Securities Lawyer Blog

The Securities Lawyer Blog has followed the Bank of America's troubled settlement with the SEC in its acquisition of Merrill Lynch. The matter is finally moving towards resolution. Maybe.

Last week, the Am Law Daily Blog reported that BofA has settled with the SEC. Again.

Both the SEC and BofA are hopeful that this time Judge Rakoff will approve the settlement.

As previously reported, the original settlement of $33 million in fines was dismissed by Judge Rakoff as "trivial" for BofA's alleged failure to notify shareholders prior to its acquisition of Merrill Lynch that it planned to pay billions of dollars in employee bonuses. The Judge was not pleased that ultimately the shareholders would bear the burden of the fines.

The new settlement proposal carries substantially more in fines and includes specific oversight provisions and apparently a distribution plan that might please the judge.

According to the SEC, the new settlement deal includes a payment by the bank of $150 million in fines and will strengthen its corporate governance and disclosure practices. In this deal, the SEC requires the bank implement specific remedial measures over three years. These include, but are not limited to:

-- An independent auditor to audit internal disclosure controls;

-- Requires the CEO and CFO to certify a review of annual and merger proxy statements;

-- Retain disclosure counsel to report to the Board's Audit Committee;

-- Adopt a "super-independence" standard for the Compensation Committee prohibiting acceptance of other compensation from the bank;

-- Maintain a Consultation Committee consultant that would meet super-independence criteria; and,

-- Prominent publication on the bank's website of incentive compensation principles.

The bank has also agreed to turn over some formerly privileged documents between the bank and its counsel. The larger issue of privilege waiver - based on an alleged drafting error -- is still being litigated in separate shareholder cases.

Troubles remain as New York Attorney General Andrew Cuomo announced last week that his office has filed a civil suit against BofA and three former BofA executives. The suit charges BofA with disclosure violations in the Merrill acquisition.

If Shakespeare were alive today, he might be seeking out an interview with Judge Jack Weinstein. Or perhaps invite him up to Stratford for a weekend of discussion on the human condition and its intersection with the sub-prime crisis.

Last week, the Judge sentenced Eric Butler, a securities dealer who formerly worked for Credit Suisse. Think of all the good work he could have done in five years on Wall Street.

Instead, he will be in prison and he will pay $5 million dollars in fines. He will also be supervised for three years after his release from prison. He told the court tearfully last week that he regrets all of this.

Mr. Butler was fairly brazen apparently in his push to get investors into very high-risk sub-primes that also happened to carry high-commissions. These investors lost over one billion dollars.

He was convicted of things that Shakespeare would not have known about and some things he would like fakery and fraud. In fact, allegations of securities fraud, conspiracy to commit securities fraud and conspiracy to commit wire fraud were the rub for Mr. Butler.

The Judge's Statement of Reasons at the sentencing on some of these charges included deeply cutting prose. Pointing to the "the pernicious and pervasive culture of corruption" on Wall Street, the Judge went out of his way to express his concerns saying that "[t]he most compelling aspect of this case may be its illumination of the need to reconsider how compensation is calculated and investment products are marketed by the financial industry." He urged reform.

Lots of people are condemning this culture. It has hurt many people in America.

If Shakespeare failed to rip this story from the headlines, perhaps Charles Dickens would. The tale aligns well with so many Dickens characters as life imitates art. Or more likely, these great artists understood what is in the human character. One such Dickens character Mr. Merdle, swindles all the swooning swells of the time in a Ponzi-like scheme almost exactly along the lines of Mr. Madoff. The character of Mr. Butler is apparently not far off the mark.

And so into the annals of American law go the likes of Eric Butler. He is the new Merdle. He hopefully has learned that crime does not pay as his family has lost him for a period of years to another place, maybe not as bad as the Marshalsea prison, but still, prison.

In his Sentencing Statement of Reasons the Judge passed responsibility around the table like a plate of cookies in a Rockwell painting gone wrong. "The blame for this condition is shared not only by individual defendants like Butler, but also by the institutions that employ them, those who carelessly invest, and those who fail to regulate. Supervision is seriously negligent; greed and short-term gain are so enormous that fraud and arrogant disregard of others' rights and of ethics almost encourage criminal activities such as defendant's."

So, in short, the Judge seemed to be saying that we all need to look at this culture, because it is not any one defendant's doing. It is a culture Americans have allowed, it is our Wall Street and it is our responsibility to make it right. Both Shakespeare and Dickens would probably approve of that message.

Related Web Resources

For a complete review of the Sentencing Statement of Reasons, click here.

The Financial Industry Regulatory Authority (FINRA) recently announced that its Investor Education Foundation is again teaming up with the American Library Association (ALA) to help Americans learn about financial matters. Over the past three years, this program has awarded $3.2 million to public libraries and library networks nationwide. The ALA's initiative -- Smart investing@your library® -- is targeted at public education with effective, unbiased financial education resources.

The initiative supports education to Americans in the management of personal finances and more complex decisions that can be quite challenging in this economy. The programs include resources and content that are intended to increase access to, and understanding of, financial information.

Nineteen libraries across the country have been awarded grants for this program and include urban, suburban and rural communities across the country. Grantee libraries have developed programs that range from drop-in weekly clinics to programs that will target specific communities of interest such as youth, low-income women, newer Americans, English learners and many more.

One program coordinates with a local university to involve finance students and faculty for the education of the public on various financial issues and financial planning. Another partners with local schools to reach younger audiences. The use of technology is prevalent in the programs, and includes the use of social media, such as Second Life, and on-line learning for the educational content and outreach.

The ALA will provide assistance with program marketing, outreach and evaluation.

ALA's President Camila Alire noted that "libraries are part of the solution when a community is struggling economically. From free access to books and online resources for families to library business centers that help support entrepreneurship and retraining, libraries enable lifelong learning. ... We are thrilled that through the FINRA Foundation's generous support, Smart investing @ your library® grantees will have the resources to provide library users with access to unbiased investor education."

In his statement on the continued support of this program, John Gannon, the FINRA Foundation's president said that "smart decisions about personal finances and investing often begin at the local public library. By nearly doubling last year's funding for Smart investing @ your library®, we are helping to turn library cards into passports for people hoping to arrive at a brighter financial future."

Related Web Resources

More information on the FINRA Investor Education Foundation and its initiatives can be accessed at its website.

For more information on The Reference and User Services Association, which is a division of the American Library Association, visit www.ala.org.

Continue reading "$1.5 Million for Investor Literacy -- FINRA Foundation and the American Library Association Team Up" »

Earlier this week, Judge Rakoff refused to allow the SEC to amend its previously-filed complaint against the Bank of America Corp. related to its merger with Merrill Lynch. Denying the motion to amend, the judge also stated that the SEC could file a new action if it chose to do so. It chose to do so.

A quick refresher is in order. As the Securities Lawyer Blog has noted in prior posts, the case has been moving forward with Judge Rakoff's firm management in one of the most well-reported cases in recent years. All of this after the parties had reached a settlement that was ultimately rejected by the judge.

The case is of significant interest to the American public and to industry insiders for many reasons, not the least of which is the allegation that substantial bonuses to Merrill were not disclosed to shareholders prior to the merger vote in December 2008.

Back to the recent motion. The SEC sought by amendment, to present a charge that BofA failed to disclose "extraordinary losses" at Merrill prior to the merger vote.

Although Judge Rakoff refused to allow the amendment to the SEC's complaint, he gave some solid reasons for this decision. First, he intends to move forward with a March 1, 2010 trial date on the original complaint. Second, he expressed concern that new allegations with new underlying facts could confuse the jury and the bank should be permitted time to assess the allegations and present a defense to it.

The SEC's litigation release details the charges against Bank of America which include the allegation that the bank violated "federal proxy rules by failing to disclose extraordinary financial losses at Merrill Lynch prior to a shareholder vote to approve a merger between the two companies.

The SEC's complaint alleges that Bank of America learned prior to the shareholder vote that Merrill Lynch had incurred a net loss of $4.5 billion in October 2008 and estimated billions of dollars of additional losses in November.

The SEC claims that BofA "erroneously and unreasonably concluded that no disclosure concerning these extraordinary losses was required as shareholders were called upon to vote on the proposed merger with Merrill Lynch." The bank's failure to disclose this information, according the SEC, "violated its undertaking to update shareholders concerning fundamental changes to previously disclosed information, and rendered its prior disclosures materially false and misleading."

In the litigation release, the SEC acknowledged the assistance of the US Attorneys' offices in the Southern District of New York and Western District of North Carolina, the Federal Bureau of Investigation, and the Office of The Special Inspector General for the Troubled Asset Relief Program.

Continue reading ""Extraordinary" -- Claims SEC In New Suit Against BofA in Merrill Deal " »

The Securities and Exchange Commission (SEC) announced earlier this week that it has secured a settlement with the former Perot family companies employee charged with insider trading. The Securities Lawyer Blog featured this matter on an earlier post.

The settlement includes a return of illicit profits and the overall amount to be returned exceeds $8.6 million. The settlement was filed in federal court in Dallas, Texas. Part of the settlement includes a request by the SEC that a distribution plan be developed for the illegal profits to be returned. This plan would be handled by a third party. The agency also seeks to impose a financial penalty against the former Perot family company employee, Mr. Reza Saleh.

The insider trading case developed after Dell Inc. announced its intention to acquire Perot Systems. The agency alleged that Mr. Saleh had made "increasingly large purchases of Perot Systems call options contracts based on material, non-public information that he learned in the course of his employment with, or duties for, two Perot-related private companies and Perot Systems." Allegedly, immediately after the tender offer he sold all call option contracts and gained about $8.6 million in illicit profits.

WIthin two days, the SEC was in court and pursuing the insider trading deal as it sought and secured an order freezing the profits that resulted from the it. The SEC alleged that Mr. Saleh had "illegally traded in Perot Systems call options after learning about the merger before it was announced."

The SEC was assisted in the matter by several other entities including the Chicago Board Options Exchange, Options Regulatory Surveillance Authority, the Nasdaq OMX and the Financial Industry Regulatory Authority (FINRA).

Mr. Saleh has not admitted or denied the allegations against him. The settlement includes an agreement that he will be permanently enjoined from violations of the anti-fraud provisions of the Securities Exchange Act of 1934 as well as an agreement to an SEC administrative order barring him from future association with any investment adviser.

Related Web Resources

Click here to read more about the Options Regulatory Surveillance Authority and the authorities involved in surveillance and investigation of insider trading matters.

The Financial Industry Regulatory Authority (FINRA) warned investors earlier this week that green is not always good.

FINRA was established to ensure that investors are protected and the markets maintain integrity. This time, FINRA's focus is protecting the public from big promises made by companies claiming to be involved in renewable and alternative green energy investments that in fact won't bring returns.

In the new alert, Save Your Greenbacks --- Don't Fall for Green Energy , FINRA helps investors by informing them about how these green scams are often carried out. Using social media vehicles such as tweeting and texts as well as webinars and faxes these scams attempt to secure investors using what FINRA calls "very aggressive, optimistic and potentially false and misleading statements that create unwarranted demand for shares of a small, thinly traded company."

The alerts goes on to describe the activities surrounding green investment scams as "a classic 'pump and dump' fraud where con artists behind the scheme then sell off their shares, leaving investors with worthless stock. Fraudsters are also using green investing as a hook for Ponzi schemes, where a scammer uses incoming funds from new investors to pay purported returns to earlier stage investors."

This is all to be expected perhaps. While there are many companies working hard to rise to preeminence in the green and renewables arena, the opening of a new industry also provides opportunity for dishonest plays for investment.

The alert provides information to investors as to how to research companies prior to investing and signs that could indicate potential scams.

As noted by John Gannon, FINRA Senior Vice President for Investor Education "right now there are a lot of legitimate stories in the news about green energy initiatives, and con artists want to leverage people's interest in green energy to make a quick buck at investors' expense. There is a lot of interest in companies that claim to provide green energy, but we issued this Alert to remind investors to be vigilant about avoiding investment scams, no matter how they are packaged."

Investors need to be certain of the source of investment information, particularly those that are unsolicited as well as the basis for promises of large returns. FINRA provides one example in which scam artists claimed that a particular solar stock was set for a huge gain and another in which a company was claimed to be poised for huge returns from green patents.

Investors have also been approached in a recent alleged Ponzi scheme to cash in all their traditional investments to buy into a company's green initiatives.

Some green companies may have great potential from an investment standpoint, but it is important that investors educate themselves prior to making investments in this or any sector.

Related Web Resources

To learn more about investment research, visit the investors area on FINRA's website.

Recently, the Securities and Exchange Commission (SEC) announced that it is has charged ICAP Securities USA LLC (ICAP) with both fraud and material misrepresentations to customers. This firm is the US subsidiary of ICAP which is located in the United Kingdom and is the world's largest inter-broker dealer.

The SEC is sending another big message to the industry in this matter.

The firm is in the business of matching buyers and sellers in over-the-counter markets for a variety of securities. These include mortgage-backed securities and U.S. Treasuries. Customers are able to review trade information on computer screens and the SEC notes that inter-dealer brokers that show higher volume of trading activity are often able to secure more commissions and trades than those that show less activity.

In this case, SEC enforcement found that brokers on ICAP's U.S. Treasuries desk "displayed fictitious flash trades also known as "bird" trades on ICAP's screens and disseminated false trade information into the marketplace in order to attract customer attention to its screens and encourage actual trading by these customers. ICAP's customers believed the displayed fake trades to be real and relied on the phony information to make trading decisions."

These charges have now been settled. The settlement requires that ICAP pay $25 million in disgorgement and penalties. In addition to the settlement, five ICAP brokers were charged with aiding and abetting the fraudulent conduct while two senior executives were also charged for failing reasonably to supervise the brokers. These parties will pay penalties to settle the matter.

The SEC's Division of Enforcement, Lorin L. Reisner had some tough talk for the firm stating that "[i]t is essential that ICAP and other inter-dealer brokers refrain from engaging in conduct that discredits their privileged position in the marketplace ... ICAP engaged in deceptive practices that violated the legal and professional standards required of market participants; our action today demonstrates zero tolerance for such conduct."

The alarming activities in which ICAP brokers engaged are stated by the SEC to include such things as: (1) the display of thousands of fictitious flash trades to customers; and, (2) representations to certain customers that its electronic trading system would follow certain protocols that were not in fact followed. These activities were alleged to be false and misleading. The firm and the individuals have settled without admitting or denying the allegations.

The SEC's order also found that ICAP "held itself out as a firm that did not engage in trading that subjected its own capital to risk" which was not true.

Related Web Resources

For more background on SEC enforcement and litigation, please visit the SEC's website.

Continue reading "SEC's Price for Inter-Broker's Bad Behavior? How About $25 Million. " »

It's hard to imagine a better holiday gift than those handed out earlier this week to Broadcom's former executives. The National Law Journal reports that the stock options backdating shareholder suits against Broadcom Corp. could be less viable now that the criminal case against former executives has been dismissed. The Securities Lawyer Blog discussed these cases in an earlier posting.

The defendants are bound to have a more happy holiday season after the rulings from United States District Court Judge Cormac Carney. He had some very harsh words for the government, saying they had "distorted the truth-finding process."

Entering an acquittal after two months of trial for William Ruehle, former Chief Financial Officer, the judge stated that "[f]or these constitutional rights to have true meaning, the government must not do anything to intimidate and improperly influence witnesses. Sadly, they did so in this case." 
The judge also noted evidentiary issues stating that there was "considerable debate" about accounting practices used by Broadcom and many other companies.

Judge Carney also handed down dismissals of the backdating charges against Broadcom co-founder and former CEO, Henry Nicholas and then ordered the government to show cause why an indictment alleging narcotics crimes against Nicholas, should not also be dismissed.

The Securities and Exchange Commission's backdating case against Ruehle, Nicholas, Henry Samueli and David Dull, Broadcom's former general counsel was dismissed without prejudice.


All of this has now put the civil claims against Broadcom co-founders Henry Nicholas and Henry Samueli, former Chief Financial Officer William Ruehle and former General Counsel David Dull in a new light. These cases, a derivative lawsuit and a class action, are currently pending before Judge Manuel Real and are related to the backdating of stock options.

According to the NLJ, the defense attorneys for Ruehle say they " 'are hopeful that the civil plaintiffs revisit their decision to charge Mr. Ruehle in light of the results of the criminal case ... since " '[i]t was clear, following two months of trial, that there was no fraud committed in connection with Broadcom's stock option program.' "

Plaintiffs' counsel appear undeterred, while defense counsel caution that the civil case will be more difficult to prove given Judge Carney's finding of no wrongful intent in the options granting process at Broadcom, among other issues that could make the showing of materiality and scienter very difficult to prove.

Only recently, U.S. District Court Judge Manuel Real granted final approval of a $118 million partial settlement in the derivative action. Judge Real previously issued a stay in the class action pending resolution of the criminal case against Ruehle and Nicholas.

The Securities Lawyer Blog recently noted a tech wreck in the industry when penalties were imposed on Scottrade for its failure to establish and implement an adequate automated anti-money laundering (AML) program to detect and trigger reporting of suspicious transactions.

Now the Financial Industry Regulatory Authority (FINRA) has imposed a large fine on MetLife Securities, Inc., and three of its affiliates New England Securities Corp., Walnut Street Securities, Inc. and Tower Square Securities, Inc. for a different sort of digital-age supervisorial problem.

The fine is based on the firm's alleged failure to establish: (1) an adequate supervisory system for both the review of brokers' email correspondence with the public; and, (2) procedures relating to broker participation in outside business activities and private securities transactions.

The impact of these alleged failures was to allow two MetLife Securities brokers to avoid detection by the firm of their undisclosed outside business activities and private securities transactions. This is alleged to have cost some firm clients millions of dollars.

The firm did some things right. For nearly a decade, there were written supervisory procedures mandating that all securities-related broker emails be reviewed by a supervisor. But the program fell short in that supervisors were not able to directly monitor broker emails. Instead, it fell on the brokers to forward relevant emails to supervisors for review.

Managers were able to spot-check broker computers for emails that had not been forwarded. Brokers could get around this by deleting emails they did not want supervisors to find. Even regular audits were alleged to be ineffective in that did not allow for timely detection of email-forwarding failures.

FINRA found a large cache of emails involving two brokers who were able to engage in outside business activities and private securities transactions without the firm's knowledge because these emails were not forwarded to supervisors.

According to Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement, "Although FINRA's rules afford firms the flexibility to tailor procedures that are appropriate for their particular business models, all firms must have the ability to flag emails that may evidence misconduct. Relying on brokers to provide copies of their own emails to supervisors for review is hardly an effective means to detect such misconduct."

According to FINRA, MetLife Securities' inability to ensure compliance with the email-forwarding requirement caused the inadequate enforcement of the firm's supervisory procedures relating to outside business activities and private securities transactions.

Related Web Resources

For more background on enforcement and BrokerCheck, go to www.finra.org.

Continue reading "Tech Wreck -- $1.2 Million Fine For MetLife Securities" »

Earlier this week, the United States Supreme Court granted certiorari in Morrison v. National Australia Bank Ltd. (08-1191), a case involving a question of transnational securities and the application of US securities fraud laws.

The case was brought by four Australian shareholders against National Australia Bank and HomeSide Lending, which formerly was its mortgage unit located in Florida.

The appeal will determine when the United States' securities fraud laws apply in transnational securities dealings. The high court will review the appellate court's upholding of a dismissal of the lawsuit. The intermediate appellate court determined that the United States courts had no jurisdiction in the matter, since the alleged fraud at the center of the allegations occurred outside the United States.

A few basic facts. National Australia Bank purchased HomeSide Lending in 1998 for $1.22 billion and several years later announced write-downs amounting to $2.2 billion. After this occurred, the bank's stock value fell 13% in Australia and several HomeSide executives resigned.

The bank eventually reported to the SEC that it had applied incorrect interest assumptions in valuing the mortgages over time. They miscalculated the amount of time it would take for borrowers to pay back loans, and thus the fees associated with those loans. Later, HomeSide was sold to Washington Mutual and picked up in 2008 by JPMorgan Chase when it purchased Wamu's assets.

Specifically, the questions presented in the case are as follows:

1) Do anti-fraud provisions of U.S. securities laws extend to transnational frauds when (a) foreign-based parent company conducted substantial business in United States, its American Depository Receipts were traded on New York Stock Exchange, and its financial statements were filed with Securities and Exchange Commission, and (b) claims arose from massive accounting fraud perpetrated by American citizens at parent company's Florida-based subsidiary and were merely reported from overseas in parent company's financial statements?

(2) Should this court, which has never addressed issue of whether subject matter jurisdiction may extend to claims involving transnational securities fraud, set forth policy to resolve three-way conflict among circuits (i.e., District of Columbia Circuit versus Second, Fifth, and Seventh Circuits versus Third, Eighth, and Ninth Circuits)?

(3) Should Second Circuit have adopted SEC's proposed standard for determining proper exercise of subject matter jurisdiction in transnational securities fraud cases, as set forth in SEC's amicus brief submitted at request of Second Circuit, and should Second Circuit have adopted SEC's finding that subject matter jurisdiction exists here due to "material and substantial conduct in furtherance of" securities fraud that occurred in United States?

In their effort to have the Supreme Court accept the case, the shareholders' attorneys argued that the appellate courts are divided as to when the US has jurisdiction over transactional securities fraud. They advocated that the anti-fraud provisions of the securities laws apply to transnational securities frauds even when overseas investors suffer the resulting financial losses. This they argued is proper if the domestic conduct was material to the scheme's success and a substantial part of the alleged fraud.

The Securities and Exchange Commission represented by the U.S. Justice Department, argued that the lower courts had correctly dismissed the lawsuit and urged the Supreme Court to reject the appeal. The government advocated that a private plaintiff should be required to demonstrate a direct causal link between injury and the component of the scheme involved in the United States.

The case will be heard and decided in 2010.

Related Web Resources

For more information on the USSC case docket for the Morrison case, click here.

Remember last year when the deep freeze hit the Auction Rate Securities market?
It's been a long winter for the firms involved in the ARS failure.

Securities Lawyer Blog has been keeping an eye on the price tag for the buy-back of these securities. Across the board, firms told investors that these securities were safe, liquid and more like CD's than securities. Estimates are the cost is now up to about $61 billion.

Recently, the California Attorney General announced that Wells Fargo & Co. has agreed to buy back approximately $700 million in auction-rate securities from investors in California. The deep freeze for Wells' California ARS investors is over.

In addition to making investors whole, the bank's settlement includes a $600,000 payment back to the Attorney General's office for the expenses involved in investigating and settling the auction-rate failure.

Wells Fargo joins the ranks of many other firms that have paid out millions to their investors after the ARS market froze last year. In a statement regarding the settlement, Charles Daggs, Wells Fargo Investments CEO noted: "We have been working with ARS issuers since the auction rate market froze, and while there has been progress, redemptions by issuers have not occurred as fast as anyone would have hoped or predicted. We are glad to have resolved this for our customers."

California AG, Jerry Brown, who also happens to be trying to regain his residence as Governor of California commented on the settlement saying, "Wells Fargo convinced thousands of investors to purchase auction-rate securities with promises of robust returns and liquidity, but when the market collapsed, investors were left out in the cold."

In addition to the California settlement, Wells Fargo will also buy back $700 million in frozen ARS from residents outside California. This settlement was reached through efforts on the part of the California Department of Corporations and the North American Securities Administrators Association. In total, Wells Fargo states that it will pay penalties and fines as part of the settlements in the amount of $1.9 million.

Related Web Resources

For more information on the Auction Rate Securities issue, visit FINRA.org.

Continue reading "Auction-Rate "InSecurities" -- Wells Fargo's $1.4 Billion Buy Back" »

Does playing with the numbers ever really pay off? The Securities & Exchange Commission (SEC) is working hard to make sure we all know that it doesn't.

Yesterday, the SEC announced that it has filed its first enforcement action using Regulation G against SafeNet, Inc. and several of its former officers and accountants.

The SEC filed its complaint in the United States District Court for the District of Columbia and it includes a laundry list of allegations and fines, which the parties have settled without admitting or denying allegations. All are subject to court approval.

The SEC complaint alleges that SafeNet engaged in two fraudulent schemes from late 2000 through May 2006, including backdating of options and the other improper earnings management. In each scheme, SafeNet is alleged to have materially misstated financial results and disseminated materially false and misleading information to investors about its financial status. Senior officers of the company were involved in these schemes and accounting executives are alleged to have been involved in the earnings management scheme.

In addition to many other violations, the SEC makes its first enforcement use of Regulation G against SafeNet. The SEC instructs that: "Regulation G applies whenever a company subject to the periodic reporting requirements under Section 13(a) or 15(d) of the Exchange Act of 1934, or a person acting on the company's behalf, discloses publicly any material information that includes a 'non-GAAP financial measure.' "

According to the SEC, non-GAAP financial measures, those not calculated in conformity with Generally Accepted Accounting Principles, frequently exclude non-recurring, infrequent, or unusual expenses. Companies are required to reconcile these with the most directly comparable GAAP financial measure. The regulation also prohibits companies and their employees from disseminating false or misleading non-GAAP financial measures or presenting the non-GAAP financial measures in such a manner.

The complaint against the company and individuals alleges that in order to meet earnings targets improper accounting adjustments were made to expenses that included such things as: the improper classification of ordinary operating expenses as non-recurring integration expenses (costs incurred to integrate acquired companies into current operations), and the improper reduction of accruals and reserves.

SafeNet is alleged to have issued materially false and misleading securities filings and press releases with regard to earnings specifics. Backdating of option grants for senior executives and employees is also alleged to have occurred resulting in substantial profit-taking by those receiving these option grants.

The parties are enjoined from violating a long list of antifraud and other Securities Act and Securities Exchange Act provisions. SafeNet is ordered to pay a civil penalty of $1,000,000.

The complaint provides more specifics regarding the settlements, fines and penalties imposed on the parties. Their cooperation with the SEC was taken into account in the matter.

Related Web Resources

For additional information on SEC enforcement activities, visit www.sec.gov.

Continue reading "SEC's First Enforcement Using Regulation G Targets SafeNet - Over $1 Million in Fines" »

Last month, the Securities and Exchange Commission (SEC) brought securities fraud charges against a New York securities broker who allegedly created and disseminated "fake press releases to manipulate the stock prices of multiple publicly traded companies."

But for this publicity hound, the alleged campaign failed in short order.

The accused broker, Mr. Lambros Ballas, is a registered representative with the firm Global Arena Capital Corporation. His alleged scheme was simple, fraudulent and has landed him in a big heap of trouble.

First, there was a phony press release in which Mr. Ballas clamed that the United States Food and Drug Administration (FDA) had approved a drug developed by Discovery Laboratories, a Pennsylvania biotech firm. Next, he posted a confirmation of this news on a stock message board, making it seem even more legitimate by linking back to the "official press release." These activities apparently spiked the stock price as the company's shares opened much higher the next day.

Perhaps having been charmed by these results, the broker continued with this activity.

Again, he started with a fake press release in which he claimed that Disney had acquired IMAX Corporation. The pattern continued with a posting to a stock message board in which he attempted to independently confirm this "news" and boasting of big IMAX share acquisitions. This apparently was intended to lure investors and spike the price.

The fake PR game continued with a claim, again using a phony press release, in which it was claimed that Microsoft was acquiring Local.com of California. The scheme continued with the same pattern of activity and postings with links on stock message boards in which the broker attempted to independently verify the acquisition.

When Local.com's price rose almost 80 percent, the company issued its own press release stating that the Microsoft acquisition was false. Undeterred, the broker issued another fake press release stating that Google was to acquire Local.com.

The broker and his unwitting clients purchased shares of these companies just prior to the false publicity.

In its statement, the SEC's San Francisco Regional Office Director Marc Fagel characterized the activities as "disturbing" and stating that "Ballas caused significant market disruption with his hoaxes, forcing companies to scramble to correct the public record." He noted that "swift SEC action" was warranted "because Ballas is an industry professional responsible for handling his customers' brokerage accounts."

The broker is charged with violations of the antifraud provisions of the federal securities laws. In its complaint, the SEC is seeking injunctive relief, disgorgement of ill-gotten gains, and monetary penalties against the broker.

Related Web Resources

For additional information on SEC enforcement activities, visit www.sec.gov.

Continue reading "Publicity Stunted -- SEC Shuts Down Broker's Fake PR Blast " »

The Financial Industry Regulatory Authority (FINRA) is teaching brokerage firms a great deal these days and imposing fines in the process.

This time, Scottrade is in the hot seat and will pay a $600,000 fine for its alleged failure to "establish and implement an adequate anti-money laundering (AML) program to detect and trigger reporting of suspicious transactions, as required by the Bank Secrecy Act and FINRA rules."

FINRA instructs by Scottrade's example that the trading environment for each firm must be taken into account in establishing and maintaining appropriate programs for the detection of money laundering. Monitoring suspicious trading alone just doesn't cut it. Among other things, that's what got Scottrade in trouble.

The firm did not establish automated surveillance of transactions until 2005 and once it did it "focused only on suspicious trading that was accompanied by suspicious money movement," noted Susan L. Merrill, FINRA's Executive Vice President and Chief of Enforcement.

FINRA informs the industry that is not sufficient. Its rules require brokerage firms to establish policies and implement procedures that are "reasonably designed" to detect and ultimately to report suspicious transactions. But that does not necessarily mean that only suspicious transactions are to be watched and/or reported. More is required, as Scottrade has learned.

In Scottrade's case, the agency found that between April 2003 and April 2008, the firm did not establish or maintain an AML program that was appropriately targeted for its business model of on-line trading. The increased volume over a period of years of its on-line trading volume, brought with it such risks as identity theft and the use of customer accounts to launder funds by hiding behind securities transaction for illegal activity and other securities violations.

One major problem for the firm was its failure to adequately staff the monitoring function. For some period of time there was only one AML compliance officer at the firm. Eventually, a risk management analyst was hired to assist. But FINRA determined that the volume of trading called for more than two individuals. Another problem for the firm was its reliance for several years on a manual system for monitoring suspicious activities, relying on internal personnel and branch and other employees to identify and report suspicious activities.

Despite Scottrade's eventual implementation of proprietary automated systems to monitor suspicious trading activity, FINRA found that this too was not sufficient. Suspicious activity generated an alert, but that alone would not detect various other techniques used by those seeking to launder funds such as through account intrusions and the use of bona fide accounts for laundering purposes.

Scottrade was also found to have provided inadequate written guidance to employees on the detection and review of transactions that might be used for money laundering.

Related Web Resources

To learn more about AML requirements, visit www.FINRA.org where you will find resources for industry professionals and investors.

Continue reading "Learning the Hard Way -- Inadequate Anti-Money Laundering Program Costs Scottrade $600,000 " »

Citigroup Global Markets Inc. experienced a bit of self-inflicted pain last week.

The firm's failure to supervise tax-related stock transactions is carrying a censure and a $600,000 fine, according to the Financial Industry Regulatory Authority (FINRA).

In a recent statement, FINRA's Executive Vice President and Chief of Enforcement, Susan Merrill instructed that "[i]ncreasingly, complex trading strategies must be governed by supervision that is equally sophisticated and detailed ... In this case, Citigroup's inadequate supervision resulted in improper trading related to the execution of strategies involving transactions with a principal purpose of limiting tax liability."

Point well-taken perhaps as the issue for Citigroup was their alleged failure to establish procedures that would detect improper trades and to supervise or control these activities.

The trading involved several strategies and complex trading moves described generally as follows.

Citigroup's equity finance desk would purchase stock from generally foreign, broker-dealer clients. Once the taxable dividends had been paid, the stock would be sold back to the customer.

The problem for Citigroup is that when U.S. stock dividends are paid out to foreign investors, there may in fact be a taxable event that would require withholding. In the transactions at issue, Citigroup and its clients apparently believed these transactions were not subject to tax withholding, viewing them as "dividend equivalents" and part of a swap agreement.

To participate in this strategy, foreign Citigroup clients would sell U.S. equities to the firm's equity finance desk in New York, which served as custodian for these dividend-bearing stocks for the firm's London affiliate.

As FINRA elaborates on the scheme: The affiliate would in turn use the stock as "the underlying equity hedge in a 'total return swap' entered into with the customer. Under the swap, the London affiliate paid the customer a 'total return,' which was any income the stock generated, including any appreciation in value, as well as an amount equivalent to the dividend. In exchange for the 'total return payments,' the customer paid the London affiliate interest and covered any decline in the share price."

Between 2002 and 2005, these transactions resulted in foreign clients receiving the full value of U.S. company dividends, without paying the withholding tax.

Citigroup already paid (around 2006) a substantial $24 million to the Internal Revenue Service due to this strategy. They did so after coming to the conclusion that they could not verify whether some trades were independent.

However, in a somewhat inexplicable failure to supervise, even after the firm put written procedures in place, traders did not follow them.

Related Web Resources

For more detailed information on the Citigroup transactions subject to the supervisorial failure and related matters, visit www.FINRA.org where you will also find extensive resources for industry professionals and investors.

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