Florida Securities Fraud Lawyer Blog

The Securities and Exchange Commission ("SEC") has issued an alert to broker-dealers and investment advisers to be more vigilant regarding the detection and prevention of unauthorized trading in customer accounts. Unauthorized trading is not limited to unapproved trades executed in customer accounts, it can also include trades that exceed firm limits on position exposures, risk tolerances and losses; deliberate mis-marking of positions; and fabrication of records showing nonexistent transactions.

In addition to improper trades by rogue brokers, unauthorized trading can be done by traders, trading desk assistants, portfolio managers, risk managers or other firm employees, including those in administrative positions in the firm's back office.

The alert suggests that firms should:

• review changes in trading patterns;
• investigate any unusual or high volume of trade cancellations or corrections in a customer's account;
• scrutinize manual trade adjustments;
• examine any unexplained profits for a particular broker;
• analyze frequent requests for trade limit increases;
• evaluate patterns in employee remote access to trading accounts; and
• revise, if necessary, compensation and promotion policies to avoid potential incentives for unauthorized trading.

If anomalies are detected, firms should investigate further. The alert also suggests various compliance measures that firms might want to use to protect themselves and their clients from unauthorized trading, such as mandatory vacations for brokers, during which a full review of the trading in their customers' accounts can be undertaken.

The full alert can be found at http://sec.gov/about/offices/ocie/riskalert-unauthorizedtrading.pdf

Investors nationwide who have incurred recoverable investment losses due to specific failures by stockbrokers and brokerage firms, and who may have a FINRA arbitration claim, may contact the Florida securities lawyers at McCabe Rabin, P.A. for a free and confidential consultation by calling toll free at 877.915.4040 or by e-mail to kelly@mccaberabin.com.

The Securities and Exchange Commission (SEC) announced it will change its policy of allowing companies and individuals to "neither admit nor deny" wrongdoing in a civil case brought by the SEC when the same entities and individuals have admitted wrongdoing in related criminal cases brought by authorities such as the Department of Justice. The SEC only files civil charges.

The change in policy comes after a federal judge recently threw out a settlement between the SEC and Citigroup, in part, because Citigroup was permitted to neither admit nor deny the SEC's charges. The new policy, which is effective immediately, will not apply to the Citigroup settlement or any case in which the company or individual does not admit guilt, or is not convicted, in a related criminal case.

Wells Fargo & Co. has agreed to pay $148 million to settle charges against Wachovia Bank, which Wells Fargo acquired in 2008. The charges stem from investigations by the Securities and Exchange Commission, the Justice Department and 26 states' attorneys general into how several banks rigged purportedly competitive auctions in order to receive excessive fees on investment contracts sold to municipalities. The investigations revealed that Wachovia and several of its former employees were involved with manipulating more than 58 transactions worth approximately $9 billion during an eight year period.

The allegations relate to investment contracts purchased by state and local municipalities which allow them to earn a return on the proceeds of municipal bonds sales until funds are needed for a public works project. Typically, municipalities receive multiple bids from various banks at auctions arranged by financial advisers, with the bank offering the highest return winning the contract. However, investigators say advisers manipulated the auctions to steer business to a favored bidder in return for kickbacks.

Wells Fargo neither admitted nor denied the allegations. Previously, JPMorgan Chase & Co., UBS AG and Bank of America Corp. settled similar charges.

The Securities and Exchange Commission (SEC) announced the settlement of separate complaints related to compliance failures by Feltl & Company, Inc. (Feltl) and Omni Investment Advisors, Inc. (Omni). Omni's former chief compliance officer, Gary R. Beynon was also named in the SEC's complaint.

Firms are required by law to have written compliance policies and procedures in place.

The SEC alleged that from September 2008 to August 2011, Omni had no compliance procedures whatsoever. In addition, the SEC claimed its advisors were completely unsupervised. Beynon, the chief compliance officer, actually resided in Brazil. The SEC asserted that client agreements requiring the review and approval of Beynon as chief compliance officer, were signed by Beynon and backdated one day before they were produced to the SEC in response to a subpoena. Omni and Beynon agreed to settle the SEC's charges with payment of a $50,000 penalty and Beynon's permanent bar from acting in any compliance or supervisory capacity within the securities industry.

The SEC alleged that Feltl failed to have written compliance policies and procedures in place. In addition, the SEC claimed that Feltl advisors engaged in hundreds of principal transactions without obtaining their clients' consent as required by law. The SEC also alleged that Feltl charged undisclosed commissions. Feltl agreed to settle the SEC's charges with payment of a $50,000 penalty and the return more than $142,000 to its clients.

A federal judge in New York struck down a settlement previously agreed to between the Securities and Exchange Commission (SEC) and Citigroup. In his ruling, U.S. District Judge Jed Rakoff cited the public's need for clarity about the financial markets.

The settlement stemmed from the SEC's allegations that Citigroup misled investors about a complex mortgage investment which resulted in a $160 Million profit to Citigroup and millions in losses to investors. Judge Rakoff stated that the SEC has an inherent duty to see that the truth emerges.

Trial in the case is set for July 16.

The U.S. Securities and Exchange Commission (SEC) announced that Randall Merk (Merk), former Executive Vice President of Charles Schwab & Co., Inc. and President of Charles Schwab Investment Management, has agreed to pay a $150,000 fine to settle charges brought against him in connection with Schwab's YieldPlus Fund.

The SEC's complaint filed in January 2011 alleged that Merk, and former YieldPlus Fund manager Kimon Daifotis, committed securities law violations in connection with the offer, sale and management of the YieldPlus Fund including misleading investors about the risks of the ultra-short bond fund. The complaint also claims that Merk approved other Schwab funds' redemptions of their YieldPlus holdings when Merk knew, or should have known, that the portfolio managers for those funds had received material, non-public information about the YieldPlus Fund.

According to Bloomberg, the YieldPlus Fund had $13.5 billion in assets at its peak in 2007 before tumbling to $1.8 billion 8 months later after fund managers deviated from the fund's stated investment policies.

The SEC reports that the litigation against Kimon Daifotis continues.

The Securities and Exchange Commission (SEC) has begun scrutinizing registration documents submitted by investment advisers to uncover misrepresentations they have made regarding their education, assets under management and other aspects of their firm. The intent behind the crackdown is to uncover and address misconduct before it balloons into a threat to investor protection. What action the SEC will take regarding advisers who are found to have filed misleading forms is unclear.

In testimony before the Senate Banking Subcommittee on Securities, Insurance and Investment, Robert Khuzami, Director of the SEC's Division of Enforcement, stated "If they [advisers with misleading information on their forms] come face to face with inspectors early on...they're going to know that we're watching, and they're going to be unlikely to graduate to larger fraud."

The SEC faces quite a challenge in carrying out its mission. Carlo di Florio, Director of the SEC's Office of Compliance Inspections and Examinations, testified that, in fiscal year 2011 which ended September 30, the SEC conducted examinations of only 8% of the nearly 12,000 registered investment advisers. In addition, approximately 38% of registered investment advisers have never been subjected to an SEC review.

On November 10, 2011, the SEC brought charges against a San Diego-based investment advisory firm and its president for securities fraud based on its failure to disclose a conflict of interest to investors and falsely represented the liquidity of a hedge fund they managed.

The SEC claims that Western Pacific Capital Management LLC and its president, Kevin James O'Rourke, encouraged investors to purchase a security without informing them that Western Pacific received a 10% commission. Western Pacific and O'Rourke also (1) failed to register as a broker, (2) failed to give required written disclosures to investors, (2) wrongly redeemed one hedge fund client's interest before another's, and (4) materially misrepresented to clients about the fund's liquidity.

According to Marshall Strung, an Assistant Director within SEC Enforcement Division, "Investment advisers have a fiduciary duty to act in the best interests of their clients and be forthcoming with them. Western Pacific and O'Rourke fraudulently breached that duty by failing to disclose the commissions they would receive for the recommended investments and lying to clients about the liquidity of the fund they managed."

Specifically, the SEC alleges that Western Pacific and O'Rourke acted as brokers in the non-public stock offering by Ameranth Inc. during 2005 and 2006. In return, Ameranth paid Western Pacific a 10% "success fee." Although Western Pacific and O'Rourke told investors to invest in Ameranth, they failed to advise each investor that they would make money off these investments, and failed to give investors the mandatory written disclosures as to their role in the offering.

Further, the SEC claims that from 2005-2008, Western Pacific and O'Rourke falsely represented the liquidity of The Lighthouse Fund LP, a hedge fund that they formed and managed. Western Pacific and O'Rourke always maintained that illiquid assets comprised only 25% of the Lighthouse Fund, when in reality 90 percent of the fund's assets were comprised of illiquid securities.

The Securities and Exchange Commission announced that it has ordered the Financial Industry Regulatory Authority (FINRA) to hire an independent consultant to evaluate and recommend improvements to FINRA's compliance policies, procedures and staff training regarding the integrity of documents produced to the SEC. The Order came about when it was learned that on August 7, 2008, the Director of FINRA's Kansas City District Office caused the alteration of documents requested during an SEC audit just hours prior to producing them to the SEC investigator. Without admitting or denying the findings, FINRA consented to the SEC's Order and agreed to engage an independent consultant within 30 days to conduct a comprehensive review of FINRA's policies, procedures and training. A copy of the Order may be viewed at http://sec.gov/news/press/2011/2011-227.htm.

The SEC has charged two South Floridians, posing as money managers, with an illegal scheme of selling shares of stock before the shares had been paid for. According to allegations filed in federal court in New Jersey, the SEC has charged Scott Kupersmith of Boca Raton and Frederick Chelly of Miami Beach of opening accounts with broker-dealers, on behalf of several purported "investment funds," and ultimately causing millions in losses.

Kupersmith and Chelly would open "Delivery Versus Payment/Receipt Versus Payment" ("DVP") brokerage accounts in the name of their purported investment funds. Chelly opened a DVP in the name of Antibe Arbitrage Group, Inc., while Kupersmith opened DVP's in the name of Atlantic Southern Capital Group, Fullerton Capital Group, Inc., and Northbrea Capital Group, Inc. Kupersmith and Chelly opened these accounts by convincing broker-dealers that they held sufficient cash and securities with a third-party bank to cover their trades. Of course, Kupersmith and Chelly held no such funds or assets to cover their trades.

Then, the two would engage in illegal "free-riding," where they would buy and sell the same quantity of the same stock in different accounts with the intent of profiting from swings in the price of the stock. In most instances, Kupersmith and Chelly used the proceeds from their stock trades to purchase the same shares over again. When their trades were profitable, Kupersmith and Chelly kept the profits. When the trades resulted in loss, however, Kupersmith and Chelly did not cover the sales they had ordered and left the broker-dealers to settle the trades at a significant loss.

The scheme fell apart when Kupersmith and Chelly started failing to deliver the shares necessary to settle sales in their various DVP's. This forced broker-dealers to purchase replacement shares to cover the sales transaction. Because the broker-dealers had to purchase replacement shares at higher prices than those at which the shares were sold, the broker-dealers suffered losses equivalent to the difference between the replacement purchase price and the proceeds from the sale.

By the end, Kupersmith and Chelly had caused over $2 million in losses to broker-dealers. The two men reaped over $600,000 in illicit profits. The SEC has charged both men with violations of section 17(a) of the Securities Act and section 10(b) of the Exchange Act, seeking an injunction against further violations, disgorgement of "ill-gotten gains," and civil penalties. Kupersmith also faces charges in New York, including first and second-degree grand larceny, scheming to defraud, and violating New York's General Business Law.

On October, 6, 2011, the SEC received an emergency court order to stop a Ponzi scheme that promised investors high returns on water-filtering natural stone pavers, but defrauded them of over $26 million during a four-year period. The SEC's complaint states that, among others, convicted felon Eric Aronson bilked investors in PermaPave Companies, a web of companies based in Long Island, N.Y., and controlled by Aronson.

The scheme involved over 140 investors during 2006-2010, many of whom worked in the construction or landscaping business. Representations were made to investors that PermaPave Companies had a high volume of orders for the pavers, which would yield monthly returns to investors of 7.8% to 33%. In reality, there was not much demand for the pavers, and its cost far exceeded sales revenue.

Without the promised returns, Aronson and two other PermaPave Companies executives, Vincent Buonauro Jr., and Robert Kondratick, had to pay earlier investors with funds from new investors and then took a large portion of the funds for themselves. In doing so, they bought luxury cars, gambling trips to Las Vegas, and jewelry. Aronson also used investors' funds to satisfy court-ordered restitution payments to victims of an earlier scheme that he operated in 2000.

According to the SEC New York Regional Office's Director, George S. Canellos, "Aronson and his associates operated the PermaPave Companies as a classic Ponzi scheme. They created the façade of a profitable business, promised investors extraordinary rates of return, and used much of their investors' money to fund their own lavish lifestyle."

On Aug. 29, 2011, the SEC charged two Florida men for running a Ponzi scheme set up as an alleged private equity fund that fraudulently raised over $22 million from more than 100 investors, including many Florida teachers or retirees.

The SEC's complaint alleges that James Davis Risher of Sanibel handled the fund's trading operations, and Daniel Joseph Sebastian of Lakeland marketed the fund, including distributing offering materials and soliciting investors. Risher falsely informed investors that he had years of experience in trading equities and providing wealth and asset management services. Instead, Risher had no such experience but rather a vast criminal history, spending 11 of the last 21 years in prison.

The SEC claims that Risher and Sebastian falsely told investors that the "fund" generated annual returns between 14% and 124% percent by purchasing public equity securities. They sent investors fabricated account statements showing these inflated returns to support their misrepresentations. Indeed, only a small portion of the raised capital was actually invested, as Risher instead spent investor funds on personal, lavish gifts, such as jewelry, and property in North Carolina and Florida. Moreover, Risher and Sebastian also paid themselves millions of dollars in fake management and performance fees.

Based on the SEC's complaint, Risher and Sebastian solicited the "fund" using the names Safe Harbor Private Equity Fund, Managed Capital Fund, and Preservation of Principal Fund. They described themselves in offering documents as "two unique individuals" who had the necessary expertise to "create an investment vehicle that would allow investors to capitalize from both bull and bear markets."

The SEC recently charged a Texas man, Jody Dunn, with securities fraud for soliciting more than $3.45 million from thousands of deaf investors. Dunn claimed he would invest the funds in Imperia Invest IBC, a company that allegedly raised more than $7 million from investors while promising guaranteed returns of 1.2 percent a day. Last year, the SEC charged Imperia with absconding with investor's funds by depositing the money into foreign bank accounts and froze the company's assets.

Dunn used the money he received from investors to pay his mortgage, car payments, car insurance, and a variety of other personal expenses. The remaining funds he sent to Imperia's offshore bank accounts. Even after the SEC froze Imperia's assets, Dunn continued to reassure investors that Imperia was a legitimate investment and that investors would be repaid.

According to the SEC, Imperia claimed to invest in foreign viatical settlements. Investors were required to invest at least $50, after which customers could obtain an $80,000 loan from an unspecified foreign bank that would be used to purchase one of the viatical settlements. Imperia purportedly traded the viaticals and paid a guaranteed return of 1.2 percent per day. Imperia also required investors to purchase Visa debit cards to access their investment proceeds and charged fees ranging from $145 to $450 for the cards. Visa, however, never authorized investors to use its name and trademarks on Imperia's products.

Dunn told investors he would help them invest with Imperia, but no investor funds were used to purchase any viaticals. In fact, Dunn never met anyone affiliated with Imperia. He would ask investors to send money orders, which he would then cash and deposit into his own accounts. Then, he would electronically transfer the money to foreign accounts in places like Costa Rica, Cyprus, and New Zealand, with no apparent link to Imperia. Dunn made no effort to verify whether Imperia made the promised investments or any effort to verify Imperia's licensure or registration with any federal or state agency.

On August 31, 2011, the SEC announced it froze the assets of a Chicago-based money manager and his hedge fund advisory firm for lying to prospective investors in their startup hedge fund.

The SEC claims that Belal K. Faruki and his firm, Neural Markets LLC, solicited highly sophisticated individuals to invest in the "Evolution Quantitative 1X Fund," a hedge fund they managed that allegedly employed a proprietary algorithm to conduct an arbitrage strategy involving trading in liquid exchange-traded funds (ETFs). Faruki and Neural Markets misrepresented the amount of investor capital and that trading was creating returns when, in reality, it incurred losses. They defrauded at least one investor out of $1 million before admitting the losses, and were still seeking other wealthy investors prior to the SEC obtaining a court order to stop the scheme.

According to Bruce Karpati, the Co-Chief of the SEC's Asset Management Unit, "Faruki and Neural Markets lied throughout this elaborate scheme in order to attract capital from sophisticated investors. Even sophisticated institutional investors should be wary of unscrupulous hedge fund managers who cloak their misrepresentations in lofty pitches about a complex investment strategy."

The SEC's complaint filed in federal court in Chicago alleges that Faruki and Neural Markets informed investors that the hedge fund started trading in 2009. From January 2010 until approximately October 2010, Faruki and Neural Markets misrepresented the hedge fund's performance results, falsely claimed that wealthy investors invested $5 million into the fund, and misstated that it employed a top-notch auditor to help prepare the fund's financial statements. Faruki also misrepresented to investors that he invested his own funds into the hedge fund so that his own interests were the same as other investors.

On July 11, 2011, the Securities and Exchange Commission ("SEC") brought and settled charges that Janney Montgomery Scott ("Janney"), a dually-registered broker dealer and investment advisor, failed to establish and enforce policies and procedures, as required by the Securities and Exchange Act of 1934, to protect material nonpublic information from misuse.

The SEC's order instituting proceedings alleges that from at least January 2005 through July 2009, Janney's policies for its Equity Capital Markets division ("ECM") were insufficient and lacking. The SEC's order found that in some instances that Janney failed to: (1) monitor contacts between investment bankers and research analysts; (2) monitor trading in securities of firms on the ECM Compliance watch list; (3) failed to require its investment bankers to receive clearance prior to making personal trades; enforce its policy that required its employees to receive approval to have brokerage accounts at other firms.

In anticipation of the institution of proceedings by the SEC, Janney proposed an offer of settlement, which the SEC accepted. Janney did not deny or admit to any findings of the SEC, but agreed to be censured and pay an $850,000 penalty. Janney also agreed to cease and desist from committing or causing any violations of Section 15(g) of the Securities Exchange Act of 1934.

The SEC's order can be found at: http://www.sec.gov/litigation/admin/2011/34-64855.pdf

The SEC's press release in regards to this matter can be found at: http://www.sec.gov/news/press/2011/2011-144.htm