Securities Lawyer Blog

It's worth noting so we will. The Securities Lawyer Blog cannot end this month's postings without noting the largest penalty ever imposed on a Wall Street firm.

Two weeks ago, the Securities and Exchange Commission (SEC) revealed that Goldman, Sachs & Co. has agreed to pay $550 million and to reform its business practices for its part in subprime-related investment collapse. The settlement was recently approved by United States District Court Judge Barbara Jones.

In the SEC's complaint filed this past April, the firm was alleged not only to have affirmatively misstated key facts, but also to have omitted them. The problems for the firm centered on the performance of subprime residential mortgage-backed securities. Investors were not told about the role that the hedge fund Paulson & Co. Inc. played in the Collateralized Debt Obligation (CDO) portfolio selection process. Paulson's interests were not aligned with those of investors. In fact, Paulson had "taken a short position against the CDO."

In Goldman's consent, the firm did not admit or deny the allegations, but did acknowledge that its marketing materials contained incomplete information. The firm also called it "a mistake" not to have disclosed the role of Paulson in the portfolio selection process because their interests were "adverse" to Collateralized Debt Obligation (CDO) investors.

Robert Khuzami, Director of the SEC's Division of Enforcement put it this way: "[t]his settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing."

As part of the settlement, Goldman is permanently enjoined from violating the antifraud provisions of the Securities Act of 1933. The payment includes $250 million to investors harmed in these transactions. The firm will also be required to reform its review and approval process with regard to mortgage securities offerings, including written marketing materials, as well as the role of key functions in theprocess, including counsel and compliance personnel.

Continue reading "Goldman and the $550 Million SEC Settlement" »

Another settlement was announced this week from the Financial Industry Regulatory Authority (FINRA) and it carries a high price. SunTrust Investment Services, Inc. has been ordered to pay a total of $1.44 million, which includes restitution, commission disgorgement and fines. The settlement centers on the sale of short-term Unit Investment Trusts (UITs) and other investments.

A Full Review
The settlement requires that SunTrust review all their UIT purchases and ensure that certain customers receive remediation since, according to FINRA, those including the elderly and disabled, suffered "significant losses" in these investments. Specifically, two former SunTrust brokers and their supervisor from its Maryland Region are alleged by FINRA to have sold UITs, closed end funds and mutual funds that were unsuitable investments to the elderly and the disabled. The pattern of unsuitability involved margin transactions in which these customers are alleged not to have received maximum sales discounts.

Unsuitable Investments
The pattern also involved the unsuitable purchases and sales of these securities on margin within short periods of time and on the brokers' recommendation. These activities resulted in either "little or no [customer] benefit." In addition, the risks and costs of these investments were not disclosed to these customers.

Red Flags Ignored
As the Securities Lawyer Blog has noted in other FINRA investigations, SunTrust's systems and procedures for monitoring these transactions were found to be inadequate and red flags for these transactions were ignored.

Broker Actions Pending
Actions are pending against one of the brokers and the supervisor involved. The other broker has been permanently barred from the securities industry for his activities at SunTrust and subsequently at Merrill Lynch. These activities included a pattern of investment recommendations that were unsuitable, failures to inform customers of costs and fees of transactions, failure to provide applicable discounts and the transfer and use of customer funds to pay personal expenses while at Merrill Lynch.

Related Web Resources

For more information on UITs and other securities visit the Securities and Exchange Commission website.

Continue reading "Suitability Issue -- SunTrust Settles $1.44 Million" »

The Open Book
The old saying "play by the rules," takes on new meaning in the compliance world as brokers are under more and more scrutiny by regulators and the public. Now the Securities and Exchange Commission has given the Financial Industry Regulatory Authority (FINRA) the go-ahead to provide more information about both former and current brokers on its BrokerCheck® service. A Regulatory Notice is expected in the near future on this development.

FINRA has announced that the expanded information will roll out in phases. In late August, we will see the addition of historic complaints for all current and former brokers. Later in 2010, the records of all brokers terminated in the past 10 years will be on the service.

Some of the major additions include more information about customer complaints, extension of records disclosure from two years to 10 years for brokers leaving the industry, permanent information on criminal convictions and other proceedings such as arbitration awards and injunctive relief.

More specific information on what the BrokerCheck® expansion will include can be viewed here. Briefly summarized, it includes the following.

Expanded Historic Complaint Disclosure
Expect expanded disclosure of what are known as "historic" complaints that were over two years old, were not resolved through adjudication or were settled for less than the required reporting amount, now set at $15,000. Previously, these events were disclosed on the service after a broker had three or more such events. The expansion will now include all historic complaints from 1999 forward for current brokers and those brokers whose registrations terminated in the prior 10 years.

Expanded Disclosure for Former Brokers
The expansion of disclosed information will reach back 10 years for those brokers who have left the securities industry. The current period is only two years, which FINRA notes aligns with its jurisdiction over former brokers and the time-frame in which an individual can continue broker activities without requalifying.

Expanded Permanent Information on Former Brokers
The new BrokerCheck expansion will include permanent information about brokers who have been subject to final regulatory action. It will also include additional information such as criminal convictions, guilty or nolo contendere pleas, injunctive relief related to regulatory violations and arbitration or civil judgments relating to "alleged sales practice violations."

Dispute Process Available
Brokers will have the opportunity to dispute accuracy of information included in the BrokerCheck service through a formalized process. This will include a notation of disputed information after a broker has filed a written notice to FINRA and will remain posted as such until resolved after FINRA investigation.

The Securities Lawyer Blog urges brokers to stay posted with us on the developments with regard to expanded BrokerCheck.

Resources
For any questions or concerns on the expansion of BrokerCheck® disclosures, please contact Gusrae, Kaplan, Bruno & Nusbaum, PLLC. We can provide support and guidance for brokers to ensure that their BrokerCheck® disclosures are accurate and when they are not accurate, follow the procedures for disputing their accuracy.

The Securities Lawyer Blog has posted previously on brokers who have paid the ultimate price for creating and allowing market manipulations and other bad dealings. We have also noted when broker-dealers fail to supervise or detect bad dealings.

In a recent case, Deutsche Bank's compliance department apparently did its job and now one of its former brokers is permanently barred. A hearing panel at the Financial Industry Regulatory Authority (FINRA) issued this ruling on a complaint filed by FINRA in December 2008. The decision will be final, unless appealed.

Big Manipulations
Essentially, the broker involved was alleged to have manipulated the price of a biosciences stock seeking to create big gains for a hedge fund client, his family and himself. The panel's litany of findings are a roadmap for noncompliance and self-dealing.

Mr. Edward Brokaw was located in a Connecticut office of Deutsche Bank Securities. He is said to have executed a deliberate effort to drive the biosciences stock value down and in so doing, enhance the value of contingent value rights (CVRs) for this stock.

The hedge fund client held about 18.5 million CVR's for the bioscience stock, which amounted to about 30 percent of the total outstanding CVR's. The broker and his family owned over 200,000 of these. As the stock value dropped the CVR values increased and a big payout would result for CVR holders.

Bad Calls
The evidence against the barred-broker included recorded sell orders that were placed at the firm's trading desk. And the decision by the hearing panel included evidence that orders were taken by the trading desk to sell off large share holdings of the bioscience stock by the hedge fund resulting in a drop of value.

Further, another call "explained the pricing of the CVRs and the strategy behind the hedge fund's instructions to sell close to the market's open and close" and included a statement that this game was to be played for the next 15 days. Ultimately, it was found that this was a deliberate effort to depress the stock's price.

Compliance Works
After three days, Deutsche Bank's compliance personnel picked-up on the aggressive trading pattern and stopped sales of the biosciences stock for the hedge fund. Mr. Brokaw was suspended and terminated for these trades.

Another policy at Deutsche Bank was found to have been violated in that order tickets were not created as received, but rather were aggregated for each day "with a false notation that the order was given by the client directly to the trading desk rather than to Brokaw - thus circumventing automatic branch office compliance review of the orders"

Continue reading "Done Deal -- Former Deutsche Bank Broker Permanently Barred " »