Securities Lawyer Blog

Last week, the Securities and Exchange Commission (SEC) announced that Kmart Corporation's former Chief Executive Officer, Charles C. Conaway, has been ordered to pay in excess of $10 million in disgorgement, prejudgment interest and civil penalties.

This matter dates back to August 2005, when the SEC filed an action against Mr. Conaway, alleging that prior to the company's bankruptcy, he misled investors with regard to Kmart's financial condition.

In June 2009, after a three-week trial held in the United States District Court for the Eastern District of Michigan, the jury returned a verdict in favor of the SEC. The SEC had alleged that Mr. Conaway engaged in material misrepresentations and omissions with regard to the liquidity of the company. Specifically, he was alleged to have been responsible for making these misrepresentations in the Management's Discussion and Analysis ("MD&A") section of Kmart's Form 10-Q for the third quarter and nine months ended October 31, 2001, and in an earnings conference call with analysts and investors.

The SEC had argued in the case that Mr. Conaway, along with Kmart's former Chief Financial Officer, John T. McDonald, failed to disclose why the company had engaged in a huge overbuy in 2001 and how that had impacted the company's liquidity. The jury agreed with the SEC's allegation that the MD&A disclosure misstated the reasons for this inventory build-up. The company claimed this was due to "seasonal inventory fluctuations and actions taken to improve our overall in-stock position." The SEC's position was that this was materially misleading since the actual reason for much of this inventory mess was due to "reckless and unilateral purchase of $850 million of excess inventory."

After this occurred the company began to pull back on timely payments to vendors and by the end of the third quarter 2001, in essence had borrowed $570 from its vendors in slow payments. Then the executives misrepresented the reasons behind the failure to pay vendors and its impact on liquidity. Many vendors stopped shipping products to the company in late 2001 and the company filed for bankruptcy in January 2002.

The court's order will require Conaway to pay disgorgement in the amount of $5,000,000, prejudgment interest of $2,853,432 and a civil penalty of $2,500,000. Additional specifics are currently being negotiated by the parties with regard to the handling of a stay, pending the appeal of this matter.

Related Web Resources

Click here for more information on disclosure requirements in Form 10Q and related filings.

Continue reading "Court Orders Former Kmart CEO to Pay $10 Million " »

Last week, the Securities and Exchange Commission (SEC) filed a complaint in the U.S. District Court for the Southern District of New York against Daniel Bonventre. Mr. Bonventre is alleged to have made a career of falsifying records in Bernard Madoff's back room operations.

The purpose of the alleged fraud was not only to create enrichment for Madoff's key players, but also to create a false appearance of legitimate income. Apparently, for about three decades, Mr. Bonventre was responsible for the back office operations of the now infamous Ponzi scheme -- also known as Bernard L. Madoff Investment Securities LLC (BMIS). Specifically, he managed the accounting and securities clearing functions.

The SEC claims that Bonventre not only knew investors' monies were not being used to purchase securities, but lined his own pockets to the tune of $1.9 million placing false backdated so-called trades in his own account.

Not surprisingly, this latest filing is the seventh enforcement matter brought in the Madoff matter. Prior SEC actions include those against Madoff, auditors, computer programmers and others involved in the elaborate scheme. Guilty pleas have been entered for criminal charges brought in these matters.

According to the SEC's litigation release Mr. Bonventre hid the liabilities to investors and assets received from them. Mr. Bonventre is alleged by the SEC to have assisted Madoff and his close advisor Frank DiPascali, Jr., in lying to investors and regulators when BMIS operations came under review. The operational losses of BMIS were kept secreted behind a wall of $750 million in investor funds employed to "artificially improve reported revenue and income."

In the words of the SEC, "[w]ith Bonventre's assistance, they made serial misrepresentations to external reviewers by manufacturing reams of false reports and data."

Related Web Resources

Information on SEC Madoff-related matters can be located at accounting and auditing enforcement releases and litigation releases at www.sec.gov.

Continue reading "More Guilty Please? $1.9 Million Illicit Profits for Madoff's Chief Back Room Operator" »

If Shakespeare were alive today, he might be seeking out an interview with Judge Jack Weinstein. Or perhaps invite him up to Stratford for a weekend of discussion on the human condition and its intersection with the sub-prime crisis.

Last week, the Judge sentenced Eric Butler, a securities dealer who formerly worked for Credit Suisse. Think of all the good work he could have done in five years on Wall Street.

Instead, he will be in prison and he will pay $5 million dollars in fines. He will also be supervised for three years after his release from prison. He told the court tearfully last week that he regrets all of this.

Mr. Butler was fairly brazen apparently in his push to get investors into very high-risk sub-primes that also happened to carry high-commissions. These investors lost over one billion dollars.

He was convicted of things that Shakespeare would not have known about and some things he would like fakery and fraud. In fact, allegations of securities fraud, conspiracy to commit securities fraud and conspiracy to commit wire fraud were the rub for Mr. Butler.

The Judge's Statement of Reasons at the sentencing on some of these charges included deeply cutting prose. Pointing to the "the pernicious and pervasive culture of corruption" on Wall Street, the Judge went out of his way to express his concerns saying that "[t]he most compelling aspect of this case may be its illumination of the need to reconsider how compensation is calculated and investment products are marketed by the financial industry." He urged reform.

Lots of people are condemning this culture. It has hurt many people in America.

If Shakespeare failed to rip this story from the headlines, perhaps Charles Dickens would. The tale aligns well with so many Dickens characters as life imitates art. Or more likely, these great artists understood what is in the human character. One such Dickens character Mr. Merdle, swindles all the swooning swells of the time in a Ponzi-like scheme almost exactly along the lines of Mr. Madoff. The character of Mr. Butler is apparently not far off the mark.

And so into the annals of American law go the likes of Eric Butler. He is the new Merdle. He hopefully has learned that crime does not pay as his family has lost him for a period of years to another place, maybe not as bad as the Marshalsea prison, but still, prison.

In his Sentencing Statement of Reasons the Judge passed responsibility around the table like a plate of cookies in a Rockwell painting gone wrong. "The blame for this condition is shared not only by individual defendants like Butler, but also by the institutions that employ them, those who carelessly invest, and those who fail to regulate. Supervision is seriously negligent; greed and short-term gain are so enormous that fraud and arrogant disregard of others' rights and of ethics almost encourage criminal activities such as defendant's."

So, in short, the Judge seemed to be saying that we all need to look at this culture, because it is not any one defendant's doing. It is a culture Americans have allowed, it is our Wall Street and it is our responsibility to make it right. Both Shakespeare and Dickens would probably approve of that message.

Related Web Resources

For a complete review of the Sentencing Statement of Reasons, click here.

The Securities and Exchange Commission (SEC) announced earlier this week that it has secured a settlement with the former Perot family companies employee charged with insider trading. The Securities Lawyer Blog featured this matter on an earlier post.

The settlement includes a return of illicit profits and the overall amount to be returned exceeds $8.6 million. The settlement was filed in federal court in Dallas, Texas. Part of the settlement includes a request by the SEC that a distribution plan be developed for the illegal profits to be returned. This plan would be handled by a third party. The agency also seeks to impose a financial penalty against the former Perot family company employee, Mr. Reza Saleh.

The insider trading case developed after Dell Inc. announced its intention to acquire Perot Systems. The agency alleged that Mr. Saleh had made "increasingly large purchases of Perot Systems call options contracts based on material, non-public information that he learned in the course of his employment with, or duties for, two Perot-related private companies and Perot Systems." Allegedly, immediately after the tender offer he sold all call option contracts and gained about $8.6 million in illicit profits.

WIthin two days, the SEC was in court and pursuing the insider trading deal as it sought and secured an order freezing the profits that resulted from the it. The SEC alleged that Mr. Saleh had "illegally traded in Perot Systems call options after learning about the merger before it was announced."

The SEC was assisted in the matter by several other entities including the Chicago Board Options Exchange, Options Regulatory Surveillance Authority, the Nasdaq OMX and the Financial Industry Regulatory Authority (FINRA).

Mr. Saleh has not admitted or denied the allegations against him. The settlement includes an agreement that he will be permanently enjoined from violations of the anti-fraud provisions of the Securities Exchange Act of 1934 as well as an agreement to an SEC administrative order barring him from future association with any investment adviser.

Related Web Resources

Click here to read more about the Options Regulatory Surveillance Authority and the authorities involved in surveillance and investigation of insider trading matters.

Recently, the Securities and Exchange Commission (SEC) announced that it is has charged ICAP Securities USA LLC (ICAP) with both fraud and material misrepresentations to customers. This firm is the US subsidiary of ICAP which is located in the United Kingdom and is the world's largest inter-broker dealer.

The SEC is sending another big message to the industry in this matter.

The firm is in the business of matching buyers and sellers in over-the-counter markets for a variety of securities. These include mortgage-backed securities and U.S. Treasuries. Customers are able to review trade information on computer screens and the SEC notes that inter-dealer brokers that show higher volume of trading activity are often able to secure more commissions and trades than those that show less activity.

In this case, SEC enforcement found that brokers on ICAP's U.S. Treasuries desk "displayed fictitious flash trades also known as "bird" trades on ICAP's screens and disseminated false trade information into the marketplace in order to attract customer attention to its screens and encourage actual trading by these customers. ICAP's customers believed the displayed fake trades to be real and relied on the phony information to make trading decisions."

These charges have now been settled. The settlement requires that ICAP pay $25 million in disgorgement and penalties. In addition to the settlement, five ICAP brokers were charged with aiding and abetting the fraudulent conduct while two senior executives were also charged for failing reasonably to supervise the brokers. These parties will pay penalties to settle the matter.

The SEC's Division of Enforcement, Lorin L. Reisner had some tough talk for the firm stating that "[i]t is essential that ICAP and other inter-dealer brokers refrain from engaging in conduct that discredits their privileged position in the marketplace ... ICAP engaged in deceptive practices that violated the legal and professional standards required of market participants; our action today demonstrates zero tolerance for such conduct."

The alarming activities in which ICAP brokers engaged are stated by the SEC to include such things as: (1) the display of thousands of fictitious flash trades to customers; and, (2) representations to certain customers that its electronic trading system would follow certain protocols that were not in fact followed. These activities were alleged to be false and misleading. The firm and the individuals have settled without admitting or denying the allegations.

The SEC's order also found that ICAP "held itself out as a firm that did not engage in trading that subjected its own capital to risk" which was not true.

Related Web Resources

For more background on SEC enforcement and litigation, please visit the SEC's website.

Continue reading "SEC's Price for Inter-Broker's Bad Behavior? How About $25 Million. " »

The Securities Lawyer Blog recently noted a tech wreck in the industry when penalties were imposed on Scottrade for its failure to establish and implement an adequate automated anti-money laundering (AML) program to detect and trigger reporting of suspicious transactions.

Now the Financial Industry Regulatory Authority (FINRA) has imposed a large fine on MetLife Securities, Inc., and three of its affiliates New England Securities Corp., Walnut Street Securities, Inc. and Tower Square Securities, Inc. for a different sort of digital-age supervisorial problem.

The fine is based on the firm's alleged failure to establish: (1) an adequate supervisory system for both the review of brokers' email correspondence with the public; and, (2) procedures relating to broker participation in outside business activities and private securities transactions.

The impact of these alleged failures was to allow two MetLife Securities brokers to avoid detection by the firm of their undisclosed outside business activities and private securities transactions. This is alleged to have cost some firm clients millions of dollars.

The firm did some things right. For nearly a decade, there were written supervisory procedures mandating that all securities-related broker emails be reviewed by a supervisor. But the program fell short in that supervisors were not able to directly monitor broker emails. Instead, it fell on the brokers to forward relevant emails to supervisors for review.

Managers were able to spot-check broker computers for emails that had not been forwarded. Brokers could get around this by deleting emails they did not want supervisors to find. Even regular audits were alleged to be ineffective in that did not allow for timely detection of email-forwarding failures.

FINRA found a large cache of emails involving two brokers who were able to engage in outside business activities and private securities transactions without the firm's knowledge because these emails were not forwarded to supervisors.

According to Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement, "Although FINRA's rules afford firms the flexibility to tailor procedures that are appropriate for their particular business models, all firms must have the ability to flag emails that may evidence misconduct. Relying on brokers to provide copies of their own emails to supervisors for review is hardly an effective means to detect such misconduct."

According to FINRA, MetLife Securities' inability to ensure compliance with the email-forwarding requirement caused the inadequate enforcement of the firm's supervisory procedures relating to outside business activities and private securities transactions.

Related Web Resources

For more background on enforcement and BrokerCheck, go to www.finra.org.

Continue reading "Tech Wreck -- $1.2 Million Fine For MetLife Securities" »

Remember last year when the deep freeze hit the Auction Rate Securities market?
It's been a long winter for the firms involved in the ARS failure.

Securities Lawyer Blog has been keeping an eye on the price tag for the buy-back of these securities. Across the board, firms told investors that these securities were safe, liquid and more like CD's than securities. Estimates are the cost is now up to about $61 billion.

Recently, the California Attorney General announced that Wells Fargo & Co. has agreed to buy back approximately $700 million in auction-rate securities from investors in California. The deep freeze for Wells' California ARS investors is over.

In addition to making investors whole, the bank's settlement includes a $600,000 payment back to the Attorney General's office for the expenses involved in investigating and settling the auction-rate failure.

Wells Fargo joins the ranks of many other firms that have paid out millions to their investors after the ARS market froze last year. In a statement regarding the settlement, Charles Daggs, Wells Fargo Investments CEO noted: "We have been working with ARS issuers since the auction rate market froze, and while there has been progress, redemptions by issuers have not occurred as fast as anyone would have hoped or predicted. We are glad to have resolved this for our customers."

California AG, Jerry Brown, who also happens to be trying to regain his residence as Governor of California commented on the settlement saying, "Wells Fargo convinced thousands of investors to purchase auction-rate securities with promises of robust returns and liquidity, but when the market collapsed, investors were left out in the cold."

In addition to the California settlement, Wells Fargo will also buy back $700 million in frozen ARS from residents outside California. This settlement was reached through efforts on the part of the California Department of Corporations and the North American Securities Administrators Association. In total, Wells Fargo states that it will pay penalties and fines as part of the settlements in the amount of $1.9 million.

Related Web Resources

For more information on the Auction Rate Securities issue, visit FINRA.org.

Continue reading "Auction-Rate "InSecurities" -- Wells Fargo's $1.4 Billion Buy Back" »

Does playing with the numbers ever really pay off? The Securities & Exchange Commission (SEC) is working hard to make sure we all know that it doesn't.

Yesterday, the SEC announced that it has filed its first enforcement action using Regulation G against SafeNet, Inc. and several of its former officers and accountants.

The SEC filed its complaint in the United States District Court for the District of Columbia and it includes a laundry list of allegations and fines, which the parties have settled without admitting or denying allegations. All are subject to court approval.

The SEC complaint alleges that SafeNet engaged in two fraudulent schemes from late 2000 through May 2006, including backdating of options and the other improper earnings management. In each scheme, SafeNet is alleged to have materially misstated financial results and disseminated materially false and misleading information to investors about its financial status. Senior officers of the company were involved in these schemes and accounting executives are alleged to have been involved in the earnings management scheme.

In addition to many other violations, the SEC makes its first enforcement use of Regulation G against SafeNet. The SEC instructs that: "Regulation G applies whenever a company subject to the periodic reporting requirements under Section 13(a) or 15(d) of the Exchange Act of 1934, or a person acting on the company's behalf, discloses publicly any material information that includes a 'non-GAAP financial measure.' "

According to the SEC, non-GAAP financial measures, those not calculated in conformity with Generally Accepted Accounting Principles, frequently exclude non-recurring, infrequent, or unusual expenses. Companies are required to reconcile these with the most directly comparable GAAP financial measure. The regulation also prohibits companies and their employees from disseminating false or misleading non-GAAP financial measures or presenting the non-GAAP financial measures in such a manner.

The complaint against the company and individuals alleges that in order to meet earnings targets improper accounting adjustments were made to expenses that included such things as: the improper classification of ordinary operating expenses as non-recurring integration expenses (costs incurred to integrate acquired companies into current operations), and the improper reduction of accruals and reserves.

SafeNet is alleged to have issued materially false and misleading securities filings and press releases with regard to earnings specifics. Backdating of option grants for senior executives and employees is also alleged to have occurred resulting in substantial profit-taking by those receiving these option grants.

The parties are enjoined from violating a long list of antifraud and other Securities Act and Securities Exchange Act provisions. SafeNet is ordered to pay a civil penalty of $1,000,000.

The complaint provides more specifics regarding the settlements, fines and penalties imposed on the parties. Their cooperation with the SEC was taken into account in the matter.

Related Web Resources

For additional information on SEC enforcement activities, visit www.sec.gov.

Continue reading "SEC's First Enforcement Using Regulation G Targets SafeNet - Over $1 Million in Fines" »

Last month, the Securities and Exchange Commission (SEC) brought securities fraud charges against a New York securities broker who allegedly created and disseminated "fake press releases to manipulate the stock prices of multiple publicly traded companies."

But for this publicity hound, the alleged campaign failed in short order.

The accused broker, Mr. Lambros Ballas, is a registered representative with the firm Global Arena Capital Corporation. His alleged scheme was simple, fraudulent and has landed him in a big heap of trouble.

First, there was a phony press release in which Mr. Ballas clamed that the United States Food and Drug Administration (FDA) had approved a drug developed by Discovery Laboratories, a Pennsylvania biotech firm. Next, he posted a confirmation of this news on a stock message board, making it seem even more legitimate by linking back to the "official press release." These activities apparently spiked the stock price as the company's shares opened much higher the next day.

Perhaps having been charmed by these results, the broker continued with this activity.

Again, he started with a fake press release in which he claimed that Disney had acquired IMAX Corporation. The pattern continued with a posting to a stock message board in which he attempted to independently confirm this "news" and boasting of big IMAX share acquisitions. This apparently was intended to lure investors and spike the price.

The fake PR game continued with a claim, again using a phony press release, in which it was claimed that Microsoft was acquiring Local.com of California. The scheme continued with the same pattern of activity and postings with links on stock message boards in which the broker attempted to independently verify the acquisition.

When Local.com's price rose almost 80 percent, the company issued its own press release stating that the Microsoft acquisition was false. Undeterred, the broker issued another fake press release stating that Google was to acquire Local.com.

The broker and his unwitting clients purchased shares of these companies just prior to the false publicity.

In its statement, the SEC's San Francisco Regional Office Director Marc Fagel characterized the activities as "disturbing" and stating that "Ballas caused significant market disruption with his hoaxes, forcing companies to scramble to correct the public record." He noted that "swift SEC action" was warranted "because Ballas is an industry professional responsible for handling his customers' brokerage accounts."

The broker is charged with violations of the antifraud provisions of the federal securities laws. In its complaint, the SEC is seeking injunctive relief, disgorgement of ill-gotten gains, and monetary penalties against the broker.

Related Web Resources

For additional information on SEC enforcement activities, visit www.sec.gov.

Continue reading "Publicity Stunted -- SEC Shuts Down Broker's Fake PR Blast " »

The Financial Industry Regulatory Authority (FINRA) is teaching brokerage firms a great deal these days and imposing fines in the process.

This time, Scottrade is in the hot seat and will pay a $600,000 fine for its alleged failure to "establish and implement an adequate anti-money laundering (AML) program to detect and trigger reporting of suspicious transactions, as required by the Bank Secrecy Act and FINRA rules."

FINRA instructs by Scottrade's example that the trading environment for each firm must be taken into account in establishing and maintaining appropriate programs for the detection of money laundering. Monitoring suspicious trading alone just doesn't cut it. Among other things, that's what got Scottrade in trouble.

The firm did not establish automated surveillance of transactions until 2005 and once it did it "focused only on suspicious trading that was accompanied by suspicious money movement," noted Susan L. Merrill, FINRA's Executive Vice President and Chief of Enforcement.

FINRA informs the industry that is not sufficient. Its rules require brokerage firms to establish policies and implement procedures that are "reasonably designed" to detect and ultimately to report suspicious transactions. But that does not necessarily mean that only suspicious transactions are to be watched and/or reported. More is required, as Scottrade has learned.

In Scottrade's case, the agency found that between April 2003 and April 2008, the firm did not establish or maintain an AML program that was appropriately targeted for its business model of on-line trading. The increased volume over a period of years of its on-line trading volume, brought with it such risks as identity theft and the use of customer accounts to launder funds by hiding behind securities transaction for illegal activity and other securities violations.

One major problem for the firm was its failure to adequately staff the monitoring function. For some period of time there was only one AML compliance officer at the firm. Eventually, a risk management analyst was hired to assist. But FINRA determined that the volume of trading called for more than two individuals. Another problem for the firm was its reliance for several years on a manual system for monitoring suspicious activities, relying on internal personnel and branch and other employees to identify and report suspicious activities.

Despite Scottrade's eventual implementation of proprietary automated systems to monitor suspicious trading activity, FINRA found that this too was not sufficient. Suspicious activity generated an alert, but that alone would not detect various other techniques used by those seeking to launder funds such as through account intrusions and the use of bona fide accounts for laundering purposes.

Scottrade was also found to have provided inadequate written guidance to employees on the detection and review of transactions that might be used for money laundering.

Related Web Resources

To learn more about AML requirements, visit www.FINRA.org where you will find resources for industry professionals and investors.

Continue reading "Learning the Hard Way -- Inadequate Anti-Money Laundering Program Costs Scottrade $600,000 " »

Citigroup Global Markets Inc. experienced a bit of self-inflicted pain last week.

The firm's failure to supervise tax-related stock transactions is carrying a censure and a $600,000 fine, according to the Financial Industry Regulatory Authority (FINRA).

In a recent statement, FINRA's Executive Vice President and Chief of Enforcement, Susan Merrill instructed that "[i]ncreasingly, complex trading strategies must be governed by supervision that is equally sophisticated and detailed ... In this case, Citigroup's inadequate supervision resulted in improper trading related to the execution of strategies involving transactions with a principal purpose of limiting tax liability."

Point well-taken perhaps as the issue for Citigroup was their alleged failure to establish procedures that would detect improper trades and to supervise or control these activities.

The trading involved several strategies and complex trading moves described generally as follows.

Citigroup's equity finance desk would purchase stock from generally foreign, broker-dealer clients. Once the taxable dividends had been paid, the stock would be sold back to the customer.

The problem for Citigroup is that when U.S. stock dividends are paid out to foreign investors, there may in fact be a taxable event that would require withholding. In the transactions at issue, Citigroup and its clients apparently believed these transactions were not subject to tax withholding, viewing them as "dividend equivalents" and part of a swap agreement.

To participate in this strategy, foreign Citigroup clients would sell U.S. equities to the firm's equity finance desk in New York, which served as custodian for these dividend-bearing stocks for the firm's London affiliate.

As FINRA elaborates on the scheme: The affiliate would in turn use the stock as "the underlying equity hedge in a 'total return swap' entered into with the customer. Under the swap, the London affiliate paid the customer a 'total return,' which was any income the stock generated, including any appreciation in value, as well as an amount equivalent to the dividend. In exchange for the 'total return payments,' the customer paid the London affiliate interest and covered any decline in the share price."

Between 2002 and 2005, these transactions resulted in foreign clients receiving the full value of U.S. company dividends, without paying the withholding tax.

Citigroup already paid (around 2006) a substantial $24 million to the Internal Revenue Service due to this strategy. They did so after coming to the conclusion that they could not verify whether some trades were independent.

However, in a somewhat inexplicable failure to supervise, even after the firm put written procedures in place, traders did not follow them.

Related Web Resources

For more detailed information on the Citigroup transactions subject to the supervisorial failure and related matters, visit www.FINRA.org where you will also find extensive resources for industry professionals and investors.

Continue reading "Seriously Taxing -- Citigroup Fined $600,000 in Failure to Supervise " »

WIth the varied allegations that have been prevalent from regulators over the past year, we return to the previously more common claim of insider trading in a case out of Texas.

Earlier this week, the Securities and Exchange Commission (SEC) charged Reza Saleh, a Richardson, Texas resident, with insider trading.

These allegations relate to Mr. Saleh's activities prior to Dell Inc.'s tender offer for Perot Systems. The agency alleges that Mr. Saleh "made increasingly large purchases of Perot Systems call options contracts based on material, non-public information that he learned in the course of his employment with, or duties for, two Perot-related private companies and Perot Systems."

Allegedly, immediately after the tender offer he sold all call option contracts and gained about $8.6 million in illicit profits.

The SEC picked-up on this quite rapidly with the help of the Options Regulatory Surveillance Authority, that identified him as a suspicious trader. The SEC has expressed its appreciation to the ORSA for their assistance in the case thus far. When asked, he disclosed to a Perot director that he had knowledge of the impending transaction during the trading.

The SEC's announcement on this case noted that "[t]he overwhelming evidence in this case allowed the SEC to move quickly against the trader before he could spend the huge profits from his illegal trading," said Rose Romero, Director of the SEC's Fort Worth Regional Office. "The Commission is seeking a court order to freeze Saleh's assets."

The SEC claims that Saleh violated the Securities Exchange Act of 1934 anti-fraud provisions, including specific provisions that prohibit trading while in possession of material nonpublic information about tender offers. A co-holder of the brokerage accounts is also named as a relief defendant.

The agency's investigation is continuing. It has already sought an emergency asset freeze, a preliminary injunction and a final judgment permanently enjoining Mr. Saleh from future violations federal securities laws. The complaint also seeks an order that would require him to pay financial penalties and disgorge all the gains with prejudgment interest.

Related Web Resources

If you would like to learn more about regulations related to insider trading and related topics, please visit the SEC's website.

Continue reading "Perot No-No -- $8.6 million Insider Trading Allegations Against Employee" »

For over a year now, investors have had regulatory agency support getting their Auction Rate Securities (ARS) out of the deep freeze.

Recently, the Financial Industry Regulatory Authority (FINRA) announced a settlement with an additional three firms who sold these investments, only to have the auctions freeze-up in February 2008. FINRA has now settled with a total of 12 firms.

The dollar amounts are staggering. Investors have been guaranteed the return of $1.3 billion and the firms have been fined $3.2 million. In the most recent settlement, Northwestern Mutual Services, LLC, of Milwaukee was fined $200,000, City Securities Corporation of Indianapolis was fined $250,000 and Fifth Third Securities, Inc., of Cincinnati was fined $150,000.

The universal problem with the ARS investments appears to have been the way, and to whom, they were sold. FINRA's Executive Vice President and Chief of Enforcement, Susan L. Merrill, noted that the "failure of firms to adequately disclose the risks associated with auction rate securities left customers unprepared for the failure of the auction market last year and the resulting consequences."

Generally, the failures of firms who sold these securities involved marketing materials or communications with firm sales forces that did not inform internal personnel of the potential problems with liquidity with these investments. Investors often purchased these believing that they were similar to Certificates of Deposit and that their investments could be accessed on a regular basis in the event liquidity was needed.

That turned out to be wrong in theory and practice as the auctions completely dried-up in the financial crisis in early 2008 and investors were stuck holding frozen assets.

As part of this particular settlement and according to FINRA's announcement, the firms involved have agreed to participate in a "special FINRA-administered arbitration program to resolve investor claims for consequential damages - that is, damages investors may have suffered from their inability to access funds invested in ARS." This program includes expedited arbitration proceedings that will be paid for by the firms.

Related Web Resources

Detailed information on ARS procedures and background, for both investors and industry professionals, can be found on FINRA's website.

Continue reading "Thawing To Liquidity -- $128 Million in Auction Rate Securities Holdings Repurchased " »

The Securities and Exchange Commission (SEC) has approved new rules that will enable the Financial Industry Regulatory Association (FINRA) to move promissory note disputes more quickly through arbitration and perhaps provide a reduction in costs for both the brokerage firms and individual brokers.

In Regulatory Notice 09-48, FINRA announced that the new procedures, effective September 14, 2009, allow parties to select a single arbitrator from the roster of those who are approved to hear statutory discrimination claims. FINRA noted that these arbitrators are uniquely qualified to hear such cases, given their expertise in the area of employment law and related disputes. All cases filed after the effective date will be subject to the new rule and amendments.

To accomplish these expedited procedures, FINRA has amended its Rules 13214 and 13600 of the Code of Arbitration Procedure for Industry Disputes and has also adopted new FINRA Rule 13806.

Specifically, these changes enable a streamlining of cases in which there are no allegations by the firms or associated persons other than a promissory note dispute, since these are straightforward contracts with few evidentiary documents.

The new rules will not only expedite these cases, but will also reduce expenses for all parties while ensuring that procedural safeguards remain in place. Depending upon the circumstances, including the amount in controversy, either one arbitrator or a panel will decide the cases.

Briefly summarized, the new rules provide as follows:

• If the associated person does not file an answer, simplified discovery procedures apply and, regardless of the amount in controversy, a single arbitrator will render an award based on the pleadings and other materials submitted by the parties.
• If the associated person files an answer (but does not seek any additional relief or assert any counterclaims or third party claims), regular discovery procedures will apply and, regardless of the amount in controversy, the single arbitrator will hold a hearing.
• If the associated person files a counterclaim or third party claim, then regular discovery procedures will apply and the number of arbitrators will be based on the amount of the counterclaim or third party claim.
• If the counterclaim and/or third party claim is not more than $100,000, exclusive of interest and expenses, the Director will appoint a single public arbitrator from the roster of arbitrators approved to hear statutory discrimination claims.
• If the counterclaim and/or third party claim is more than $100,000, then the Director will appoint a three-arbitrator panel comprised of one public arbitrator from the roster of arbitrators approved to hear statutory discrimination claims who would serve as chairperson, one arbitrator from the public roster and one arbitrator from the non-public roster.
• If the counterclaim or third party claim is filed after the single arbitrator is appointed, and a three-arbitrator panel is required, the Director will retain the appointed arbitrator as chair and appoint two additional arbitrators (one public and one non-public arbitrator) to the panel.

Related Web Resources

To learn more about FINRA and the many services and resources provided for brokers and investors visit www.finra.org.

Continue reading "Quick Steps -- FINRA Streamlines Dispute Resolution on Promissory Notes" »