Securities Lawyer Blog

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.