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SEC Whistleblowers

On January 23, the SEC announced that its whistleblower program will pay out to three whistleblowers a combined award of $7 million.  The whistleblowers’ awards were for helping the SEC pursue an investment scheme.

One whistleblower gave the SEC the initial information that launched the SEC investigation.   That whistleblower will receive more than $4 million.  Two other whistleblowers jointly provided additional evidence that also contributed to the SEC’s successful enforcement action.  Those two whistleblowers will split more than $3 million.

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Over $100 Million in Rewards Given to Whistleblowers

The SEC has announced that, as of yesterday, it has made more than $100 million in awards to whistleblowers under the SEC Whistleblower program.  Created by Congress as part of the Dodd-Frank Act in 2010, the program has been up and running since August 2011.  After five years, the program appears to be a resounding success.

Under the whistleblower program, one who voluntarily provides a useful tip to the SEC that leads to the recovery of over $1 million in sanctions may get an award.  The information regarding a securities law violation must be independently known by the whistleblower and cannot be derived from another source.  The amount of the award is discretionary, but under SEC rules, the amount will be between 10% and 30% of the SEC’s recovery.  The amount may be adjusted based on the significance of the information provided, the degree of assistance provided by the whistleblower, the SEC’s interest in deterring future violations, and the whistleblower’s cooperation with a company’s internal compliance and auditing systems.  The Dodd-Frank Act also included anti-retaliation protections, creating both a private right of action for whistleblowers and enforcement mechanisms for the SEC.

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The Securities and Exchange Commission (“SEC”) announced that it has reached a settlement with Edward D. Jones & Co. (“Edward Jones”) and the former head of its municipal syndicate desk.  The allegations concern the pricing of municipal securities in the primary market.  Edward Jones is a retail-oriented broker dealer headquartered in St. Louis, Missouri.  It is also an underwriting co-managing syndicate member for new issue negotiated municipal securities. The SEC alleged that the firm failed to make bona fide public offerings of new issue municipal bonds at initial offering prices.  The SEC’s press release said it is the agency’s first case against an underwriter for fraud relating to the pricing of municipal bonds in the primary market.

In a primary market transaction, one or more municipal securities underwriters purchase newly issued securities from the issuing municipality and sell the securities to investors. The initial offering price is the price negotiated with the issuer of the bonds.  At the time of the original issuance of the bonds, municipal bond underwriters are required to offer new issue bonds to their customers at the initial offering price. This type of transaction may also be referred to as a new issue transaction.

In a secondary market transaction, municipal bond dealers provide quotes to other broker dealers on the bonds that they deal in. A municipal bond quote consists of a bid (the price at which the dealer is willing to purchase the securities) and an offer (the price at which the dealer is willing to sell the securities.) Secondary market purchasers of municipal bonds may pay a mark-up on the bonds.  It is the equivalent of the broker dealer buying the bonds at wholesale prices and selling them to their customers at retail prices. Securities rules do not require broker dealers to disclose the markups on municipal bond transactions.

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According to the Securities and Exchange Commission (“SEC”), it has filed suit against a Texas retirement planning firm and its principals in connection with their practices in the sales of life settlement investments.  The SEC’s Complaint filed in the United States District Court for the Northern District of Texas names as Defendants NFS Group, LLC d/b/a Novers Financial a/k/a Safe Retirement Experts and its owners Christopher A. Novinger and Brady J. Speers, both residents of Mansfield, Texas.

According to the Complaint, the Defendants made false and misleading statements to investors to induce them to purchase fractional interests in third-party life insurance policies known as life settlements. Investors in fractional life settlements receive a portion of the future benefits payable on the life insurance policy when the insured dies. Typically, life settlements can only be sold to “accredited” investors who meet specific income or net worth requirements (i.e. individual net worth of $1,000,000, not including primary residence, or income of $200,000 in each of the 2 most recent years.) According to the SEC, the Defendants improperly qualified some of the investors by including anticipated income that the investors had not yet received such as 20 years-worth of future Social Security and pension benefit payments.

The SEC alleges that, between February 2012 and January 2014, Novinger and Speers fraudulently misrepresented investments in life settlements as “safe, guaranteed investments” that were “risk free” and “federally insured.” The Complaint also alleges that Novinger and Speers held themselves out to the public on their radio show “Retirement Experts Radio Show” as licensed financial consultants and “experts”, when the SEC claims that they actually have little to no training or expertise in securities and financial products.  In addition, the pair has previously been sanctioned by securities regulators in Oklahoma, Texas, and California.

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The Securities and Exchange Commission (“SEC”) has brought its first enforcement action for whistleblower retaliation under the Dodd-Frank Act against hedge fund advisory firm, Paradigm Capital Management (“Paradigm”).  According to Reuters, the SEC’s case stems from Paradigm’s alleged retaliation against its former head trader, James Nordgaard (“Nordgaard”), after Nordgaard made a whistleblower submission to the SEC about Paradigm.

The SEC claims that Paradigm’s owner, Candace King Weir (“Weir”), conducted client transactions between Paradigm and a broker dealer that she owns, C.L. King & Associates (“C.L. King”), without disclosing to the client that she was effectively participating on both sides of the transactions.  Specifically, the SEC claims that Weir’s trading strategy for her client PCM Partners L.P. II (“PCM”) involved Paradigm’s traders, including Nordgaard, selling securities that had unrealized losses from the hedge fund to a proprietary trading account at C.L. King.  According to the SEC, Weir’s intention was for the realized losses to offset PCM’s realized gains in other securities.

The SEC’s Order Instituting Administrative Proceeding states that, because Weir was the advisor to the PCM hedge fund and the owner of both Paradigm and C.L. King, she had a conflicted role in the transactions which was required to be disclosed to PCM.  According to the SEC’s Order, Paradigm established a conflicts committee to review and approve each of the principal transactions on behalf of PCM, purportedly to satisfy the disclosure and consent requirements.  The conflicts committee, however, was itself conflicted, in that, one of its members was the chief financial officer of both Paradigm and C.L. King.

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The Securities and Exchange Commission (“SEC”) and a private investor, Chirag Amin, have initiated lawsuits against a Tampa-based investment adviser, its principal, and an unregistered hedge fund.

In an action filed in the United States District Court for the Southern District of Florida, the SEC formerly charged OM Investment Management, LLC (“OM Management”), its principal, Gignesh Movalia, and its director of investments, Edwin Gaw, a Massachusetts resident, with making material misrepresentations and omissions to investors in connection with the hedge fund, OM Global Investment Fund, LLC (“OM Global”). In addition, an investor, Chirag Amin, filed a state court action in Miami-Dade circuit court naming Gignesh Movalia and OM Global as defendants. Gignesh Movalia is a resident of Land O’ Lakes, Florida.

The SEC’s complaint alleges that OM Management, through Movalia and Gaw, made material misrepresentations and omissions to potential investors concerning OM Global’s holdings, the identity of OM Global’s auditor, and OM Global’s registration status. The SEC also alleged that OM Management did not accurately disclose OM Global’s participation in related party transactions, misappropriated investors’ investments, falsified documents, and violated the federal securities laws governing investment advisers.

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The Securities and Exchange Commission (“SEC”) announced that Merrill Lynch has agreed to pay $131.8 million to settle allegations in an SEC administrative proceeding. The SEC’s charges stem from alleged misrepresentations by Merrill Lynch concerning two structured product collateralized debt obligations (“CDOs”) and for allegedly keeping inaccurate books and records for a third CDO.

The three CDOs involved are the Octans I CDO Ltd. (“Octans”), Norma CDO I Ltd. (“Norma”), and Auriga CDO Ltd. (“Auriga”).

A CDO is a structured product in which a special purpose vehicle (an “Issuer”) issues tranches of securities backed by a portfolio of assets owned by the Issuer. Typically, a designated collateral manager is responsible for selecting, acquiring, and monitoring the portfolio of assets used as collateral for the tranches of securities.

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An Initial Decision (“Decision”) was rendered by the Honorable Brenda P. Murray, Chief Administrative Law Judge for the Securities and Exchange Commission (“SEC”), dismissing an Order Instituting Administrative and Cease-and-Desist Proceedings filed on May 1, 2012 (“Proceeding”). In the Proceeding, the SEC alleged that two executives of UBS Financial Services, Inc. of Puerto Rico (“UBS PR”), Miguel Ferrer and Carlos Juan Ortiz-Leon, made material omissions and misrepresentations to investors concerning proprietary UBS closed-end funds.

UBS PR is a subsidiary of UBS Financial Services, Inc., which in turn, is wholly owned by Switzerland-based UBS AG. UBS PR is based in Hato Rey, Puerto Rico and is a member of the Financial Industry Regulatory Authority (“FINRA”) and is registered with the SEC. According to the Decision, UBS PR is the largest broker-dealer in Puerto Rico with approximately one-half of the market in assets under management.

Ferrer was Chairman and Chief Executive Office of UBS PR from 2003 to 2009. A few months later, he was re-hired as UBS PR’s Vice-Chairman.

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The Securities and Exchange Commission (“SEC”) announced an award of approximately $14 million to a whistleblower who provided meaningful information leading to an investigation, and subsequent recovery of substantial investor funds. The SEC’s announcement indicated that the whistleblower did not want to be identified. As such, neither the announcement, nor the order, indicates the name of any of the entities or individuals involved.

It is the largest award made by the SEC’s whistleblower program to date. Previous whistleblower awards were $50,000 and $25,000. The payments to whistleblowers are made from a fund established by the Dodd-Frank Act and do not come from the SEC’s annual appropriations, or reduce the amounts paid to aggrieved investors.

The Order Determining Whistleblower Award Claim can be found here.

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The Securities and Exchange Commission (“SEC”) has charged two Florida residents, Peter Kirschner of Delray Beach and Stuart Rubens of North Miami, with securities fraud in connection with $2.4 million raised from approximately 200 investors under false pretenses.

According to the SEC, Thought Development Inc. (“TDI”), based in Miami Beach, hired Kirschner, Rubens and their company, Premiere Consulting, to solicit investors to help the Miami Beach-based company raise capital. The complaint states that TDI invented a laser-line system that generates a green line on a football field that is visible as a first-down marker not only on television, but also within the stadium to players, fans, and officials. TDI asserted that its technology would decrease the time needed by officials to determine first downs, so more time could be sold to television advertisers.

The SEC alleges that Kirschner and Rubens misrepresented to investors that their money would be used to develop TDI’s technology and fund a purported IPO of its stock. In reality, 75 percent of the capital raised was retained by Premiere Consulting or paid to sales agents through undisclosed commissions and fees. In addition, the complaint alleges that potential investors were told that TDI’s laser-line technology would be used during NFL games and the Super Bowl. According to the SEC, TDI did not have any agreements with the NFL or any team to use its technology during football games.

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