Securities Lawyer Blog

The Financial Industry Regulatory Authority (FINRA) announced recently that it has imposed a $650,000 fine on the Dallas firm Southwest Securities, Inc. The fine stems from what FINRA called "deficiencies in due diligence, risk assessment and written supervisory procedures" related to improper short sales by one of its correspondent firms. This in turn is alleged to have created risk for Southwest.

The event that triggered this situation occurred over one day in August 2009. Cutler Securities is alleged to have purchased nearly 18 million shares and sold over 20 million shares of the same stock. Southwest was alerted to this trading, but is alleged to have allowed Cutler to take a 2.5 million-share short position. When Cutler could not cover the deficit, Southwest closed it and was left with a $6.3 million debit balance that was unsecured.

Southwest is alleged to have had deficiencies in written due diligence policies, evaluative process for potential correspondents and several other supervisorial failures. Not surprisingly, FINRA noted that Cutler Securities "had significant regulatory and supervisory deficiencies" that are alleged to be related to short sales, failures to comply with Regulation SHO and failing to comply with SEC Emergency Orders.

The consequences of this situation for Cutler included expulsion, with its president being barred due to this activity. The consequence for Southwest includes the fine as well as a risk management officer who will be required to oversee risks associated with the firm's correspondent clearing services business.

FINRA noted that the firm's failure to effectively monitor "Cutler's reckless behavior jeopardized its ability to meet its obligations to its other correspondent firms and counterparties." Southwest did not admit or deny the allegations in settling this matter.

Related Resources
The Securities Lawyer Blog cannot close this week without mentioning Judge Rakoff's recent opinion in the backdating action against Vitesse Semiconductor, in which he criticized the SEC's longstanding practice of entering settlements with the no admission or denial language. It is worthwhile reading for anyone in the securities industry.

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Along with every new legitimate opportunity for investment in technology, come "opportunities" that are instead fraudulent and deceptive. Apparently, FINRA decided that the public needed further warning in this area due to the attraction of social media companies and their potential profits. And to address this, FINRA has issued a warning about social media investment with an investor alert on Pre-IPO offerings.

The warning concerns scams that are attempting to lure potential investors into believing they will be offered pre-IPO shares in social media sites such as Facebook. These "con artists" offer what are non-existent private stock offerings in the most well-known social media companies. The FINRA alert is entitled Pre-IPO Offerings -- These Scammers Are Not Your Friends.

FINRA has created a list of ways investors can identify legitimate private placements as opposed to the scams that have been cropping up. These include: avoiding any unsolicited pre-IPO offer that comes from someone you do not know; being alert to the tactics that are used by scammers such as high returns and discounts; knowing whether the offer is coming from a licensed person; checking search engines for information on possible scammers; seeking advice from a licensed broker-dealer and/or an attorney.

In the recent past, there have been some reports of legitimate pre-IPO speculation with some major social media sites. These "private placements" are not for most investors and generally are offered to entities or individuals that have significant resources and can manage the risk that goes along with the purchase of pre-IPO shares.

The concern for the general public is that even though pre-IPO offerings can be what they purport to be, there are some very deceiving offerings being made as well. According to FINRA, there have been attempts to sell fake Facebook shares in this manner. For example, the SEC just completed a case involving a securities trader who was self-employed and is alleged to have raised close to $10 million dollars for fake pre-IPO shares of sites like Facebook and Google.

The Wall Street law firm, Gusrae Kaplan Nusbaum PLLC has decades of experience in advising and representing members of the broker-dealer community. Please contact us at any time to consult with one of our lawyers who are preeminent former regulators and experienced litigators.

This week, the Financial Industry Regulatory Authority (FINRA) announced a settlement with an investment company's hedge fund and its CEO. MICG Investment Management, LLC and its CEO, who is also a majority owner of the company were expelled and barred, respectively.

The allegations in this matter included securities fraud, false account statements and the misuse of investor funds. The account statements pertained to a proprietary hedge fund that was managed and controlled by the CEO.

Calling this case an "extreme abuse of trust," Brad Bennett, FINRA's Executive Vice President and Chief of Enforcement stated the view that the company and CEO "used the proprietary hedge fund to unjustly enrich themselves." The defendants in the matter have consented to settlement without admitting or denying the allegations.

Among FINRA's findings were that allegedly improper valuations had been assigned to assets and that these valuations were used for payments to management for incentive performance fees that were not justified.

Over a two-year period the investment company and CEO assigned high valuation to the assets without the use of independent or accepted valuation methods. FINRA noted that an example of this was an allegation that an equity interest was valued "at more than triple the price at which it was contemporaneously being offered to them for sale."

Another example of this was an allegedly unjustified valuation of common stock from the purchase price of $1.15 per share to $2.13 per share. The allegedly unjustified increase in valuation became the basis of an incentive management fee.

Additional allegations included false and misleading account statements and sales of hedge fund shares to an elderly investor without "reasonable grounds for believing the investment was suitable." In addition there was alleged to be no disclosure to the elderly client that the sale would generate a management fee.

Contact New York City's Gusrae Kaplan Nusbaum PLLC, for more information on our practice, questions regarding our broker-dealer advisory services and our representation before regulatory entities. Our preeminent Wall Street lawyers are experienced as litigators, advisors and former regulators.

Earlier this week, the Securities and Exchange Commission (SEC) filed a complaint against a former UBS financial adviser in an allegedly fraudulent scheme that began in 2006. The defendant has agreed to settle the matter without admitting or denying the charges.

According to the SEC's complaint, between 2006 and 2009, the broker who held Series 7, 63 and 65 licenses and worked for UBS Financial Services LLC in the Walnut Creek, California office, established a private pooled investment fund to be comprised of life settlement policies.

After advising his clients that this was a sound investment, he raised $1.4 million for the investments from his UBS clients. However, rather than investing it as agreed, he used the funds for his own personal use, spending it on a lavish lifestyle. He allegedly did so by "liquidating his customers' securities and funneling the money back to the fund and its investors."

As an attempt to avoid the theft being discovered, the broker is said to have convinced some of his other UBS customers to liquidate their securities in the amount of $1.9 million. In some instances, the broker asked customers to provide their liquidated securities to him as loans on which they would make a quick return. He then allegedly took the proceeds of those sales and loans to replenish the original fund.

Criminal charges have been filed against the former UBS adviser for conduct involved in the scheme alleged by the SEC.

The adviser has been permanently enjoined from further violations of Sections 10(b) and 15(a) of the Securities Exchange Act and Rule 10b-5. He is also forever barred from the securities industry.

New York City's Gusrae Kaplan Nusbaum PLLC, represents brokers before all 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.