interest in connection with public appearances in which covered companies were mentioned.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “Citigroup failed to make required conflict of interest disclosures which prevented investors from being aware of potential biases in its research recommendations. Firms need to provide investors with full and accurate information so they will be able to take it into consideration before making an investment decision.”

FINRA found that Citigroup failed to disclose the required information because the database it used to identify and create the disclosures was inaccurate and/or incomplete due primarily to technical deficiencies. In addition, Citigroup failed to have reasonable supervisory procedures in place to ensure that the firm was populating its research reports with required disclosures.

In concluding this settlement, the firm neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Posted in Citigroup, Conflicts of Interest, Enforcement, FINRA, Research | Leave a comment

SEC CHARGES FORMER FANNIE MAE AND FREDDIE MAC EXECUTIVES WITH SECURITIES FRAUD

Posted on December 16, 2011 by Klayman & Toskes

Companies Agree to Cooperate in SEC Actions

The Securities and Exchange Commission today charged six former top executives of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) with securities fraud, alleging they knew and approved of misleading statements claiming the companies had minimal holdings of higher-risk mortgage loans, including subprime loans.

Fannie Mae and Freddie Mac each entered into a Non-Prosecution Agreement with the Commission in which each company agreed to accept responsibility for its conduct and not dispute, contest, or contradict the contents of an agreed-upon Statement of Facts without admitting nor denying liability. Each also agreed to cooperate with the Commission’s litigation against the former executives. In entering into these Agreements, the Commission considered the unique circumstances presented by the companies’ current status, including the financial support provided to the companies by the U.S. Treasury, the role of the Federal Housing Finance Agency as conservator of each company, and the costs that may be imposed on U.S. taxpayers.

Three former Fannie Mae executives – former Chief Executive Officer Daniel H. Mudd, former Chief Risk Officer Enrico Dallavecchia, and former Executive Vice President of Fannie Mae’s Single Family Mortgage business, Thomas A. Lund – were named in the SEC’s complaint filed in U.S. District Court for the Southern District of New York.

The SEC also charged three former Freddie Mac executives — former Chairman of the Board and CEO Richard F. Syron, former Executive Vice President and Chief Business Officer Patricia L. Cook, and former Executive Vice President for the Single Family Guarantee business Donald J. Bisenius — in a separate complaint filed in the same court.

“Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was,” said Robert Khuzami, Director of the SEC’s Enforcement Division. “These material misstatements occurred during a time of acute investor interest in financial institutions’ exposure to subprime loans, and misled the market about the amount of risk on the company’s books. All individuals, regardless of their rank or position, will be held accountable for perpetuating half-truths or misrepresentations about matters materially important to the interest of our country’s investors.”

The SEC is seeking financial penalties, disgorgement of ill-gotten gains with interest, permanent injunctive relief and officer and director bars against Mudd, Dallavecchia, Lund, Syron, Cook, and Bisenius. Both lawsuits allege that the former executives caused the federal mortgage firms to materially misstate their holdings of subprime mortgage loans in periodic and other filings with the Commission, public statements, investor calls, and media interviews. The suit involving the Fannie Mae executives also includes similar allegations regarding Alt-A mortgage loans. The suit against the former Fannie Mae executives alleges they made misleading statements — or aided and abetted others — between December 2006 and August 2008. The former Freddie Mac executives are alleged to have made misleading statements — or aided and abetted others – between March 2007 and August 2008.

The SEC’s complaint against the former Fannie Mae executives alleges that, when Fannie Mae began reporting its exposure to subprime loans in 2007, it broadly described the loans as those “made to borrowers with weaker credit histories,” and then reported — with the knowledge, support, and approval of Mudd, Dallavecchia, and Lund — less than one-tenth of its loans that met that description. Fannie Mae reported that its 2006 year-end Single Family exposure to subprime loans was just 0.2 percent, or approximately $4.8 billion, of its Single Family loan portfolio. Investors were not told that in calculating the Company’s reported exposure to subprime loans, Fannie Mae did not include loan products specifically targeted by Fannie Mae towards borrowers with weaker credit histories, including more than $43 billion of Expanded Approval, or “EA” loans.

Fannie Mae’s executives also knew and approved of the decision to underreport Fannie Mae’s Alt-A loan exposure, the SEC alleged. Fannie Mae disclosed that its March 31, 2007 exposure to Alt-A loans was 11 percent of its portfolio of Single Family loans. In reality, Fannie Mae’s Alt-A exposure at that time was approximately 18 percent of its Single Family loan holdings.

The misleading disclosures were made as Fannie Mae’s executives were seeking to increase the Company’s market share through increased purchases of subprime and Alt-A loans, and gave false comfort to investors about the extent of Fannie Mae’s exposure to high-risk loans, the SEC alleged.

In the complaint against the former Freddie Mac executives, the SEC alleged that they and Freddie Mac led investors to believe that the firm used a broad definition of subprime loans and was disclosing all of its Single-Family subprime loan exposure. Syron and Cook reinforced the misleading perception when they each publicly proclaimed that the Single Family business had “basically no subprime exposure.” Unbeknown to investors, as of December 31, 2006, Freddie Mac’s Single Family business was exposed to approximately $141 billion of loans internally referred to as “subprime” or “subprime like,” accounting for 10 percent of the portfolio, and grew to approximately $244 billion, or 14 percent of the portfolio, as of June 30, 2008.

The SEC’s complaint alleges that Mudd violated Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rules 10b-5(b) and 13(a)14(a) thereunder, and Section 17(a)(2) of the Securities Act of 1933 (the “Securities Act”); and that Mudd aided and abetted Fannie Mae’s violations of Sections 10(b) and 13(a) of the Exchange Act and Exchange Act Rules 10b-5(b), 12b-20, 13a-1, and 13a-13 thereunder. The SEC complaint also alleges that Dallavecchia violated Section 17(a)(2) of the Securities Act and aided and abetted Fannie Mae’s violations of Sections 10(b) and 13(a) of the Exchange Act and Exchange Act Rules 10b-5(b), 12b-20, 13a-1, and 13a-13 thereunder. Finally, the SEC complaint alleges that Lund aided and abetted Fannie Mae’s violations of Sections 10(b) and 13(a) of the Exchange Act and Exchange Act Rules 10b-5(b), 12b-20, 13a-1, and 13a-13 thereunder.

The SEC’s complaint alleges that Syron and Cook violated Exchange Act Section 10(b) and Rule 10b-5(b) thereunder and Securities Act Section 17(a)(2); that Syron violated Exchange Act Rule 13a-14; and that Syron, Cook and Bisenius aided and abetted violations of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5(b), 12b-20 and 13a-13 thereunder.

Posted in Enforcement, Fannie Mae, Fraud, Freddie Mac, SEC, Securities Fraud | Leave a comment

The Securities Arbitration Law Firm of Klayman & Toskes Investigates Securities Arbitration Claims Against Wells Investment Securities After FINRA Levies Fine of $300,000 for Misleading Marketing of Wells Timberland REIT

Posted on December 15, 2011 by Klayman & Toskes

The Securities Arbitration Law Firm of Klayman & Toskes (“K&T”), announced today that it is currently investigating securities arbitration claims against Wells Investment Securities, Inc. (“Wells Investment”), after the Financial Industry Regulatory Authority (“FINRA”) announced that it fined Wells Investment $300,000 for using misleading marketing materials in the sale of Wells Timberland REIT, Inc. (“Wells Timberland REIT”), a non-traded Real Estate Investment Trust (“REIT”). Wells Investment was the dealer-manager and wholesaler for the public offering of Wells Timberland REIT, which invested in timber-producing land. Wells Investment reviewed, approved and distributed the marketing materials for Wells Timberland REIT. K&T has significant experience in representing investors who sustained losses or have money frozen in non-traded REITS.

According to FINRA, “from May 2007 through September 2009, Wells reviewed, approved and distributed 116 advertising and sales materials containing misleading, unwarranted or exaggerated statements. For example, Wells Timberland’s initial offering prospectus stated that it intended to qualify as a REIT for the tax year that ended Dec. 31, 2006; however, it did not qualify for REIT election until the tax year that ended Dec. 31, 2009. The majority of the advertisements and sales literature failed to disclose the significance of Wells Timberland’s non-REIT status or suggested that Wells Timberland was a REIT at a time when in fact it had not qualified as a REIT. The communications also contained misleading statements regarding Wells Timberland’s portfolio diversification and ability to make distributions and redemptions.”

FINRA further said that, “although non-traded REITs are generally illiquid, often for periods of eight years or more, they can avoid particular tax consequences if they qualify under certain Internal Revenue Service requirements. The Wells advertisements at issue did not make it clear to potential investors who might be seeking such favorable tax treatment, that the investment at issue was not yet a REIT and therefore would not be able to offer the desired tax benefits at the time the ads were being used.”

Investors who purchased Wells Timberland REIT can contact K&T to explore their legal rights and options. The attorneys at K&T are dedicated to pursuing claims on behalf of investors who have suffered significant losses. K&T, an experienced, qualified and nationally recognized securities litigation law firm, practices exclusively in the field of securities arbitration and litigation.  It continues its representation of investors throughout the world in securities arbitration and litigation matters against major Wall Street brokerage firms.

If you are an investor of Wells Timberland REIT, please contact Steven D. Toskes, Esquire or Jahan K. Manasseh, Esquire of Klayman & Toskes, P.A., at 888-997-9956 or visit us on the web at http://www.nasd-law.com

Posted in Enforcement, FINRA, REITs, Wells Timberland REIT | Leave a comment

FINRA Fines Wells Fargo $2 Million for Unsuitable Sales of Reverse Convertibles to Elderly Customers and Failure to Provide Breakpoints on UIT Sales

Posted on December 15, 2011 by Klayman & Toskes

The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Wells Fargo Investments, LLC, $2 million for unsuitable sales of reverse convertible securities through one broker to 21 customers, and for failing to provide sales charge discounts on Unit Investment Trust (UIT) transactions to eligible customers. As part of the settlement, the firm is required to pay restitution to customers who did not receive UIT sales charge discounts and to provide restitution to certain customers found to have unsuitable reverse convertible transactions.

FINRA also filed a complaint against Alfred Chi Chen, the former Wells Fargo registered representative who recommended and sold the unsuitable reverse convertibles, and made unauthorized trades in several customer accounts, including accounts of deceased customers.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “Wells Fargo failed to review reverse convertible transactions to ensure they were suitable and also did not provide sales charge discounts to eligible customers purchasing unit investment trusts, both serious failings that harmed investors.”

Reverse convertibles are interest-bearing notes in which repayment of principal is tied to the performance of an underlying asset, such as a stock or basket of stocks. Depending on the specific terms of the reverse convertible, an investor risks sustaining a loss if the value of the underlying asset falls below a certain level at maturity or during the term of the reverse convertible.

FINRA found that Chen recommended hundreds of unsuitable reverse convertible investments to 21 clients, most of whom were elderly and/or had limited investment experience and low risk tolerance. As of June 2008, Chen had 172 accounts that held reverse convertibles, with 148 of those accounts having concentrations greater than 50 percent of their total account holdings, and 46 having concentrations greater than 90 percent. Fifteen of the 21 customers were over 80 years old. The reverse convertible transactions exposed these customers to risk inconsistent with their investment profiles, and resulted in overly concentrated reverse convertible positions in their accounts.

FINRA also found that Wells Fargo failed to provide certain eligible customers with breakpoint and rollover and exchange discounts in their sales of UITs because the firm had insufficient systems and procedures to monitor for unsuitable reverse convertible sales and to ensure that UIT customers received discounts for which they were entitled.

UITs offer sales charge discounts on purchases that exceed certain thresholds (“breakpoints”) or involve redemption or termination proceeds from another UIT during the initial offering period. Between January 2006 and July 2008, Wells Fargo failed to provide certain eligible customers with these “breakpoint” and “rollover and exchange” discounts.

In concluding these settlements, Wells Fargo neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

FINRA’s investigation was conducted by Sandra Del Buono, Jeffrey Pariser, Justin Chretien and Jessica Hopper.

Under FINRA rules, a firm or individual named in a complaint can file a response and request a hearing before a FINRA disciplinary panel. Possible remedies include a fine, censure, suspension or bar from the securities industry; disgorgement of gains associated with the violations; and payment of restitution. The issuance of a disciplinary complaint represents the initiation of a formal proceeding by FINRA in which findings as to the allegations in the complaint have not been made and does not represent a decision as to any of the allegations contained in the complaint. Because this complaint is unadjudicated, interested persons may wish to contact the respondent before drawing any conclusions regarding the allegations in the complaint.

Posted in Enforcement, FINRA, UITs, Wachovia, Wells Fargo | Leave a comment

SEC Charges Wachovia With Fraudulent Bid Rigging in Municipal Bond Proceeds

Posted on December 9, 2011 by Klayman & Toskes

Wachovia Agrees to $148 Million Settlement With SEC and Other Authorities

On December 8, 2011, the Securities and Exchange Commission charged Wachovia Bank N.A. with fraudulently engaging in secret arrangements with bidding agents to improperly win business from municipalities and guarantee itself profits in the reinvestment of municipal bond proceeds.

The SEC alleges that Wachovia generated millions of dollars in illicit gains during an eight-year period when it fraudulently rigged at least 58 municipal bond reinvestment transactions in 25 states and Puerto Rico. Wachovia won some bids through a practice known as “last looks” in which it obtained information from the bidding agents about competing bids. It also won bids through “set-ups” in which the bidding agent deliberately obtained non-winning bids from other providers in order to rig the field in Wachovia’s favor. Wachovia facilitated some bids rigged for others to win by deliberately submitting non-winning bids.

Wachovia agreed to settle the charges by paying $46 million to the SEC that will be returned to affected municipalities or conduit borrowers. Wachovia also entered into agreements with the Justice Department, Office of the Comptroller of the Currency, Internal Revenue Service, and 26 state attorneys general that include the payment of an additional $102 million. The settlements arise out of long-standing parallel investigations into widespread corruption in the municipal securities reinvestment industry in which 18 individuals have been criminally charged by the Justice Department’s Antitrust Division.

“Wachovia won bids by playing an elaborate game of ‘you scratch my back and I’ll scratch yours,’ rather than engaging in legitimate competition to win municipalities’ business.” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

Elaine C. Greenberg, Chief of the SEC’s Municipal Securities and Public Pensions Unit, added, “Wachovia hid its fraudulent practices from municipalities by affirmatively assuring them that they had not engaged in any manipulative conduct. This settlement will result in significant payments to municipalities harmed by Wachovia’s unlawful actions.”

Wachovia Bank is now Wells Fargo Bank following a merger in March 2010.

When municipal securities are sold to investors, portions of the proceeds often are not spent immediately by municipalities but rather temporarily invested in municipal reinvestment products until the money is used for the intended purposes. These products are typically financial instruments tailored to meet municipalities’ specific collateral and spend-down needs, such as guaranteed investment contracts (GICs), repurchase agreements (repos), and forward purchase agreements (FPAs). The proceeds of tax-exempt municipal securities generally must be invested at fair market value, and the most common way of establishing that is through a competitive bidding process in which bidding agents search for the appropriate investment vehicle for a municipality.

According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, Wachovia engaged in fraudulent bidding of GICs, repos, and FPAs from at least 1997 to 2005. Wachovia’s fraudulent practices and misrepresentations not only undermined the competitive bidding process, but negatively affected the prices that municipalities paid for reinvestment products. Wachovia deprived certain municipalities from a conclusive presumption that the reinvestment instruments had been purchased at fair market value, and jeopardized the tax-exempt status of billions of dollars in municipal securities because the supposed competitive bidding process that establishes the fair market value of the investment was corrupted.

Without admitting or denying the allegations in the SEC’s complaint, Wachovia has consented to the entry of a final judgment enjoining it from future violations of Section 17(a) of the Securities Act of 1933 and has agreed to pay a penalty of $25 million and disgorgement of $13,802,984 with prejudgment interest of $7,275,607. The settlement is subject to court approval.

Financial institutions have now paid a total of $673 million in settlements resulting from the ongoing investigations into corruption in the municipal reinvestment industry. Others charged prior to Wachovia are:

In a related action to the Banc of America matter, the SEC today charged the firm’s former vice president and marketer Dean Pinard for his role in various improper bidding practices. Pinard is the beneficiary of a grant of conditional amnesty from criminal prosecution by the Department of Justice provided to Banc of America’s parent corporation. Pinard, who cooperated with the investigation, agreed to pay more than $40,000 to settle the SEC’s case without admitting or denying the findings. He is barred from association with any broker, dealer, investment adviser, municipal securities dealer, or municipal advisor.

Posted in Enforcement, Fraud, SEC, Wachovia | Leave a comment

SEC, U.S. Attorney and FBI Announce 13 Charged in Connection with Securities Kickback Schemes

Posted on December 2, 2011 by Klayman & Toskes

SEC Suspends Trading in Seven Companies

The Securities and Exchange Commission, U.S. Attorney for the District of Massachusetts, and Federal Bureau of Investigation announced that parallel cases were filed in federal court against several corporate officers, lawyers and a stock promoter alleging they used kickbacks and other schemes to trigger investments in various thinly-traded stocks.

The criminal case charged 13 defendants who engaged in criminal activity in the midst of an undercover FBI operation. According to the charges filed in U.S. District Court, the schemes involved secret kickbacks to an investment fund representative in exchange for having the investment fund buy stock in certain companies; the kickbacks were to be concealed through the use of sham consulting agreements. What the insiders and promoters did not know was that the purported investment fund representative was actually an undercover agent.

The criminal defendants include Kelly Black-White and James Prange, both of whom were in the business of finding capital for emerging companies. The civil case names some of the individuals who were charged criminally, and the SEC also issued trading suspensions in the stocks of a number of the companies involved in the criminal cases.

The charges follow a year-long investigation focusing on preventing fraud in the micro-cap stock markets. Microcap companies are small publicly traded companies whose stock often trades at pennies per share. Fraud in the microcap stock markets is of increasing concern to regulators as such markets have proven to be fertile grounds for fraud and abuse. This is, in part, because accurate information about microcap stocks may be difficult for the average investor to find, since many microcap companies do not file financial reports with the SEC.

The SEC suspended trading in seven microcap companies involved in the kickback-for-investment schemes:

  • 1st Global Financial Inc. (FGFB) based in Las Vegas
     
  • Augrid Global Holdings Corp. (AGHD) based in Houston
     
  • ComCam International, Inc. (CMCJ) based in West Chester, Pa.
     
  • MicroHoldings US, Inc. (MCHU) based in Vancouver, Wash.
     
  • Outfront Companies (OTFT) based in Fla.
     
  • Symbollon Corp./Symbollon Pharmaceuticals, Inc. (SYMBA) based in Medfield, Mass.
     
  • ZipGlobal Holdings Inc. (ZIPG) based in Hingham, Mass.

MicroHoldings and ZipGlobal are also charged civilly by the SEC with fraud.

These latest charges follow a series of similar cases filed by the SEC in October 2010 and June 2011 in which more than a dozen companies and penny stock promoters were charged in similar kickback-for-investment schemes.

“The public has a right to invest in an honest and fair market. Companies that agree to pay illegal kickbacks harm investors and undermine fair competition in the markets,” said United States Attorney Carmen Ortiz. “Hard working Americans who invest their savings should not be subjected to backroom deals like those alleged today.”

“We are committed to working with our law enforcement partners here in Massachusetts and around the country to stop abuses in the microcap sector and hold the perpetrators responsible,” said David Bergers, Director of the SEC’s Boston Regional Office. “Kickbacks and phony consulting agreements have no place in the financial strategies of any public company, and executives who engage in this kind of fraud are just selling out their own investors.”

“Boston FBI agents initiated an undercover operation aimed at identifying corporate insiders engaged in illegal investment schemes. No one who is engaged in illegal activity while participating in the markets, including CEOs, traders, fund managers, equities analysts, lawyers and publicists, is exempt from the FBI’s scrutiny,” said Richard DesLauriers, Special Agent in Charge of the FBI in Boston. “Because the nation’s economic security is intertwined with our overall national security, the Boston division of the FBI places a substantial emphasis on investigating white collar crimes. During these difficult economic times, now, more than ever, the well-being of the global economy rests on the diligent enforcement of laws designed to ensure the fair and orderly operation of the capital markets. The FBI will continue to use undercover operations and other sophisticated investigative tools at its disposal to protect the integrity and transparency of financial markets.”

The following individuals were criminally charged:

  • Kelly Black-White, 51, of Mesa, Ariz. (Operator of Premier Funding, Inc. and Premiere Services, Inc.), charged with wire fraud.
     
  • James Prange, 60, of Greenbush, Wis. (Northern Equity, Inc.), charged with wire fraud.
     
  • Michael Lee, 51, of Hingham, Mass. (CEO of ZipGlobal), charged with mail fraud and conspiracy to commit securities fraud.
     
  • Edward Henderson, 69, of Lincoln, R.I., charged with wire fraud.
     
  • Paul DesJourdy, 50, of Medfield, Mass. (CEO of Symbollon Pharmaceuticals), charged with mail fraud and conspiracy to commit securities fraud.
     
  • James Wheeler, 51, of Camas, Wash. (CEO MicroHoldings, Inc.), charged with mail fraud and conspiracy to commit securities fraud.
     
  • Steve Berman, 49, of Hillsboro, Ohio (CEO of China Wi-Max Communications), charged with mail and wire fraud.
     
  • Richard Kranitz, 68, of Grafton, Wis. (Board Member of China Wi-Max Communications), charged with mail and wire fraud.
     
  • JC Jordan, 60, of Cameron Park, Calif. (CEO of Vida Life International, LTD), charged with mail and wire fraud.
     
  • Karen Person, 61, of Naperville, Ill. (President of Small Business Company, Inc.), charged with mail and wire fraud.
     
  • Albert Reda, 65, of Tustin, Calif. (Treasurer of 1st Global Financial), charged with mail and wire fraud.
     
  • Steve Stuart, 48, of Monrovia, Md. (Major Shareholder in ComCam International, Inc.), charged with mail and wire fraud.
     
  • Muhammad (“M.J.”) Shaheed, 44, of Houston, Texas (CEO of Augrid Global Holdings Corporation), charged with mail and wire fraud.

The SEC also filed civil charges of securities fraud against Desjourdy, Henderson, Lee and Wheeler alleging they defrauded investors through the use of kickbacks in financing transactions.

If convicted, the defendants charged with mail fraud and wire fraud each face up to 20 years in prison, to be followed by three years of supervised release and a $250,000 fine on each count. If convicted on the conspiracy to commit securities fraud charges, the defendants each face up to five years in prison, to be followed by three years of supervised release and a $250,000 fine on each count.

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SEC Staff and FINRA Issue Risk Alert on Broker-Dealer Branch Office Inspections

Posted on December 2, 2011 by Klayman & Toskes

The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) and the Financial Industry Regulatory Authority (FINRA) have issued a Risk Alert and a Regulatory Notice on broker-dealer branch inspections, and offered suggestions to help securities industry firms better perform this key supervisory function.

“A robust process for self-inspection of branch offices is a critical element of a firm’s compliance and supervision process, and a vital part of a comprehensive risk management program,” said Carlo di Florio, Director of OCIE. “This Risk Alert highlights practices that are characteristic of effective branch office supervisory systems, and describes major deficiencies that SEC and FINRA examiners have found in the branch inspection process.”

“An effective risk based branch office inspection program is an important component of a broker-dealer’s supervisory system and, when constructed and implemented reasonably, it can better protect investors and the firm’s own interests,” said Stephen Luparello, Vice Chairman of FINRA. “FINRA encourages broker-dealers to review this guidance and consider enhancements to their own branch office inspection programs.”

Along with specific requirements outlined in the report, effective practices observed by examiners include:

  • Using risk analysis to identify whether individual non-supervising branches should be inspected more frequently than the FINRA-required minimum three-year cycle, with more frequent inspections of branches meeting certain risk criteria. In addition, some firms conduct “re-audits” when routine inspections reveal a high number of deficiencies, repeat deficiencies, or serious deficiencies. Typically, these re-audits and audits for cause are conducted as unannounced inspections.
  • Using surveillance reports and employing current technology and techniques to help identify risks and develop a customized approach for branch office inspections based on the type of business conducted at each branch.
  • Employing comprehensive checklists that incorporate previous inspection findings and trends noted in internal reports such as audit reports.
  • Conducting unannounced branch inspections either randomly or based on certain risk factors. “Surprise” exams may yield a more realistic picture of a broker-dealer’s supervisory system as they reduce the risk that individual RRs and principals might attempt to falsify, conceal, or destroy records in anticipation for an internal inspection.
  • Involving qualified senior personnel in several branch office examinations each year.
  • Incorporating findings of branch office inspections into management information or risk management systems and using a centralized, comprehensive compliance database that enables compliance personnel in various offices to access to information about all of the firm’s RRs and their business activities. Such a system appears to be very useful when supervising independent contractor RRs dispersed across a broad geographic area.
  • Providing branch office managers with the firm’s internal inspection findings and requiring them to take and document corrective action.
  • Tracking corrective action taken by each branch office manager in response to branch audit findings.
  • Elevating the frequency of branch inspections, or their scope, or both, in cases where registered personnel are allowed to conduct business activities other than as associated persons of a broker-dealer, for example away from the firm.

This is the second in a continuing series of Risk Alerts that the SEC’s national examination staff expects to issue. These documents are intended to alert senior management, risk management, and compliance managers in the securities industry to significant risks identified by the SEC’s national examination staff, so that industry members can more effectively address those risks. The following SEC staff contributed substantially to preparing this Risk Alert: Julius Leiman-Carbia, Daniel Gregus, Rich Hannibal, George Kramer, Barbara Lorenzen and Karol Pollock

The following FINRA staff also contributed substantially to preparing this Risk Alert: Michael Rufino, Paul Fagone, Donald Litteau and George Walz.

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