Securities Lawyer Blog

In a continuing investigation, the Securities and Exchange Commission (SEC) announced earlier this month that it has charged three executives, along with their financial services firm, with allegations of fraudulent disclosure in an accounting scheme involving life settlements. The company, Life Partners Holdings, Inc., is based in Texas and is traded on the Nasdaq. The core business of this company is in the brokering of life settlements. In fact, the SEC notes that all the company's revenues derive from life settlements.

Perhaps a lesser-known business model for most of the investing public, life settlements involve the buying and selling of fractional interests in life insurance policies. Key to the offering of this investment is the insured's life expectancy, as well as the terms and conditions of the insurance policy.

In this matter, the SEC complaint alleges that three of the company's executives - the chairman and CEO, the president and general counsel and the chief financial officer -- " 'misled shareholders by failing to disclose a significant risk to Life Partners' business: the company was systematically and materially underestimating the life expectancy estimates it used to price transactions.' " These estimates are significant because if they are consistently inaccurate, the company's revenues and profits are likely to be adversely impacted.

The SEC also alleges that the company and its executives engaged in disclosure violations. They are also alleged to have engaged in improper accounting practices, which resulted in an overvaluing of the company's assets while also making it seem to the public that the company had healthy earnings from brokering these life settlement transactions. The company's misrepresentations and disclosure failures in its SEC public filings are alleged by the agency to have constituted a material risk to the company's revenues, which was detrimental to its shareholders and the investing public.

A major factor in this was the use of an allegedly unqualified individual to perform the actuarial work needed to estimate life expectancies, which were consistently shorter than they should have been. According to the complaint filed by the SEC, the shortened life expectancy valuations resulted in the use of material non-public information that generated revenues to the public's detriment. The person performing this function was not an experienced life expectancy underwriter and was told simply to use methodologies that had been established by a former underwriter that had worked for the company. The use of unqualified experts in a core valuation that is critical to a company's health, presents a risk to the investing public.

New York City's Gusrae Kaplan Nusbaum PLLC, represents firms and broker-dealers before all regulatory agencies. Please contact our law firm for a confidential consultation with one of our lawyers regarding representation and our litigation and advisory practice. Our highly-respected lawyers have decades of experience and expertise representing firms and broker-dealers.

Last week, we posted the first part of our summary of FINRA's year-end review of its efforts in various areas of enforcement. This week we bring you part two of that review.

One major area of focus this past year for FINRA has been its securities firm examination program. Several key reforms were made to "better detect potential fraud and to focus on areas of risk." To this end, FINRA conducted more than 3,050 examinations in 2011 and deployed the resources needed to accomplish these examinations. For example, matters that pose the most risk to investors are now designated as urgent, with resources allocated to expedite the review of these matters. One area in which this has been evident is in the staffing of district offices, which has increased to manage the push for greater real-time monitoring.

As noted in our last post, branch-level examinations are increasing, as are point-of-sale examinations. The shift this past year included greater time in the branch offices for FINRA staff -- another way in which resources were allocated in a different way than they have been in the past. This is borne out by the numbers, as FINRA reported an increase of 350 more branch office exams than in the past year. This is a significant increase that is likely continue into 2012.

Another major area of significant expansion for FINRA was in equity markets regulation. FINRA took over the primary surveillance of the NYSE's equity and options markets, and according to the agency its collection of data is now accounting for 80 percent of volume across the NASDAQ and NYSE.

New developments for 2012 include the creation of comprehensive cross-market surveillance patterns which will be evaluating trading activity across these markets simultaneously. According to FINRA, the "consolidation of market data for integration into new cross-market surveillance patterns will help FINRA identify problematic trading activity more quickly." The intention is to "detect improper conduct" as soon as possible and then take steps to stop it from continuing. In addition, the NYSE's Order Tracking System is essentially being replaced as FINRA has now expanded its tracking systems to meet its cross-markets surveillance responsibilities.

Arbitration panel composition was another area of change for FINRA, with nearly 4.400 arbitration matters filed last year. As we posted last year, FINRA's new arbitration rule made it possible for customers with three panel arbitrations to have those panels comprised of only public members. This was intended to support the public's confidence in the arbitration process.

Finally, FINRA notes that its Investor Education Foundation issued investor alerts on a number of topics. We have posted information about some of these alerts this past year, which are intended to educate the public on various issues, including potential scams and high-risk investments.

The New York firm of Gusrae Kaplan Nusbaum PLLC represents firms and broker-dealers in regulatory and enforcement matters. Our lawyers advise our industry member clients in matters involving a broad spectrum of issues before all regulatory entities. Contact our law firm to consult with one of our attorneys.

As 2011 comes to a close, the Financial Industry Regulatory Authority (FINRA) has issued a look-back at the year. The agency posted some interesting statistics on activities in the areas of investor protections, fraud avoidance and various efforts to "ensure the securities industry operated fairly and honestly for investors." Noting the achievements of this past year, the agency has certainly been proactive in this charged environment that carries with it not only investor expectations, but a greater public focus on financial markets and their stability.

Advising and representing broker-dealers and firms, the lawyers of the Securities Lawyer Blog are well aware of the proactive regulatory and enforcement environment. FINRA's numbers are noteworthy. In the area of disciplinary actions for example, FINRA brought over 1400, involving both firms and registered individuals. The fines resulting from these amounted to over $63 million. Restitution to investors amounted to over $19 million.

The Securities Lawyer Blog has also posted throughout the year on expulsions and suspensions that have resulted from various enforcement actions and settlements. FINRA notes that its numbers are up from 2010 in this regard, with the suspension of over 430 brokers and the barring of nearly 320 individuals from association with regulated firms. The agency reports that it expelled 17 firms from operating within the securities industry.

The year-end review for FINRA's Office of Fraud Detection and Market Intelligence (OFDMI) included referrals to other regulators in over 600 matters. The breakdown of those referrals between federal and state regulators and law enforcement is not delineated in FINRA's statistics.

Coordinated efforts with the Securities and Exchange Commission in the area of real-time surveillance is noted to have made it possible for the OFDMI to expedite matters that involved potential fraud and insider trading. Nearly 640 matters were referred out by OFDMI for further investigation when real time surveillance pointed to potential issues. These matters were referred to various enforcement agencies, including the SEC, state and federal agencies.

Over the year, the Securities Lawyer Blog has also kept our readers informed of the many matters involving firms and broker-dealers in the area of retail product promotions and unsuitability issues involving structured products. FINRA notes that it has been very active during the year highlighting its activities in the area of 'sales practice violations" that include a broad spectrum of issues, such as "misrepresentation, material omissions, unsuitable recommendations, and inadequate supervision and training in principal-protected notes, reverse convertibles and subprime investments."

We will continue the year-in-review with the area of examinations and market regulation in our next post. The lawyers of New York's Gusrae Kaplan Nusbaum, PLLC are pleased to bring our readers the Securities Lawyer Blog. Please contact our New York or Florida offices to learn about our law practice and speak with one of our highly-experienced attorneys.

We wish you all a good and productive year in 2012.

Recently, the Financial Industry Regulatory Authority (FINRA) announced that it has settled two separate and unrelated enforcement matters involving Barclays Capital Inc. (Barclays) and Wells Fargo Investments, LLC, (Wells Fargo) which together resulted in fines totaling about $5 million.

The matter involving Barclays which was settled for $3 million, centered around allegations that the firm misrepresented delinquency data with regard to certain investments and provided inadequate supervision with regard to their offering and sale. The Securities Lawyer Blog has posted on other matters in the recent past involving failures to adequately supervise as alleged in regulatory and enforcement actions.

The Barclays matter and settlement involved the issuance of residential subprime mortgage securitizations (RMBS). FINRA alleged that for a period of about three years, from 2007 through 2010, the firm allegedly misrepresented the historical delinquency rates for certain subprime RMBS that it offered. Noting that "historical delinquency rates are material to investors," both in assessing RMBS value and potential future returns based on the potential for mortgage payment failures, the firm allegedly misrepresented these rates for three of the RMBS underwritten and sold by Barclays.

Specifically, FINRA claimed that the firm posted delinquency data on its website that was inaccurate. The errors in this historical information was said to have been significant, so much so that it could impact investor's ability to evaluate the investment value and "subsequent securitizations."

The issue related to supervision involved FINRA's allegation that the firm did not have in place a system that would ensure that its website disclosures were maintained and updated. Without supervision of these critical components, the delinquency data could well be inaccurate, making it difficult if not impossible for investors to assess future RMBS investment performance.

The matter involving Wells Fargo, which was settled for $2 million, involved alleged activities with regard to one broker and 21 of the firm's customers. The firm was alleged through this broker to have provided "unsuitable sales of reverse convertible securities." In addition, it was also alleged that customers eligible for sales charge discounts on Unit Investment Trust (UIT) transactions were not provided those discounts. Under the settlement, these customers will now be given restitution for the non-payment of discounts and the unsuitable transactions.

FINRA also filed a complaint against the registered representative who was alleged to have been involved in the recommendation and sale of unsuitable reverse convertibles. He was also alleged to have been involved in dealing improperly with customer accounts, including deceased customers, and making unauthorized trades. These investments were recommended to the very elderly (many over the age of 80) and low-risk tolerance investors and were held in disproportionately high concentrations in these accounts.

The lawyers of Wall Street's Gusrae Kaplan Nusbaum PLLC, are experienced advisors to firms and broker-dealers in all areas of compliance and representation. Contact our law firm for more information on our wide range of services, including regulatory and enforcement representation, broker-dealer advisory services and securities litigation. We are a firm comprised of experienced former senior level regulators and securities and compliance litigators, providing advisory and litigation services and representation before all regulatory agencies.

The Securities and Exchange Commission (SEC) has issued a statement on a matter involving a Chicago option trader who has agreed to pay $2 million to settle allegations that he violated short selling restrictions. The SEC administrative proceeding under Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") involved a cease-and-desist proceeding against the trader. In anticipation of this proceeding, an Offer of Settlement was made and accepted by the SEC.

The trader was alleged to have violated requirements of Regulation SHO -- which the Securities Lawyer Blog has highlighted in past posts. In this case, the trader was ordered to cease and desist from violations of Rules 203(b)(1) and 203(b)(3) of Regulation SHO.

Specifically, the "locate" and "close out" requirements were said by the SEC to have been violated. These provisions require that before selling short, traders locate a source of borrowable shares. The shares must be deliverable by a date certain and only those market makers engaged in bona-fide market making in the excepted security are permitted to operate under the exception.

In this case, the allegations center on the SEC's conclusion that this particular trader used the "market maker exception" improperly. His business loaned certain stocks to broker-dealers that are generally "hard-to-borrow." Those broker's customers received locates and stock loans on those shares. The stock provided was actually not available for delivery, which amounted to illegal naked short sales that were effectuated between late 2006 to June 2007.

As noted by George S. Canellos, Director of the SEC's New York Regional Office, the Commission intends to aggressively " 'pursue and punish abusive short sellers who attempt to circumvent regulatory requirements to make more money.' " The trader in this matter was alleged to have "avoided the cost of borrowing shares while engaging in complex short selling transactions," which resulted in great profits, lower risks and advantages over legitimate market participants.

Delineating two types of transactions in the alleged practices, the Commission's allegations centered on a "reverse conversion" or "reversal" in which stocks are sold short with a simultaneous put option sale and a call option buy. The other transaction involved a sham that combined stock-and-option transactions that created "the illusion that the party subject to a close-out obligation has satisfied that obligation by buying the same kind and quantity of securities it has sold short."

The trader sought to create an appearance of Regulation SHO compliance when in fact the shares purchased were not delivered. This naked short selling practice meant that the trader and his former firm failed to deliver shares resulting in what the Commission noted as "persistent 'fail-to-deliver' positions." The attempt to take advantage of the market maker exception to Regulation SHO was improper since in fact these parties were not involved in bona-fide market making with the securities they traded.

Gusrae Kaplan Nusbaum PLLC represents broker-dealers in regulatory and enforcement matters. Establishing policies and procedures designed to comply with all regulatory requirements is critically important for industry members. Our lawyers include highly-experienced former regulators and experienced litigators that help our clients with all aspects of securities laws, rules and regulations. Please contact our New York law firm to consult with one of our attorneys at any time.

In the past few months, the Securities Lawyer Blog has posted on several alleged supervisory problems that firms have settled with FINRA or the SEC. As a key component of compliance and supervision, FINRA and SEC staff have now issued a joint Regulatory Notice 11-54 for guidance on branch office inspections, as well as a Risk Alert related to this issue. These are intended to guide the securities industry to "better perform this key supervisory function" as well as to protect investors and firms.

The SEC Office of Compliance Inspections and Examinations and FINRA examination staff have put together a list of the elements that comprise firm best practices with regard to the process of branch examinations. These include such specifics as: focusing the exams on the business within the specific branch; scheduling the exams in terms of underlying risk, as opposed to an arbitrary cycle; conducting an exam at least on an annual basis; performing unannounced exams that are based on the risk and also selecting branches randomly; using senior level examiners who are in a better position to challenge assumptions; and, ensuring that procedures are in place to avoid the types of conflicts of interest that would make it difficult for the examination to be effective.

On the other hand, staff has identified various common deficiencies in branch inspections, which include: failing to tailor the examination procedures based on the business itself or the underlying risk assessment; using examiners who are not sufficiently experienced to fully understand the business or to effectively challenge assumptions; performing cursory exams that are generic; failing to adequately review the exam program itself for effectiveness and following existing policies and procedures; announcing exams when they should have been unannounced; failing to focus on individuals with a history of disciplinary issues and applying more supervision with those individuals.

Other suggested approaches to ensure compliance and effectiveness are also identified in the guidance issued jointly by the agencies. One important area is analyzing the risk to support the evaluation as to whether certain branches should be inspected more often than required within the FINRA three year cycle. Additionally, engaging in unannounced re-audits is a suggested practice when varying degrees of deficiencies are found. Circling back to branch office managers with the firm's internal inspection findings with monitoring of corrective measures within the branch is also suggested.

The Wall Street law firm of Gusrae Kaplan Nusbaum PLLC provides legal counsel and representation to firms and broker-dealers in establishing and maintaining proper supervisory systems and all related compliance with FINRA and SEC rules and regulations. Please contact our law firm to discuss our advisory services and representation by lawyers with expertise and experience before all regulatory agencies and courts in the field of securities law.

Earlier this week, Judge Jed S. Rakoff put his judicial foot down on the proposed settlement that had been reached between the SEC and Citigroup. The settlement would have resolved the SEC's allegations that the firm had mishandled the marketing of collateralized debt obligations (CDO's) that Citigroup sold.

In Judge Rakoff's words, the firm "dump[ed] some dubious assets on misinformed investors" and the settlement was reached before sufficient facts had been brought to light about the funds set up for the CDO's. He said that without "cold, hard, solid facts" to satisfy the public's interest, he could not approve the settlement.

The consent judgment would have resolved the matter. The SEC's agreement with the firm was to require it to return profits, interest and penalties in the amounts of $160 million, $30 million and $95 million, respectively. The firm was also putting into place various measures that would require a more stringent review and accountability for investment worthiness and related public statements.

In his opinion, the Judge stated that the enjoining of future violations was not sufficient and that the United States Supreme Court has held the public interest must be considered in the issuance of permanent injunctive relief. He concluded that the "proposed consent judgment is neither fair, nor reasonable, nor adequate, nor in the public interest."

Both the SEC and Citigroup issued statements about the opinion, with which Citigroup said it "respectfully" disagrees. The SEC's said its focus was not so much on the need for an admission of wrongdoing, which the Judge found lacking, but rather in the the disgorgement, penalties and reforms that would be forthcoming and avoid both the risk and expense of trial.

Citigroup said it had begun making the reforms that were agreed to and that the court's decision was not aligned with similar precedent. Other federal courts had approved similar settlements in major CDO cases. If the case were to go to trial, Citigroup's spokesperson noted that they will present substantial legal and factual defenses.

The Securities Lawyer Blog will keep you posted on the next developments in this matter.

The lawyers of Gusrae Kaplan Nusbaum, PLLC advise broker-dealers and firms in all aspects of securities regulation and compliance, as well as representation before all tribunals and agencies. Please contact our law offices for more information on representation and our securities litigation practice.

The Securities Lawyer Blog has posted in the past on compliance issues that have arisen concerning programs and policies for broker training and supervision at various firms. Recently, The Financial Industry Regulatory Authority (FINRA) settled a matter concerning the training and supervision of brokers in the sale of Unit Investment Trusts (UIT's).

The settlement was reached with Chase Investment Services Corporation (Chase) for $3.6 million in reimbursements and fines with regard to the sale of UIT's. Brokers who were part of what was WaMu Investments, Inc., acquired by Chase two years ago, were also alleged to have been involved in the sales activities that led to this matter. Customer losses were said to have resulted from the alleged sales recommendation of various investments that were later determined to be unsuitable.

The investigation by FINRA centered on the recommendations brokers of the firm made with regard to UITs and floating rate loan funds. It was said that these customers were not only unsophisticated, but had conservative risk tolerances and that due to these factors, reasonable grounds for the recommendation.

Suitability with regard to higher risk investments has been a major issue in enforcement, especially since the financial crisis began as losses have become more common. One of the main issues in this matter was FINRA's contention that the firm "failed to implement supervisory procedures" that would have ensured the supervision of the sales of these higher-risk investments.

The investors involved in this matter were those with little or no investment experience. It was alleged that the firm's brokers recommended these investments to about 260 customers.

Specific investments on Chase's list of approved products included those with many assets that were held in closed-end funds with high-yield or junk bonds. FINRA concluded that due to the investors lack of experience and to the obligation to determine suitability of higher risk investments for conservative risk customers, the firm had failed in its obligations in this regard as these customers invested outside their risk tolerance. These customers sustained losses of about $1.4 million in what were deemed to be unsuitable investments.

Other customers suffered losses of about $500,000 in risky, potentially illiquid and high credit risk floating rate loan funds. These customers also had conservative risk tolerances. Although these customers sought preservation and liquidity, the investments were recommended.

New York City's Gusrae Kaplan Nusbaum PLLC, represents broker-dealers in all aspects of compliance -- counseling them in their programs and policies and before all industry regulatory agencies. Please contact our law firm for a confidential consultation with one our lawyers regarding representation and our litigation and advisory practice. Our highly-respected, preeminent lawyers have decades of experience and expertise representing broker-dealers.

The Securities and Exchange Commission (SEC) recently announced a year-end report stating that it has filed the largest number of enforcement actions in its 2011 fiscal year. The agency says the record number of enforcement actions -- 735 -- included a wide range of matters such as those involving market practices, insider trading, complex products and transactions.

A strongly worded announcement made it clear that the SEC believes it has strengthened its enforcement work after a reorganization that occurred in 2009 and 2010. Referring to the financial crisis and its repercussions, SEC Chairman Mary L. Schapiro noted the agency's " 'unmatched record of holding wrongdoers accountable and returning money to harmed investors.' "

The SEC's announcement comes at the end of the first year of enforcement since the reforms were put in place. The $2.8 billion in penalties and discouragements in the 2011 Fiscal Year are the highest in the agency's history.

Robert Khuzami, Director of the SEC's Division of Enforcement described the accomplishment as "remarkable" going on to point out the " 'talent, grit, and determination of the staff, as well as their creativity and willingness to consider new tools and approaches to stopping and deterring fraud and misconduct.' "

The statistics cited by the agency include actions involving C Suite members and senior corporate officers, individuals and firms involved in failed CDO offerings. Others involved related matters concerning subprime mortgage securities and related funds. The insider trading cases rose as well this past year. These cases targeted hedge fund managers and traders, as well as other individuals with access to do significant damage to firms, markets and investors.

Other matters included financial fraud and issuer disclosure violations, which once were the standard fare for the agency prior to the financial crisis. Overstating results and audit failures were the basis for some of these actions. In addition, there were notable cases brought against firms and individuals involved in allegedly fraudulent schemes that targeted vulnerable populations such as the elderly and the deaf, in an on-line solicitation.

Another major area of enforcement were actions against investment advisers and broker-dealers which included 146 enforcement actions which represents a 30 percent increase over the prior year. Broker-dealer enforcements were up by 60 percent in the prior year. These matters included allegations of misleading statements on fund performance, analytics tools (investment models) and misuse of client information on the part of firms and individuals.

When broker-dealers and firms need compliance advice and representation, they turn to securities law experts with significant experience with regulatory agencies. New York's Gusrae Kaplan Nusbaum, PLLC, is a securities law firm comprised of former regulators and experienced securities compliance practitioners immersed in the field of securities law & regulation as well as advisory counsel to broker-dealers for compliance and representation before all agencies. Contact us for representation or more information about our law practice and our lawyers.

As experts in the field of securities law and regulation and the representation of broker-dealers, the New York securities lawyers of the Securities Lawyer Blog recently reviewed a filing by the Securities and Exchange Commission (SEC) in Massachusetts. In the action, the SEC filed charges against an investment firm and its principal in Boston. The SEC's complaint was filed in the U.S. District Court in Massachusetts and the court quickly issued a temporary restraining order after the SEC sought an order to freeze assets of the investment firm and its hedge fund.

The allegations of the SEC's complaint include charges that the firm misled investors regarding many aspects of its business, including where the funds raised were actually being placed, in this case, allegedly into the money manager's personal bank account.

The purported hedge fund was the magnet to which potential investors were attracted, but according to the SEC, the solicitation was fraught with misleading information that included false statements. These included that: the principal graduated from Harvard University with both undergraduate and graduate degrees; that he worked for a major global investment company in which he grew and managed billions of dollars; that a major auditing firm served as the purported fund's auditor; and that the firm was a British Virgin Islands company.

The SEC's allegations include that by creating the "indicia of legitimacy" using misrepresentations, the principal had ten investors that may have put up at as much as $1.7 million. Some of this was placed into the principal's personal accounts.
The SEC says both the Swiss Financial Market Supervisory Authority and the British Virgin Islands Financial Services Commission has assisted in the matter, which remains under investigation. Both these entities are involved in regulatory compliance, supervision and inspection of financial services businesses operating within their jurisdictions.

The alleged violations in this matter include those under Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8.

The New York law firm of Gusrae Kaplan Nusbaum PLLC represents broker-dealers and firms in matters involving a broad spectrum of issues before all regulatory entities. Please contact our law firm to consult with one of our attorneys in any matter related to securities regulation and compliance, broker-dealer services and representation before all entities involved with the regulation and compliance of the securities industry.

The Securities Lawyer Blog has previously posted on Regulation SHO and this past week, FINRA announced that another Reg SHO matter has been settled. UBS Securities LLC has agreed to pay $12 million in fines for the alleged violations. The firm also settled claims that it had failed to supervise securities short sales, something that was not detected by the firm until FINRA's investigation brought various alleged failures to light.

Among other things, Reg SHO provides for specific requirements for broker-dealers in short sale transactions. FINRA alleged that in the UBS matter, the broker-dealer's Reg SHO violations led to "millions of short sale orders" that were "mismarked and/or placed to the market without reasonable grounds to believe that the securities could be borrowed and delivered."

Specifically, since short sales involve the sale of securities that the seller does not own, Reg SHO protects the buyer in that it requires that the broker-dealer have reasonable grounds to believe the security involved in the short sale can either be purchased or borrowed at the time of delivery. The "reasonable grounds" must be present before the broker engages in the short sale and the broker should not accept the short sale order unless these reasonable grounds are present.

Under Reg SHO, broker-dealers are required to designate an equity securities sale as either long or short. It is intended to protect buyers from a potential failure of delivery of equity securities -- this is why the broker-dealer must secure and also document the "locate" information prior to the short sale.

Allegedly, UBS's supervision of these critical aspects of compliance with Reg SHO were lacking in that locates and marking of sale orders were not sufficiently monitored. This in turn led to Reg SHO failures in the firm's equity trading business which is the scenario that Reg SHO is intended to protect against.

Without locates at the time of the short sale order, the risk of failure is increased significantly. When selling securities that are difficult to borrow, this makes the likelihood even greater. That is one way in which FINRA alleged the UBS system was flawed. FINRA noted that the locate violations were found throughout the UBS system, stating that they "extended to numerous trading systems, desks, accounts and strategies."

The violations were also alleged to have extended to the firm's procedures and technologies, as well as its operations. UBS short sales orders were alleged also to have been mismarked as long, rather than short which violated the locate requirement in Reg SHO. UBS was also alleged to have had "significant deficiencies related to its aggregation units" which was suggested to have possibly resulted in the extensive order-marking and locate violations.

FINRA's investigation uncovered systems and a lack of supervisorial procedures for short sales in the UBS system prior to 2009, which it has had an opportunity to correct and redesign to ensure compliance with Reg SHO in the future.

Gusrae, Kaplan & Nusbaum, PLLC represents broker-dealers in regulatory and enforcement matters. Establishing policies and procedures that are designed to comply all regulatory requirements is critically important for broker-dealers. Our lawyers include highly-experienced former regulators and experienced litigators that help our broker-dealer clients with all aspects of securities laws, rules and regulations. Please contact our New York law firm to consult with one of our attorneys at any time.

Earlier this week, the SEC settled a civil matter against the firm Long Term-Short Term, Inc. as well as its d/b/a BetterTrades and its president. The defendants in this matter neither admit, nor deny the charges, but have consented to judgments that enjoin further violations of the anti-fraud provisions of the federal securities laws.

The civil penalties amount to close to $1 million. The firm has agreed to enforce internal trading guidelines to ensure compliance and avoid future violations.

BetterTrades' core business is in providing seminars, workshops and the sale of materials and software that are intended to instruct the trading of options, as well as the actual facilitation of options trading through their software products.

The SEC alleged that for a period of at least one year, instructors involved with BetterTrades misrepresented themselves as having great success in the sale of options and in the use of the products sold by the company to make these trades. In addition, the SEC alleged that the defendants allowed these claims to be made in marketing materials and infomercials, but that the accuracy of these claims was not verified by the company even after red flags arose. The company's president was represented as having created his own wealth through options trading and the company's software, rather than the company's operations which was, according to the SEC, the actual source of his wealth.

An important and valuable component of this settlement was the SEC's view of the remediation efforts which were made voluntarily by the defendants. The SEC took into account what they viewed as significant remediation steps which included the retention of counsel to review the manner in which the company sells and promotes the classes it offers, adoption of various standards and policies to ensure proper behavior on the part of the company's instructors and mandatory training of the instructors with regard to those policies.

Other efforts that impressed the SEC were retention of traders' records, review of traders' claims of success and more careful vetting of these claims. DIsciplinary actions taken by the company against non-compliant instructors were also part of the voluntary remediation.

Remediation and / or compliance programs established with the support of experienced securities counsel are part of New York's Gusrae, Kaplan & Nusbaum, PLLC significant securities law practice on behalf of broker-dealers and other entities. Please contact our New York or Florida offices to learn about our law practice and speak with one of our our highly-experienced attorneys.

Last week, the FINRA Investor Education Foundation announced that it has expanded its efforts on behalf of our military service members. Together with the First Lady's and Dr. Jill Biden's Joining Forces initiative and the Foundation's Military Financial Education Project, 50,000 of our service members and their spouses will be entitled to complimentary FICO® Scores, which doubles the members currently able to receive a free credit score.

Using this important credit tool, families will also benefit from expanded financial information through the Foundation. A number of educational videos are being produced and will be available to members of the National Guard and their families. The first such video has just been released and will be made available to members. This particular video provides information about avoiding fraudulent investment schemes. This material will help members not only manage finances, but also stay away from fraudulent investments that might otherwise require more research time than members can afford. Military spouses will also receive training as financial counselors.

The Military Financial Education Project was launched five years ago to help military families deal with the challenges they have in managing their finances while they are on active duty and deployments. The resources provided by the Foundation and its projects are intended to help these families manage their finances without the additional expense of paying for private investment counseling.

This project allows service members to use myriad resources on line through the website, www.SaveAndInvest.org as well as to educate them on finances and savings. The stress these families are under given the nature of the work they do makes household management more and more challenging. The resources provided by FINRA are an important way of supporting our military families. As noted by the President of the FINRA Investor Education Foundation, Gerri Walsh " '[w]e believe providing the right tools for military families can enhance their financial readiness and relieve some of the stress families feel when it comes to managing household finances.' "

The programs for military families include not only the additional free FICO® Scores, which are available through service members' military financial educators, but many other efforts as well. Another important endeavor is the training of military spouses to become Accredited Financial Counselors. This program is in partnership with the Association for Financial Counseling and Planning Education® (AFCPE®) and the National Military Family Association. This year, there were 200 military spouses who received fellowships to become accredited and commit to two years of counseling military families with financial issues.

The New York City securities law firm Gusrae Kaplan Nusbaum PLLC, dedicates its practice to and specializes in securities and commodities litigation, regulatory and enforcement representation, broker-dealer advisory services and related representation. Please feel free to contact our offices at any time to speak with one of our experienced lawyers.

The Securities Lawyer Blog has previously posted on various internal activities that have been missed by supervisors of major broker-dealers within their own firms. Examples of this include registered representatives who have been able, for a time, to engage in improper conduct with the firm's clients and their investments.

This week, FINRA announced a settlement of an alleged supervisory failure in a branch office of a large brokerage firm. Merrill Lynch, Pierce, Fenner & Smtih Inc. will pay $1 million for alleged supervisory failures in its San Antonio, Texas office. In this matter, it is alleged that a registered representative engaged in a Ponzi scheme in which 11 investors provided funds amounting to $1 million over a period of nearly one year.

The branch office Merrill Lynch supervisors were said to have approved the opening of a business account by the registered representative, which is a common occurrence. But FINRA alleged that the firm then failed to supervise the funds in the account which the representative was able to withdraw to carry out a Ponzi scheme without the firm knowing this was occurring. The registered representative was permanently barred from the securities industry by FINRA in December 2009. In addition, the investors who unknowingly were part of what was a Ponzi scheme, have all been reimbursed by Merrill Lynch.

What was left unresolved, was the underlying lack of adequate supervisory systems that enabled the activity to go forward in the first place. The allegations included a failure to adequately monitor employee accounts for improper conduct. Now Merrill Lynch has settled this portion of the matter with FINRA.

The situation is instructive for all broker-dealers. The problem with the Merrill Lynch system apparently was as follows. Accounts opened with an employee social security number were picked-up by the system and automatically monitored by the firm. However, where the system fell short was if an employee opened an account using a social security or other tax identification number, the employee had to manually put the account into the system for supervision.

In addition, according to FINRA, for a period of about four years, the firm failed to monitor "40,000 employee/employee-interested accounts, which were not reported for certain periods of time and therefore not available on the supervisory system." FINRA's Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, cautions that
"[f]irms must ensure their supervisory systems are designed to properly monitor employee accounts for potential misconduct" and that Merrill Lynch's inadequate supervisory system and the firm's excessive reliance on employee self-reporting enabled [the representative] to facilitate his Ponzi scheme to the detriment of investors."

The Wall Street law firm of Gusrae Kaplan Nusbaum PLLC provides legal counsel and representation to broker-dealers in establishing and maintaining proper supervisory systems and all related compliance with FINRA and SEC rules and regulations. Please contact our law firm to talk with us about our broker-dealer advisory services and representation, as well as our expertise and experience before all regulatory agencies and courts in the field of securities law.

In May of 2008, the Securities and Exchange Commission (SEC) filed an action for civil fraud in the United States District Court for the Southern District of New York in which AOL Time Warner Inc. former executives were named. The complaint alleged that eight former executives had participated in a scheme that inflated ad revenues in an amount over $1 billion, which the SEC claimed was fraudulent.

The fraud action alleged that for over a period of two years, the executives, including the CFO's of AOL Time Warner and of the AOL division, were directly involved in a scheme that allegedly involved round-trip transactions. In these transactions, which were intended to inflate the company's value for analysts and investors ad revenue was generated by giving purchasers the funds to buy online advertising. But the ads were not sought out by the purchasers and were not needed by them. The inflated online advertising revenue was said by the SEC to be a "key measure by which analysts evaluated the company."

In addition, the named defendants were alleged to have contributed to investor statements that misrepresented the company's revenue results. Two of the defendants were also charged with providing external auditor misleading information about the ad transactions. The complaint charged various violations, including Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), and Exchange Act Rules 10b-5 and13b2-1.

Some defendants settled actions that had been filed against them in 2008, but others did not. In July and September 2011, two defendants in the original actions settled without admitting or denying the allegations. These included the former CFO's of AOL Time Warner, Inc. and the CFO of the AOL Division of the company. These settlements have resulted in final judgments that now resolve the action filed against these defendants. Two defendants remain in the SEC's action in this matter.

The New York securities regulation and enforcement attorneys at Gusrae Kaplan Nusbaum PLLC represent broker-dealers in regulatory and enforcement matters. Our lawyers advise clients and defend industry members in matters involving a broad spectrum of issues: Market timing; Sales practice violations; NASD Rule 3070 violations; Forms U4 and U5 reporting violations; Front running; Insider trading; Market manipulation; Trading issues and many more areas of regulation and enforcement. Please contact our law firm to consult with one of our attorneys at any time.