Securities Lawyer Blog

Too good to be true? When investors are promised a return in the quadruple digits, one might assume that warning flags would immediately be on this rise. But apparently, the Securities and Exchange Commission (SEC) has found that two San Francisco-area individuals were offering extremely high returns and that investors believed in them.

The two were charged with securities fraud in connection with a scheme that involved offers of as much as 6,300 percent in returns. But actually, the investors' funds were used for such things as luxury cars and home improvements. Two individuals and two companies that were controlled by one of the defendants, raised close to $8 million which they used for purposes other than investments. One of the companies was represented as trading in gold and diamonds. The other company was represented as trading in collateralized mortgage obligations or CMOs. Instead of investing these funds, the money was diverted for personal use.

In 2007 and 2008, the SEC claims that one of the defendants represented himself as a very successful real estate investor, among other things. His targeted investors were assured that they would have little risk with great reward. He raised $4.5 million and proceeded to spend it. When he was unable to pay investors, he issued false statements to them that their money was hard at work and that the investments were sound and had not lost value.

Teaming up with the other unregistered defendant in 2008, they were able to raise another $3.2 million with the promise that their investors would make wildly high returns in CMOs and other financial instruments. They misrepresented their investor base to other investors to promote their efforts. Again, investor funds were used to purchase cars, jewelry and other luxuries as well as home improvements. The second defendant was paid cash for his "efforts."

The complaint alleges violations of, among others, the antifraud and registration provisions of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. §§ 77e(a), 77e(c), and 77q(a)] and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.c. § 78j(b)] and Rule l0b-5.

Please contact the experienced securities lawyers at New York's Gusrae Kaplan Nusbaum PLLC, PLLC, for more information about our law practice and how we can support your firm's compliance and provide legal counsel in regulatory and enforcement proceedings.

As all broker-dealers are aware, the Financial Industry Regulatory Authority (FINRA) has cast a wide net in monitoring and enforcing industry compliance with rules and regulations. Aftera "targeted review of improper fees charged by broker-dealers," FINRA has announced sanctions and settlements with several firms that it found were charging customers excessive or improper fees.

The review resulted in settlements with five broker-dealers. In each case, the firms had not properly stated the total commissions charged for trade confirmations. What were allegedly commissions for trades, were actually represented as handling charges and were therefore mischaracterized. But FINRA determined that the firms were using the "handling fees" as additional commissions and as such, were in excess of the actual handling services provided by these firms.

Some of the firms involved in the review, earned handling fees of as much as $100 for each transaction which amounted to a large percentage of revenue. In the stern words of FINRA's Executive Vice President and Chief of Enforcement, Brad Bennett "[t]rade confirmations and fee schedules must clearly reflect commission charges, and firms cannot disguise commissions by improperly describing them as charges for ancillary services." He also cautioned that, "FINRA will continue to look closely at any firms that engage in these practices."

The firms that were found to have engaged in this practice were fined amounts from $300,000 to $60,000 and are located in Florida, New York and Illinois. In some instances, FINRA found that firms had not only mischaracterized these fees as handling charges, they had also engaged in deficient supervisory controls and recordkeeping, among other things.

The firms involved have agreed to correct these problems to ensure that in the future they not only properly disclose specific services that they have performed for customers, but also properly disclose any related fees on trade confirmations and communications with customers that relate to fees and commissions. Commissions will be stated as such and will no longer be categorized as fees, when in fact they are transactions-based commissions.

In addition, the firms have agreed that revisions will be made to written supervisory procedures to clarify these issues. Training for registered representatives and other personnel will now include substantive training on what is appropriate remuneration for transactions, how fees should be categorized and determined and provide training to the firms' registered representatives and how all of these should be disclosed to customers. Proper records retention policy and procedure is also part of the supervisory and training process and these settlements.

Broker-dealers should be aware that a thorough review of policies and procedures in all areas of practice, is the best protection to ensure compliance. The lawyers of Wall Street's Gusrae Kaplan Nusbaum PLLC, are experienced advisors to broker-dealers in all areas of compliance. Contact our law firm for more information on our wide range of services, including litigation and enforcement representation. We are a firm comprised of experienced former senior level regulators and securities and compliance litigators, providing advisory services to our clients to ensure regulatory compliance.

Late last month, the Securities and Exchange Commission (SEC) filed a complaint in the U.S. District Court for District of New Jersey against a hedge fund manager and his firm claiming insider trading.

The securities that were the subject of the insider trades were in three companies including Moldflow Corporation, Autodesk, Inc. and Salesforce.com, Inc. Others charged in the scheme, which is alleged to have reaped $3.9 million in ill-gotten gains, were friends and relatives of the manager.

The former director of business development for Autodesk is alleged to have tipped the hedge fund manager and another involved in thhe scheme that a tender offer was about to be made by the tech company for Moldflow. The company had not yet announced its intended merger with Moldflow at the time of the tip.

The SEC claims that the hedge fund manager "traded on the information in his personal accounts, his family members' accounts and the account of his hedge fund." He then furthered his alleged misconduct by suggesting to others that they also purchase stock in Autodesk's tender target. They did so, and are thus claimed to have used the insider information to benefit their personal accounts. In these transactions alone, $2.3 million is alleged to have been gained by these trades in Moldflow stock prior to Autodesk's acquisition.

In other related insider trading transactions, the SEC claims that Autodesk's earnings were also provided to the hedge fund manager prior to the company's public earnings announcement. And this information is said to have then been shared with others with the specific recommendation that friends and relatives not only short sell Autodesk stock, but also purchase put options on Autodesk stock.

One of the individuals involved in the insider trading was the former recruiting technology manager for Salesforce. He is alleged to have tipped the hedge fund manger with earnings information prior to the company's public announcement for the same quarter as the Autodesk earnings were tipped by the insider there.

The alleged illegal behavior continued with the hedge fund manager trading for gains in his personal accounts and those of his family within his own fund firm. Recommendations to purchase and to call options were made with regard to Salesforces' stock. The SEC alleges that all of this resulted in "illicit gains of nearly $500,000 from their trading in Salesforce securities."

The SEC's complaint seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties. Two of the defendants have consented to final judgments in the case including disgorgement of ill-gotten gains and pre-judgment interest.

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.