An SEC investigation found that the city of 11,000 residents located in Miami-Dade County borrowed approximately $12 million in two pooled, conduit bond offerings through the Florida Municipal Loan Council (FMLC). South Miami’s participation in those offerings enabled it to borrow funds at advantageous tax-exempt rates. The city represented that the project was eligible for tax-exempt financing in various documents for the second offering that were relied upon by bond counsel in rendering its tax opinion. However, South Miami failed to disclose that it had actually jeopardized the tax-exempt status of both bond offerings by impermissibly loaning proceeds from the first offering to a private developer and restructuring a lease agreement prior to the second offering.

South Miami agreed to settle the charges and retain an independent third-party consultant to oversee its policies, procedures, and internal controls for municipal bond disclosures.

“South Miami’s fraudulent conduct put bondholders in danger of incurring significant additional costs associated with their investments,” said Elaine C. Greenberg, Chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit. “The tax-exempt status of municipal bonds is vitally important to bond investors, and we will closely scrutinize any conduct by issuers or others that threatens that tax exemption.”

Eric I. Bustillo, Director of the SEC’s Miami Regional Office, added, “Municipalities in South Florida and elsewhere cannot rely on a lack of internal procedures or experience in debt offerings to excuse fraudulent disclosures made to investors.”

According to the SEC’s order instituting settled administrative proceedings, South Miami sought financing to develop a public parking garage. The project ultimately became a mixed-use retail and public parking structure to be developed by a for-profit developer. Under the initial lease agreement between the city and the developer, the city was responsible for all construction costs except the retail portion. The city retained full control over the operation and maintenance of the parking garage portion and all parking revenues. The developer’s limited role was critical to the city receiving the benefits of tax-exempt financing. Under IRS regulations, the project could be financed on a tax-exempt basis only if its use by the for-profit developer was kept to a minimum.

According to the SEC’s order, South Miami approved the financing for construction of the tax-exempt portion of the project and moved ahead with its participation in the initial FMLC 2002 bond pool offering. However, upon receiving a copy of the city’s lease agreement with the developer, bond counsel identified a potential tax issue with the mixed public-retail nature of the project. During subsequent conference calls with the city’s then-finance director, bond counsel communicated to city officials that no funds from the bond offering could be used to finance the retail portion of the structure.

However, the SEC found that subsequent city finance directors were unaware of the substance of these discussions or how the lease agreement affected the tax status of the bonds. Moreover, subsequent city finance directors had no previous experience, training, or guidance on disclosure requirement or tax issues in bond offerings. When the lease agreement was revised in 2005 to lease not only the retail space to the developer but the parking garage as well, the updated terms caused the project to be considered private business use, which jeopardized the tax-exempt status of the bonds. South Miami did not inform the FMLC, bond counsel, or any third parties about the project changes. Documents for the second 2006 FMLC bond pool offering contained material misrepresentations and omissions about the use of the offering’s proceeds and the altered terms of the parking garage lease.

According to the SEC’s order, annual certifications made by the city to the FMLC from 2003 to 2009 incorrectly stated that South Miami was in compliance with the terms of the loan agreements, which included representations that no event had occurred affecting the tax-exempt status of the bonds. South Miami eventually filed a material event notice with the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access (EMMA) system in July 2010 that publicly acknowledged a potential adverse impact on the bonds’ tax exemption. Separately, the city settled with the IRS by paying $260,345 and defeasing a portion of the two prior bond offerings at a cost of $1.16 million. Because of the city’s settlement and payments, bondholders were not financially harmed and they’re not required to include any interest from the bonds in their gross incomes.

The SEC’s order directs South Miami to cease and desist from committing or causing any violations of Sections 17(a)(2) and (3) of the Securities Act of 1933. The city must retain an independent third-party consultant, who for three years will conduct annual reviews of the city’s policies, procedures, and practices related to its disclosures for municipal securities offerings. The city must abide by the independent consultant’s determinations and implement all recommendations. South Miami neither admitted nor denied the SEC’s findings. A full description of the undertakings can be found in the SEC’s order.

The SEC alleges that Charles J. Dushek and his son Charles S. Dushek placed millions of dollars in securities trades without designating in advance whether they were trading personal funds or client funds. They delayed allocating the trades so they could cherry pick winning trades for their personal accounts and dump losing trades on the accounts of unwitting clients at Capital Management Associates (CMA). Lisle, Ill.-based CMA misrepresented the firm’s proprietary trading activities to clients, many of whom were senior citizens.

“The Dusheks and their firm had an obligation to treat clients fairly and honestly,” said Merri Jo Gillette, Director of the SEC’s Chicago Regional Office. “Instead, they exploited the trade allocation process to enrich themselves at the expense of their clients.”

According to the SEC’s complaint filed in federal court in Chicago, the scheme lasted from 2008 to 2012. During that period, the Dusheks made more than 13,500 purchases of securities totaling more than $350 million. The Dusheks typically waited to allocate the trades for at least one trading day – and often several days – by which time they knew whether the trades were profitable. The Dusheks ultimately kept most of the winning trades and assigned most of the losses to clients. At the time of the trading, they did not keep any written record of whether they were trading client funds or personal funds.

The Dusheks’ extraordinary trading success reflects the breadth of their scheme. For 17 consecutive quarters, the Dusheks reaped positive returns at the time of allocation while their clients suffered negative returns. One of Dushek Sr.’s personal accounts increased in value by almost 25,000 percent from 2008 to 2011 while many of his clients’ accounts decreased in value.

The illicit trading profits from his personal accounts were Dushek Sr.’s only source of regular income outside of Social Security, according to the SEC. It alleges that he drew no salary or other compensation as president of CMA and relied on profits from the scheme to make mortgage payments on his 6,500 square foot luxury home featuring separate equestrian facilities. He also spent the money on luxury vehicles including a Mercedes Benz SL550, membership in a luxury vacation resort, and vacations abroad. Dushek Jr. is alleged to have used trading profits to pay for a boat slip and vacations to ski resorts and Hawaii.

According to the SEC’s complaint, CMA misrepresented its proprietary trading activities to clients in a brochure that is part of the firm’s Form ADV. The brochure falsely claimed that Dushek Sr. maintained “reports” of his proprietary trading activities that he submitted to an associate for review, when he did not maintain such reports nor have any associate review his trading. The brochure further stated, “We do not merge or aggregate any client order with any employee order.” That claim also was false. When the Dusheks placed orders, there were no client orders or employee orders but instead merely block purchases in CMA’s brokerage accounts that were later allocated to client accounts or personal accounts.

The SEC’s complaint charges the Dusheks and CMA with fraud and seeks final judgments that would require them to return ill-gotten gains with interest and pay financial penalties.

Five brokerage firms that sold so-called non-traded REITs improperly, will make restitution to investors of about $8.6 million and pay a total of $975,000 in fines under settlements reached with MA Secretary of State William F. Galvin, Galvin’s office said Wednesday.

REITs are real estate investment trusts.

“Our investigation into the sales of REITs, triggered by investor complaints, showed a pattern of impropriety in the sales of these popular but risky investments on the part of independent brokerage firms where supervision has historically been difficult to maintain,” Galvin said in a statement.

The firms that settled are Ameriprise Financial Services Inc. which will make $2.6 million in restitution and pay a $400,000 fine; Commonwealth Financial Network, which will make $2 million restitution and pay a $300,000 fine; Royal Alliance Associates, which will make $59,000 in restitution and pay a $25,000 fine; Securities America ,which will make $778,400 in restitution and pay a $150,000 fine; and Lincoln Financial Advisors Corp., which will make $503,940 in restitution and pay a $100,000 fine, Galvin’s office said.

In addition to those settlements, Galvin announced that LPL Financial had completed the second round of its restitution in connection with similar violations settled with his office in December. The additional amount of $2.6 million from LPL brings the total restitution in Massachusetts from improper REIT sales to more than $11 million dollars and fines of more than $1.4 million, Galvin’s office said.

K&T is investigating whether UBS adequately disclosed the risks associated with the UBS Willow Fund, as well as whether investors’ portfolios were over-concentrated in the Fund. The individual brokers and advisors who sold the UBS Willow Fund are not the target of this investigation. Instead, K&T is looking into UBS’s conduct in connection with its marketing of the Fund to its customers. Further, the law firm is investigating whether the UBS Willow Fund deviated from its disclosed strategy of investing in distressed debt, and instead started speculating in foreign sovereign debt credit default swaps. It is believed that these credit default swaps eventually led to the collapse of the fund, and caused investors to lose a substantial portion of their investment.

The attorneys at K&T are dedicated to pursuing claims on behalf of investors who have suffered significant 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 information relating to our investigation, 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 www.recoverubswillowfundlosses.com.

The Financial Industry Regulatory Authority (FINRA) announced today that it fined LPL Financial LLC (LPL) $7.5 million for 35 separate, significant email system failures, which prevented LPL from accessing hundreds of millions of emails and reviewing tens of millions of other emails. Additionally, LPL made material misstatements to FINRA during its investigation of the firm’s email failures. LPL was also ordered to establish a $1.5 million fund to compensate brokerage customer claimants potentially affected by its failure to produce email.

As LPL rapidly grew its business, the firm failed to devote sufficient resources to update its email systems, which became increasingly complex and unwieldy for LPL to manage and monitor effectively. The firm was well aware of its email systems failures and the overwhelming complexity of its systems. Consequently, FINRA found that from 2007 to 2013, LPL’s email review and retention systems failed at least 35 times, leaving the firm unable to meet its obligations to capture email, supervise its representatives and respond to regulatory requests. Because of LPL’s numerous deficiencies in retaining and surveilling emails, it failed to produce all requested email to certain federal and state regulators, and FINRA, and also likely failed to produce all emails to certain private litigants and customers in arbitration proceedings, as required.

Brad Bennett, Executive Vice President and Chief of Enforcement, said, “As LPL grew, it did not expand its compliance and technology infrastructure; and as a result, LPL failed in its responsibility to provide complete responses to regulatory and other requests for emails. This case sends a strong message to firms to make sure your business does not outgrow your compliance systems.”

Some examples of LPL’s 35 email failures include the following.

• Over a four-year period, LPL failed to supervise 28 million “doing business as” (DBA) emails sent and received by thousands of representatives who were operating as independent contractors.
• LPL failed to maintain access to hundreds of millions of emails during a transition to a less expensive email archive, and 80 million of those emails became corrupted.
• For seven years, LPL failed to keep and review 3.5 million Bloomberg messages.
• LPL failed to archive emails sent to customers through third-party email-based advertising platforms.

In addition, LPL made material misstatements to FINRA concerning its failure to supervise 28 million DBA emails. In a January 2012 letter to FINRA, LPL inaccurately stated that the issue had been discovered in June 2011 even though certain LPL personnel had information that would have uncovered the issue as early as 2008. Moreover, the letter stated that there weren’t any “red flags” suggesting any issues with DBA email accounts when, in fact, there were numerous red flags related to the supervision of DBA emails that were known to many LPL employees.

In addition, LPL likely failed to provide emails to certain arbitration claimants and private litigants. LPL will notify eligible claimants by letter within 60 days from the date of the settlement and the firm will deposit $1.5 million into a fund to pay customer claimants for its potential discovery failures. Customer claimants who brought arbitrations or litigations against LPL as of Jan. 1, 2007, and which were closed by Dec. 17, 2012, will receive, upon request, emails that the firm failed to provide them. Claimants will also have a choice of whether to accept a standard payment of $3,000 from LPL or have a fund administrator determine the amount, if any, that the claimant should receive depending on the particular facts and circumstances of that individual case. Maximum payment in cases decided by the fund administrator cannot exceed $20,000. If the total payments to claimants exceed $1.5 million, LPL will pay the additional amount.

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

The investor alert informs investors about the risks involved when selling their rights to an income stream or investing in someone else’s income stream. The alert urges investors considering an investment in pension or settlement income streams to proceed with caution.

Anyone receiving a monthly pension or regular distributions from a settlement following a personal injury lawsuit may be targeted by salespeople offering an immediate lump sum in exchange for the rights to some or all of the payments the person would otherwise receive in future. Typically, recipients of a pension or structured settlement will sign over the rights to some or all of their monthly payments to a factoring company in return for a lump-sum amount, which will almost always be significantly lower than the present value of that future income stream.

Gerri Walsh, FINRA’s Senior Vice President for Investor Education, said, “Consumers should know that a series of potential pitfalls may greet anyone who is considering selling their rights to an income stream. And any investor who is tempted by the high yield offered by buying the rights to another person’s income stream should know that yield comes with high fees and considerable risks.”

“Investors should always learn as much as possible before making an investment decision, and this is certainly true with respect to investing in pension or structured settlement income-stream products,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy. “This alert will help investors understand the costs as well as the potentially significant risks of these transactions.”

The investor alert contains a checklist of questions before selling away an income stream:

• Is the transaction legal? Federal law may restrict or prohibit retirees from “assigning” their pension to someone else.
• Is the transaction worth the cost? Find the discount rate that the factoring company has applied to your income stream and compare this rate to alternatives such as a bank loan.
• What is the reputation of the company offering the lump sum? Check the factoring company’s record with the Better Business Bureau, and research the firm on the Internet and with a financial professional.
• Will the factoring company require life insurance? The factoring company may require you to purchase a life insurance policy, which will add to your transaction expenses and reduce your payout.
• What are the tax consequences? The lump-sum payment you collect may be taxable.

The investor alert also warns investors who might be attracted to the yield offered by buying the rights to someone else’s pension or structured settlement to be aware that:

• Investors may encounter commissions of seven percent or higher.
• Pension and structured settlement income-stream products may or may not be securities and likely are not registered with the SEC.
• These products could be difficult to sell if you need money and want to sell the product.
• Your “rights” to the income stream you purchased could face legal challenges.

Accordingly, we would greatly appreciate any information from investors who purchased Mamtek bonds from Morgan Keegan. The attorneys at Klayman & Toskes have significant experience in representing investors in securities arbitration and litigation matters against brokerage firms around the country.

If you have any information that you believe is relevant to this ongoing investigation, please contact our firm, toll free, at 1-888-997-9956.

Accordingly, K&T would greatly appreciate any information from investors who purchased Mamtek bonds from Morgan Keegan. The attorneys at K&T have significant experience in representing investors in securities arbitration and litigation matters against brokerage firms around the country.

If you have any information that you believe is relevant to this ongoing investigation, please contact K&T, toll free, at 1-888-997-9956.

The Financial Industry Regulatory Authority (FINRA) announced that it has fined three firms a total of $900,000 for failing to establish and implement adequate anti-money laundering (AML) programs and other supervisory systems to detect suspicious transactions. FINRA also fined and suspended four executives involved. FINRA imposed the following sanctions.

• Atlas One Financial Group, LLC – Miami, Florida – fined $350,000; Napoleon Arturo Aponte, former Chief Compliance Officer and AML Compliance Officer, fined $25,000 joint and severally with the firm, and suspended for three months in a principal capacity
• Firstrade Securities, Inc. – Flushing, New York – fined $300,000
• World Trade Financial Corporation (WTF) – San Diego, CA – fined $250,000; President and Owner Rodney Michel fined $35,000 and suspended in all capacities except as a financial operations principal for four months; Chief Compliance Officer Frank Brickell fined $40,000 and suspended from association in all capacities for nine months; trade desk supervisor and minority owner Jason Adams fined $5,000 and suspended for three months in a principal capacity

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “Today’s actions reinforce FINRA’s continued focus on firms’ ability to identify and respond to potential misuse and abuse of the markets. Firms must have adequate AML and supervisory systems in place to detect and report suspicious transactions.”

FINRA found that between February 2007 through May 2011, Atlas One failed to identify suspicious account activity or did not adequately investigate numerous AML “red flags.” For example, in 2007, the United States Department of Justice (DOJ) froze six Atlas One accounts that were all controlled by one customer in connection with a money laundering scheme. Even though the accounts listed the same mailing address in San Jose, Costa Rica, and an email address for another Atlas One customer as contact information for the account and the other customer’s information had been utilized as contact information for the frozen accounts, Atlas One failed to perform any additional scrutiny of the accounts that had not been part of DOJ’s action. FINRA also found that certain customers’ accounts engaged in a pattern of activity consisting of moving millions of dollars through the accounts while conducting minimal-to-no securities transactions. Atlas One’s AML program required Aponte to monitor for potentially suspicious activity and AML red flags, investigate suspicious activity and report suspicious activity by filing a suspicious activity report (SAR), when necessary, which he failed to do.

In a separate case, FINRA found that Firstrade, an online trading firm catering to the Chinese community, failed to implement an adequate AML program to detect and report suspicious transactions, including potential manipulative trading. Many of the suspicious transactions involved Chinese issuer stocks and some of the most suspicious activity in customer accounts was apparent pre-arranged trades of Chinese issuer stock done in related accounts. (See FINRA Investor Alert regarding China stocks.)

In the third case, FINRA found that WTF, Brickell, Michel, and Adams failed to create and enforce a supervisory system and written supervisory procedures to monitor for unlawful transactions in unregistered penny stocks. Between March 2009 and August 2011, WTF bought and sold more than 27.5 billion shares of 12 penny stock issues on behalf of one customer, Justin Keener, generating approximately $61 million in investor proceeds. In October 2012, FINRA barred Keener following a disciplinary hearing for his failure to provide FINRA with documents and information after he purchased an interest in a FINRA member clearing firm. Despite the fact that the securities traded were not properly registered and were not eligible for an exemption to registration, WTF and Brickell executed the transactions. The business generated by Keener’s transactions represented the majority of WTF’s business and revenue. WTF and Michel failed to supervise Brickell, who was acting as a producing manager when making the stock liquidations at issue. Also, WTF, acting through Brickell, failed to have a program reasonably designed to monitor for and detect and report suspicious activity, as required by the Bank Secrecy Act.

In concluding these settlements, Atlas One, Firstrade, WTF, Aponte, Michel, Brickell and Adams neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

The Securities Arbitration Law Firm of Klayman & Toskes announced today that it launched a new website, www.recoverubswillowfundlosses.com,  to provide information to investors who sustained losses in the UBS Willow Fund. Klayman & Toskes is presently investigating securities arbitration claims in the arbitration forum established by the Financial Industry Regulatory Authority (“FINRA”) to recover losses sustained in the UBS Willow Fund. Among other allegations, the claims involve causes of action for unsuitability, misrepresentation and omission, breach of fiduciary duty, negligence, and failure to supervise. Klayman & Toskes has been contacted by investors who sustained losses in the UBS Willow Fund.

In February 2000, UBS and Bond Street Capital formed the UBS Willow Fund, a closed-end mutual fund, in order to purchase debt and other securities of distressed companies that were in the process of restructuring their debt financing. The Fund’s regulatory filings stated that it would “maximize total return with low volatility by making investments in distressed investments,” the filings said, “primarily in debt securities and other obligations and to a lesser extent equity securities of U.S. companies that are experiencing significant financial or business difficulties.” The Fund might also hedge its portfolio against risks, using credit default swaps (“CDS”), the filings added, or use those instruments “for non-hedging purposes.” Moreover, before investing in the Fund, many UBS Willow Fund investors were advised that the Fund was a low risk, fixed-income product.

It is believed that in or about 2008, the UBS Willow Fund deviated from its disclosed investment strategy as set forth in the offering materials, abandoned its focus on investing “primarily in debt securities” of companies that were experiencing financial or business difficulties, and instead began to purchase and trade CDS that were largely based on foreign sovereign debt in addition to private issuers. CDS carry special risks that were never disclosed to investors of the UBS Willow Fund. Unfortunately, the managers of the Fund failed to disclose to investors that CDS would be used as a primary investment strategy for the Fund.

Regulatory filings reveal that the Willow Fund had performed well through 2006. That year, the Fund returned almost 25% on a portfolio of corporate bonds, bank loans and corporate repurchase agreements. CDS amounted to an insignificant 0.18% of the Willow Fund in 2006. The portfolio that year appears to have been consistent with the Fund’s description in regulatory filings.

However, according to recent news reports, the money manager of the Willow Fund, Sam S. Kim, “plunged headlong into credit default swaps on government debt of Germany, Sweden, France, Spain and other nations. In these trades, Mr. Kim was buying a type of insurance against the nations’ defaulting; his investors, therefore, would benefit if problems in these nations worsened.”

By the end of 2008, corporate bonds amounted to only 6% of the portfolio, down from 29% a year earlier. The value of the CDS, meanwhile, had ballooned to 25% of the portfolio from 2.6% in 2007. By 2009, CDS amounted to 43% of Willow’s portfolio, a fact which was unknown to many Willow Fund investors. While the Fund reported gains in 2010 and 2011, the Fund experienced a whopping 89% decline in 2012. What was represented to be a low risk product was turned out to be a high risk, speculative investment that was unsuitable for many investors.

In October 2012, the UBS Willow Fund informed investors that it was liquidating its assets after suffering significant losses in 2012. About 70% of its losses, UBS later said, derived from exposure to CDS. UBS has stated that it expects to return whatever money was left to investors by June of 2012. That return will most likely amount to pennies on the dollar.

In December 2012, a class action lawsuit, case no. 12-civ-9288, was filed on behalf of all investors in the UBS Willow Fund. However, the case was subsequently dismissed without prejudice in January 2012. Accordingly, investors who sustained substantial losses in the UBS Willow Fund are encouraged to contact Klayman & Toskes to explore their legal rights and options, and should consider filing an individual securities arbitration claim against UBS. Klayman & Toskes has successfully obtained recoveries for clients over the last several years in investment products like the UBS Willow Fund.

If you sustained losses in the UBS Willow Fund, contact our law firm, toll free, at 888-997-9956, to explore your legal rights and options.