Securities Lawyer Blog

Earlier this week, the Securities and Exchange Commission (SEC) announced that it had filed a Cease and Desist Order against Merrill, Lynch under Sections 15(b)(4) and 21C of the Securities Exchange Act of 1934 ("Exchange Act"). The SEC alleged the firm had engaged in the misuse of customer order information and in so doing committed fraud by using this information "to place proprietary trades for the firm and for charging customers undisclosed trading fees."

According to the SEC, it accepted Merrill's $10 million settlement of this matter after considering remedial actions that have been put in place since the firm's acquisition by Bank of America.

All of this is alleged to have occurred over a two-year period between 2003 and 2005. The firm's proprietary trading desk known as the Equity Trading Desk (ESD) was operated only on the firm's behalf and was not involved in customer orders. However, it was operated on the same trading floor where the firm received and made customer trades from its market-making desk.

The SEC alleged that although customer order information was supposed to be maintained discreetly and disclosed only "on a need-to-know basis" the proprietary traders were able not only to obtain information that should not have been disclosed to them from the traders on the market-making desk, but that trades were placed on the firm's behalf using this information. The SEC said that this was contrary to representations the firm had made to customers regarding how information would be used.

Additional allegations in the SEC order included claims that, contrary to the firm's agreements with certain institutional and high net worth customers that they would "only charge a commission equivalent for executing riskless principal trades," the firm charged some customers undisclosed trading fees that were contrary to its agreements with customers.

As noted by the SEC's Asset Management Unit Co-Chief, "[c]harging ... undisclosed mark-ups and mark-downs was improper and contrary to Merrill's agreements with its customers. He went on to say that "[b]rokers must act honestly and transparently when charging fees to their customers. There is no place in our markets for charging investors undisclosed trading fees."

The New York law firm of Gusrae Kaplan Nusbaum PLLC, represents broker-dealers in litigation and before all regulatory tribunals. We are a firm of preeminent former regulators and very experienced litigators, with a significant and well-respected breadth and depth of practice in securities and commodities litigation and broker-dealer representation. Please contact our law firm to speak with one of our lawyers and for more information about our law practice.

The Securities and Exchange Commission (with cooperation from the U.S. Attorney for the Southern District of New York, Federal Bureau of Investigation, and U.S. Commodity Futures Trading Commission) has completed an investigation leading to charges of "fraud, misuse of client assets, and other securities laws violations" for three New York-based investment firms and several former senior officers of those firms.

The affiliated investment advisory and investment firms (managing $66 million) are charged with misleading investors of funds relating to the firms named in the complaint: West End Financial Advisors LLC (WEFA); West End Capital Management LLC (WECM); and Sentinel Investment Management Corporation.

The SEC alleges that as the West End affiliated firms' financial stability was worsening, investors were led to believe their investments were safe and secure. The allegations continue that the firms' senior investment advisor not only misused investor assets, but also "fraudulently obtained more than $8.5 million from a bank, and used millions of dollars from an interest reserve account for unauthorized purposes."

George S. Canellos, Director of the SEC's New York Regional Office commented that "[t]he investment advisers here grossly abused the trust of their clients ... They misappropriated and commingled their clients' assets and sustained the illusion of a viable and successful business through a range of false representations."

The SEC's complaint which was filed in U.S. District Court for the Southern District of New York, alleges that between about January 2008 to May 2009, the senior investment adviser "fraudulently-obtained bank loans to make distributions to certain West End fund investors, thereby sustaining the illusion that West End's investments were performing well." According to the complaint, about $1.5 million was also misappropriated for the adviser and his family.

Other officers within the firms (CFO and Controller) are charged with either knowing, or being reckless in not knowing, that their colleague was committing fraud on the bank to secure loans and that the affiliated firms were in severe financial condition. The firms' COO is also alleged to have continued to market the firms' funds to new and existing investors with either knowing or being reckless in not knowing, of the funds' actual financial status.

New York's Gusrae Kaplan Nusbaum PLLC represents broker-dealers in all aspects of securities and commodities litigation and regulatory and enforcement actions. Please contact us to speak with one of our lawyers about our experience and practice.

The big settlement story this week is the $119 million resolution reached between Charles Schwab Corporation and the SEC. This settlement resolves both state and federal lawsuits for allegations that the company misled investors in a bond mutual fund that held mortgage-backed securities. A separate settlement was reached between Schwab and the Financial Industry Regulatory Authority.

The SEC alleged that the company made "misleading statements" with regard to its YieldPlus fund. The fund was represented by Schwab to be similar to a money market investment in safety. But in fact, sitting in the background waiting to implode were risky mortgage-backed securities. The housing market collapse brought big losses to YieldPlus.

Similar to the auction rate securities markets, firms put themselves at peril in representing safety where there was risk. The Securities Lawyer Blog posted on the ARS market failure in which firms marketed the safety of the ARS market comparing it to CD deposits.

In this case, the SEC noted that Schwab's marketing documents contained misrepresentations and omissions. About half of the YieldPlus fund was composed of mortgage-backed securities.

Schwab regrets that shareholders lost money, but stated that the "decline in the YieldPlus fund was the result of an unprecedented and unforeseeable credit crisis and market collapse."

The executives who oversaw the fund intend to fight SEC charges that they violated federal securities laws, as well as the company's internal policy that shareholders must approve when more than 25% of assets derive from one industry.

Schwab has also agreed to pay $235 million for resolution of two private class-action shareholder suits, which would bring the total YieldPlus settlements to $350 million.

Contact the lawyers at the Wall Street law firm of Gusrae Kaplan Nusbaum PLLC for more information on broker-dealer representation before all regulatory agencies, as well as broker-dealer advisory services.

The Securities and Exchange Commission (SEC) has begun 2011 with several litigation filings around the country. Among these are a case involving two executives alleged to have been involved in an illegal stock distribution scheme and another involving an investment adviser and his company that are alleged to have fraudulently raised and diverted investment funds.

In the first matter, filed in Sacramento, California, Gendarme Capital Corporation (Gendarme) is alleged to have "repeatedly acquired deeply discounted shares from penny stock issuers under the pretense of a long-term investment." These shares were then allegedly "dumped" into the market, which impacted public stock distributions. The allegations are that Gendarme failed to comply with disclosure requirements of the federal securities laws which resulted in illicit profits of over $1.6 million for the company's principals.

The complaint filed by the SEC chronicles a scheme in which Gendarme allegedly created deals with penny stock issuers that gave the company rights to purchase stocks at significant discounts off the market price. Allegedly, false representations were then made to issuers that the shares were being secured for "investment purposes only" and were not registered or disclosed under the securities laws.

Gendarme is then alleged to have sold these unregistered stock distributions in public markets, reaping significant profits. The company's outside counsel is also alleged to have issued false legal opinion letters to support these activities.

Across the country in Georgia, the SEC secured temporary injunctive relief and filed civil injunctive relief against a registered investment adviser and his investment firm related to allegedly defrauding investors in two hedge funds managed by the firm in violation of federal securities laws.

According to the complaint, the firm raised $65 million for two hedge funds. Investors were allegedly told their investments would be invested in "unaffiliated" underlying funds and that the firm would take a low percentage management fee and percentage of profits.

The SEC's complaint alleges that undisclosed funds were created from which millions of dollars were diverted for the personal use of the principal and his firm in violation of federal securities laws.

The law firm of Gusrae Kaplan Nusbaum PLLC has defended individuals, issuers underwriters, investment banks, broker/dealers, hedge funds, officers and directors in connection with a wide range of regulatory or enforcement matters. For more information, please contact our firm to speak with one of our lawyers.