Securities Lawyer Blog

The Securities Lawyer Blog has recently posted on rulemaking and regulatory enforcement matters that are related to conflicts of interest in several contexts. As we noted in discussing FINRA Regulatory Notice 10-54, Dodd-Frank and related SEC mandates are intended to address the underlying obligations of broker-dealers and investment advisers "to facilitate simple and clear disclosures of material conflicts by both broker-dealers and investment advisers."

Conflict of interest allegations can arise in various circumstances in the securities industry. Earlier this month, Citigroup Global Markets, Inc., settled conflict of interest allegations with the Financial Industry Regulatory Authority (FINRA) that arose in the context of research reports and research analyst's public appearances. The firm has agreed to pay $725,000 for the resolution of the allegations against it.

FINRA claimed that Citigroup did not disclose potential conflicts of interest that were relevant to business relationships that it maintained. At issue in the matter were research reports that the firm published from early 2007 through the first quarter of 2010. Part of the problem was alleged by FINRA to have been due to supervisory failures that otherwise might have caught the lack of required disclosures.

Additional allegations made by FINRA in this situation related to several issues. First, the firm did not disclose its management or co-management of public securities offerings; second, the firm did not disclose that it made a market in the securities of, and/or had a one percent or greater beneficial ownership in, covered companies from which it received revenues, and; third, the firm failed to disclose this in research reports.

Added to these allegations is the claim by FINRA that in public appearances, research analysts did not disclose potential conflicts when allegedly conflicted companies were discussed. According to FINRA's Executive Vice President and Chief of Enforcement, Brad Bennett, these alleged failures " 'prevented investors from being aware of potential biases in its research recommendations.' "

A major factor in the disclosure failures was stated by FINRA to be problematic databases that were used by the firm to manage and identify conflicts of interest. In this case, as in many others we have posted in the past, the databases were claimed to have been either inaccurate and/or incomplete. These database problems are alleged to have derived from what were deemed to be "technical deficiencies."

Wall Street's Gusrae Kaplan Nusbaum PLLC represents broker-dealers in regulatory and enforcement matters. We regularly advise clients and defend industry members before all regulatory entities in matters involving a broad spectrum of issues for broker-dealers and firms. These issues include maintaining adequate supervision and providing marketing materials that properly disclose potential conflicts of interest. Contact our law firm to consult with one of our attorneys and to learn more about our law practice.

Last week, we posted the first part of our summary of FINRA's year-end review of its efforts in various areas of enforcement. This week we bring you part two of that review.

One major area of focus this past year for FINRA has been its securities firm examination program. Several key reforms were made to "better detect potential fraud and to focus on areas of risk." To this end, FINRA conducted more than 3,050 examinations in 2011 and deployed the resources needed to accomplish these examinations. For example, matters that pose the most risk to investors are now designated as urgent, with resources allocated to expedite the review of these matters. One area in which this has been evident is in the staffing of district offices, which has increased to manage the push for greater real-time monitoring.

As noted in our last post, branch-level examinations are increasing, as are point-of-sale examinations. The shift this past year included greater time in the branch offices for FINRA staff -- another way in which resources were allocated in a different way than they have been in the past. This is borne out by the numbers, as FINRA reported an increase of 350 more branch office exams than in the past year. This is a significant increase that is likely continue into 2012.

Another major area of significant expansion for FINRA was in equity markets regulation. FINRA took over the primary surveillance of the NYSE's equity and options markets, and according to the agency its collection of data is now accounting for 80 percent of volume across the NASDAQ and NYSE.

New developments for 2012 include the creation of comprehensive cross-market surveillance patterns which will be evaluating trading activity across these markets simultaneously. According to FINRA, the "consolidation of market data for integration into new cross-market surveillance patterns will help FINRA identify problematic trading activity more quickly." The intention is to "detect improper conduct" as soon as possible and then take steps to stop it from continuing. In addition, the NYSE's Order Tracking System is essentially being replaced as FINRA has now expanded its tracking systems to meet its cross-markets surveillance responsibilities.

Arbitration panel composition was another area of change for FINRA, with nearly 4.400 arbitration matters filed last year. As we posted last year, FINRA's new arbitration rule made it possible for customers with three panel arbitrations to have those panels comprised of only public members. This was intended to support the public's confidence in the arbitration process.

Finally, FINRA notes that its Investor Education Foundation issued investor alerts on a number of topics. We have posted information about some of these alerts this past year, which are intended to educate the public on various issues, including potential scams and high-risk investments.

The New York firm of Gusrae Kaplan Nusbaum PLLC represents firms and broker-dealers in regulatory and enforcement matters. Our lawyers advise our industry member clients in matters involving a broad spectrum of issues before all regulatory entities. Contact our law firm to consult with one of our attorneys.

As 2011 comes to a close, the Financial Industry Regulatory Authority (FINRA) has issued a look-back at the year. The agency posted some interesting statistics on activities in the areas of investor protections, fraud avoidance and various efforts to "ensure the securities industry operated fairly and honestly for investors." Noting the achievements of this past year, the agency has certainly been proactive in this charged environment that carries with it not only investor expectations, but a greater public focus on financial markets and their stability.

Advising and representing broker-dealers and firms, the lawyers of the Securities Lawyer Blog are well aware of the proactive regulatory and enforcement environment. FINRA's numbers are noteworthy. In the area of disciplinary actions for example, FINRA brought over 1400, involving both firms and registered individuals. The fines resulting from these amounted to over $63 million. Restitution to investors amounted to over $19 million.

The Securities Lawyer Blog has also posted throughout the year on expulsions and suspensions that have resulted from various enforcement actions and settlements. FINRA notes that its numbers are up from 2010 in this regard, with the suspension of over 430 brokers and the barring of nearly 320 individuals from association with regulated firms. The agency reports that it expelled 17 firms from operating within the securities industry.

The year-end review for FINRA's Office of Fraud Detection and Market Intelligence (OFDMI) included referrals to other regulators in over 600 matters. The breakdown of those referrals between federal and state regulators and law enforcement is not delineated in FINRA's statistics.

Coordinated efforts with the Securities and Exchange Commission in the area of real-time surveillance is noted to have made it possible for the OFDMI to expedite matters that involved potential fraud and insider trading. Nearly 640 matters were referred out by OFDMI for further investigation when real time surveillance pointed to potential issues. These matters were referred to various enforcement agencies, including the SEC, state and federal agencies.

Over the year, the Securities Lawyer Blog has also kept our readers informed of the many matters involving firms and broker-dealers in the area of retail product promotions and unsuitability issues involving structured products. FINRA notes that it has been very active during the year highlighting its activities in the area of 'sales practice violations" that include a broad spectrum of issues, such as "misrepresentation, material omissions, unsuitable recommendations, and inadequate supervision and training in principal-protected notes, reverse convertibles and subprime investments."

We will continue the year-in-review with the area of examinations and market regulation in our next post. The lawyers of New York's Gusrae Kaplan Nusbaum, PLLC are pleased to bring our readers the Securities Lawyer Blog. Please contact our New York or Florida offices to learn about our law practice and speak with one of our highly-experienced attorneys.

We wish you all a good and productive year in 2012.

Recently, the Financial Industry Regulatory Authority (FINRA) announced that it has settled two separate and unrelated enforcement matters involving Barclays Capital Inc. (Barclays) and Wells Fargo Investments, LLC, (Wells Fargo) which together resulted in fines totaling about $5 million.

The matter involving Barclays which was settled for $3 million, centered around allegations that the firm misrepresented delinquency data with regard to certain investments and provided inadequate supervision with regard to their offering and sale. The Securities Lawyer Blog has posted on other matters in the recent past involving failures to adequately supervise as alleged in regulatory and enforcement actions.

The Barclays matter and settlement involved the issuance of residential subprime mortgage securitizations (RMBS). FINRA alleged that for a period of about three years, from 2007 through 2010, the firm allegedly misrepresented the historical delinquency rates for certain subprime RMBS that it offered. Noting that "historical delinquency rates are material to investors," both in assessing RMBS value and potential future returns based on the potential for mortgage payment failures, the firm allegedly misrepresented these rates for three of the RMBS underwritten and sold by Barclays.

Specifically, FINRA claimed that the firm posted delinquency data on its website that was inaccurate. The errors in this historical information was said to have been significant, so much so that it could impact investor's ability to evaluate the investment value and "subsequent securitizations."

The issue related to supervision involved FINRA's allegation that the firm did not have in place a system that would ensure that its website disclosures were maintained and updated. Without supervision of these critical components, the delinquency data could well be inaccurate, making it difficult if not impossible for investors to assess future RMBS investment performance.

The matter involving Wells Fargo, which was settled for $2 million, involved alleged activities with regard to one broker and 21 of the firm's customers. The firm was alleged through this broker to have provided "unsuitable sales of reverse convertible securities." In addition, it was also alleged that customers eligible for sales charge discounts on Unit Investment Trust (UIT) transactions were not provided those discounts. Under the settlement, these customers will now be given restitution for the non-payment of discounts and the unsuitable transactions.

FINRA also filed a complaint against the registered representative who was alleged to have been involved in the recommendation and sale of unsuitable reverse convertibles. He was also alleged to have been involved in dealing improperly with customer accounts, including deceased customers, and making unauthorized trades. These investments were recommended to the very elderly (many over the age of 80) and low-risk tolerance investors and were held in disproportionately high concentrations in these accounts.

The lawyers of Wall Street's Gusrae Kaplan Nusbaum PLLC, are experienced advisors to firms and broker-dealers in all areas of compliance and representation. Contact our law firm for more information on our wide range of services, including regulatory and enforcement representation, broker-dealer advisory services and securities litigation. We are a firm comprised of experienced former senior level regulators and securities and compliance litigators, providing advisory and litigation services and representation before all regulatory agencies.

The Securities and Exchange Commission (SEC) has issued a statement on a matter involving a Chicago option trader who has agreed to pay $2 million to settle allegations that he violated short selling restrictions. The SEC administrative proceeding under Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") involved a cease-and-desist proceeding against the trader. In anticipation of this proceeding, an Offer of Settlement was made and accepted by the SEC.

The trader was alleged to have violated requirements of Regulation SHO -- which the Securities Lawyer Blog has highlighted in past posts. In this case, the trader was ordered to cease and desist from violations of Rules 203(b)(1) and 203(b)(3) of Regulation SHO.

Specifically, the "locate" and "close out" requirements were said by the SEC to have been violated. These provisions require that before selling short, traders locate a source of borrowable shares. The shares must be deliverable by a date certain and only those market makers engaged in bona-fide market making in the excepted security are permitted to operate under the exception.

In this case, the allegations center on the SEC's conclusion that this particular trader used the "market maker exception" improperly. His business loaned certain stocks to broker-dealers that are generally "hard-to-borrow." Those broker's customers received locates and stock loans on those shares. The stock provided was actually not available for delivery, which amounted to illegal naked short sales that were effectuated between late 2006 to June 2007.

As noted by George S. Canellos, Director of the SEC's New York Regional Office, the Commission intends to aggressively " 'pursue and punish abusive short sellers who attempt to circumvent regulatory requirements to make more money.' " The trader in this matter was alleged to have "avoided the cost of borrowing shares while engaging in complex short selling transactions," which resulted in great profits, lower risks and advantages over legitimate market participants.

Delineating two types of transactions in the alleged practices, the Commission's allegations centered on a "reverse conversion" or "reversal" in which stocks are sold short with a simultaneous put option sale and a call option buy. The other transaction involved a sham that combined stock-and-option transactions that created "the illusion that the party subject to a close-out obligation has satisfied that obligation by buying the same kind and quantity of securities it has sold short."

The trader sought to create an appearance of Regulation SHO compliance when in fact the shares purchased were not delivered. This naked short selling practice meant that the trader and his former firm failed to deliver shares resulting in what the Commission noted as "persistent 'fail-to-deliver' positions." The attempt to take advantage of the market maker exception to Regulation SHO was improper since in fact these parties were not involved in bona-fide market making with the securities they traded.

Gusrae Kaplan Nusbaum PLLC represents broker-dealers in regulatory and enforcement matters. Establishing policies and procedures designed to comply with all regulatory requirements is critically important for industry members. Our lawyers include highly-experienced former regulators and experienced litigators that help our 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.

In the past few months, the Securities Lawyer Blog has posted on several alleged supervisory problems that firms have settled with FINRA or the SEC. As a key component of compliance and supervision, FINRA and SEC staff have now issued a joint Regulatory Notice 11-54 for guidance on branch office inspections, as well as a Risk Alert related to this issue. These are intended to guide the securities industry to "better perform this key supervisory function" as well as to protect investors and firms.

The SEC Office of Compliance Inspections and Examinations and FINRA examination staff have put together a list of the elements that comprise firm best practices with regard to the process of branch examinations. These include such specifics as: focusing the exams on the business within the specific branch; scheduling the exams in terms of underlying risk, as opposed to an arbitrary cycle; conducting an exam at least on an annual basis; performing unannounced exams that are based on the risk and also selecting branches randomly; using senior level examiners who are in a better position to challenge assumptions; and, ensuring that procedures are in place to avoid the types of conflicts of interest that would make it difficult for the examination to be effective.

On the other hand, staff has identified various common deficiencies in branch inspections, which include: failing to tailor the examination procedures based on the business itself or the underlying risk assessment; using examiners who are not sufficiently experienced to fully understand the business or to effectively challenge assumptions; performing cursory exams that are generic; failing to adequately review the exam program itself for effectiveness and following existing policies and procedures; announcing exams when they should have been unannounced; failing to focus on individuals with a history of disciplinary issues and applying more supervision with those individuals.

Other suggested approaches to ensure compliance and effectiveness are also identified in the guidance issued jointly by the agencies. One important area is analyzing the risk to support the evaluation as to whether certain branches should be inspected more often than required within the FINRA three year cycle. Additionally, engaging in unannounced re-audits is a suggested practice when varying degrees of deficiencies are found. Circling back to branch office managers with the firm's internal inspection findings with monitoring of corrective measures within the branch is also suggested.

The Wall Street law firm of Gusrae Kaplan Nusbaum PLLC provides legal counsel and representation to firms and 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 discuss our advisory services and representation by lawyers with expertise and experience before all regulatory agencies and courts in the field of securities law.

As experts in the field of securities law and regulation and the representation of broker-dealers, the New York securities lawyers of the Securities Lawyer Blog recently reviewed a filing by the Securities and Exchange Commission (SEC) in Massachusetts. In the action, the SEC filed charges against an investment firm and its principal in Boston. The SEC's complaint was filed in the U.S. District Court in Massachusetts and the court quickly issued a temporary restraining order after the SEC sought an order to freeze assets of the investment firm and its hedge fund.

The allegations of the SEC's complaint include charges that the firm misled investors regarding many aspects of its business, including where the funds raised were actually being placed, in this case, allegedly into the money manager's personal bank account.

The purported hedge fund was the magnet to which potential investors were attracted, but according to the SEC, the solicitation was fraught with misleading information that included false statements. These included that: the principal graduated from Harvard University with both undergraduate and graduate degrees; that he worked for a major global investment company in which he grew and managed billions of dollars; that a major auditing firm served as the purported fund's auditor; and that the firm was a British Virgin Islands company.

The SEC's allegations include that by creating the "indicia of legitimacy" using misrepresentations, the principal had ten investors that may have put up at as much as $1.7 million. Some of this was placed into the principal's personal accounts.
The SEC says both the Swiss Financial Market Supervisory Authority and the British Virgin Islands Financial Services Commission has assisted in the matter, which remains under investigation. Both these entities are involved in regulatory compliance, supervision and inspection of financial services businesses operating within their jurisdictions.

The alleged violations in this matter include those under Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8.

The New York law firm of Gusrae Kaplan Nusbaum PLLC represents broker-dealers and firms in matters involving a broad spectrum of issues before all regulatory entities. Please contact our law firm to consult with one of our attorneys in any matter related to securities regulation and compliance, broker-dealer services and representation before all entities involved with the regulation and compliance of the securities industry.

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.

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.

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.

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.

Earlier this month, an Illinois trader was suspended by the Financial Industry Regulatory Authority (FINRA) for trading activity that allegedly was intended to manipulate the market. He will be suspended for a period of 16 months and has been fined $175,000. He must also pay restitution of $171,740 for the alleged improper trading activity.

The alleged improper activity involved spoofing in which the trader had over ten undisclosed brokerage accounts used to inflate the price of a security on the NASDAQ. He is alleged to have placed a number of limit orders in small amounts that were intended to raise the National Best Bid or Offer (NBBO) for the particular security. He is then alleged to have executed larger orders for the same security that were intended to take advantage of the inflated NBBO price using a firm that guaranteed that price. When the larger order was completed, the limit orders were cancelled by the trader.

In this matter, the allegations included a claim that the trader "entered over 4,000 small share orders through his trading account at Great Point Capital LLC, his employer, to improve the NBBO for a Nasdaq security." Once the market price was elevated based on this activity, he would enter into a much larger order for the securities that had been the subject of the smaller orders.

Using an undisclosed personal brokerage account, he is alleged to have taken the benefit of the trade and then cancelled most of the original orders that were transacted through the employer's trading account. This pattern was repeated according to FINRA in over 400 trades in which a total of over $170,000 was gained through the improper inflation activity.

The matter was said by FINRA to have been referred to them by NASDAQ's MarketWatch Department which provides real-time surveillance for activity on the NASDAQ Stock Market, NASDAQ OMX BX and the NASDAQ Options Market. It is certainly instructive that the technological advances in monitoring trading activity is one more tool in the hands of regulators and enforcement to ensure that trading is fair and proper.

FINRA has said that it intends to "aggressively pursue disciplinary actions for manipulative trading schemes that undermine legitimate trading activity." Clearly, FINRA has the ability to detect patterns that arise from improper trading activity and is able to uncover this activity even when it is done through non-disclosure of outside brokerage accounts.

The New York firm of Gusrae Kaplan Nusbaum PLLC represents broker-dealers in regulatory and enforcement matters. Our lawyers advise clients and defend industry members in matters involving a broad spectrum of issues before all regulatory entities. Contact our law firm to consult with one of our attorneys.

Earlier this week, Citigroup Global Markets, Inc, agreed to settle a matter involving alleged supervisory failures with The Financial Industry Regulatory Authority (FINRA). The firm will pay a penalty of $500,000 for its alleged failure to identify the activities of one of its registered sales assistants who is no longer with the firm. The situation is alleged to have taken place over an 8-year period of time and occurred in one of the firm's branch offices, specifically in Palo Alto, California.

FINRA claimed that the employee was involved in misappropriation of 22 customer accounts which amounted to $749,978 in customer funds over this period of time. The activities included falsification of account records and unauthorized customer account trades.

As regulatory and enforcement securities lawyers, we suggest that the facts surrounding this situation are instructive to all firms and broker-dealers to ensure that supervisory lapses do not occur. In this case, the employee is alleged to have taken advantage of "Citigroup's supervisory lapses" at the Palo Alto branch in which elderly and ill customers were targeted. The sales assistant apparently targeted those customers whom she knew would be less likely to read their account statements.

Two years ago, FINRA took action to bar the sales associate from further activities. According to the agency, it is still in the process of investigating others involved in supervising her. Citigroup has paid restitution to the customers involved in these incidents.

In this matter, Citigroup is alleged to have "failed to detect or investigate a series of 'red flags' that upon further inquiry should have alerted the firm to [the assistant's] improper use of customer funds." We have previously posted on the impact of similar failures when firms ignore red flags.

Here, FINRA said these red flags included "exception reports highlighting conflicting information in new account applications and customer account records reflecting suspicious transfers of funds between unrelated accounts." It is also alleged that the firm's systems and controls in supervision and review made it possible for the sales assistant to falsify various records.

Specific instances involved suspicious discrepancies with customer addresses and phone numbers, which the sales assistant tried to explain away to her supervisors. FINRA says the explanation was not reasonable and the firm should have looked further.

FINRA also claims that the firm ignored suspicious activity involving transfers and disbursements in various accounts that the sales assistant was able to access, enabling her to use the funds for her own purposes. She was even able to open an account in her father's name to further her activities with no repercussions from the firm. Her activities also included accounts of deceased customers and others that went undetected by Citigroup, even when red flags were present.

Ensuring proper supervision and compliant systems enables firms to avoid regulatory action. 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.

Auction Rate Securities (ARS) have cost firms a great deal in settlements with both investors and regulatory authorities. Although many firms have completed settlements with regard to these securities, some are just now completing their troubled ARS histories with regulatory settlements.

Earlier this week, SunTrust Robinson Humphrey, Inc. (SunTrust RH) and SunTrust Investment Services, Inc. (SunTrust IS) agreed to settle with The Financial Industry Regulatory Authority (FINRA) for $4.6 million related to Auction Rate Securities sales and marketing.

The firm has been repurchasing millions of dollars of the failed ARS from their customers, as have many other broker-dealers. The firm will continue to settle with its investors and participate in FINRA's special arbitration program in which some investors are able to make their case for payment of consequential damages.

The settlement was reached to resolve claims made by the agency that SunTrust RH had failed adequately to disclose such issues as risks associated with theses securities and the potential for auction failures. These allegations are similar to those that have been made against many firms that sold ARS. In addition, FINRA alleged that the firm had not supervised or trained sales personnel. The related entity SunTrust IS, was fined $400,000 for an alleged deficiency with regard to sales material, as well as deficiencies with sales training and procedures.

The FINRA findings included allegations that the firm was aware of the potential for ARS failures, but that some sales people continued to sell the firm's ARS issues, hoping to reduce inventory. In addition, SunTrust RH sales personnel represented that these issues were safe and liquid. And finally, the firm stopped supporting these auctions, aware that they were likely to become frozen.

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

New York City's Wall Street law firm, Gusrae Kaplan Nusbaum PLLC, represents brokers and traders before all regulatory agencies. Please contact our law firm to talk with one our lawyers about representation and our litigation and advisory practice. The expertise and experience, as well as the regulatory background of our preeminent lawyers, is invaluable in dealing with a wide variety of legal matters and issues.

Last week, the Securities and Exchange Commission (SEC) settled a major action with J.P. Morgan Securities LLC (JPMS) in which the firm and its affiliates have agreed to pay over $200 million. The SEC had filed an action that alleged the firm had "fraudulently rigged" nearly 100 bond reinvestment transactions in over 30 states.

The settlement includes payments that will be returned to municipalities and other entities, as well as payments to settle parallel actions that were brought by other affected entities.

The allegations essentially involved "secret arrangements" that the firm is claimed to have had with bidding agents. The arrangement allowed the firm access to competitors' bids putting the issuers and the investors at a severe disadvantage and ensuring the firm's profits.

The allegations in the complaint for violations of federal securities laws, also involve a specific practice in which the proceeds of tax-exempt securities were not invested at fair market value because an actual fair market price was not possible to set given the lack of a fair competitive bidding process.

The alleged practices involved a lengthy time frame from 1997 through 2005 and the impact was wide spread. The alleged "fraudulent practices, misrepresentations and omissions" are said to have impacted the fairness of the bidding process and the price that municipalities paid for reinvestment of proceeds.

The SEC's action was filed in the United States District Court for the District of New Jersey and claims that the "last looks" practice enabled the firm to win bids unfairly and facilitated submission of rigged non-winning bids. The SEC noted that the "fraudulent conduct jeopardized the tax-exempt status of billions of dollars in municipal securities because the supposed competitive bidding process that establishes the fair market value of the investment was corrupted."

Related actions include an enforcement matter against a former marketing executive involved with the scheme who cooperated with the investigation as well as other prior matters involving corruption in the reinvestment industry. The SEC notes that the investigation in continuing which could mean that more actions are to follow against other firms involved in this area.

New York City's Gusrae Kaplan Nusbaum PLLC, represents broker-dealers and firms before all regulatory agencies. Please contact our law firm for a confidential consultation with one our lawyers. Our highly-respected, preeminent lawyers have decades of experience and expertise representing Wall Street broker-dealers and firms.