Securities Lawyer Blog

Recently, the Securities Lawyer Blog posted that the Financial Industry Regulatory Authority (FINRA) was set to take over responsibility for performing market surveillance and enforcement functions that were previously conducted by NYSE Regulation.

In mid-June, the agreement was finalized and FINRA has now taken over the regulatory functions for the following markets and exchanges: NYSE Euronext's U.S. equities and options markets; New York Stock Exchange; NYSE Arca, and NYSE Amex.
This adds to FINRA's scope of responsibility as it already provides regulatory services to several other markets and exchanges including the NASDAQ Stock Market and NASDAQ Options Market, among others.

The move towards consolidation in these functions is intended to create what NYSE's Euronext COO Lawrence Leibowitz called "a consistent and completely integrated approach to regulation."

FINRA's Chairman and CEO, Richard Ketchum echoed this view noting that the consolidation is a "significant step in addressing the fragmented trading environment, which has eroded the ability of regulators to get a complete picture of market activity." He went on to call this a "more holistic, unified approach" that will benefit markets and protect investors.

According to Nasdaq.com, Mr. Ketchum had previously warned that multiple regulators created potential for loopholes, avoidance of oversight and created an "incomplete picture" of the overall market.

The oversight for these regulatory services will continue to be provided by NYSE Euronext, through its subsidiary NYSE Regulation. Costs for this function and staffing should remain at prior levels, although some staff is expected to move over to FINRA.

Continue reading "NEWS UPDATE: FINRA TAKES OVER SURVEILLANCE AND ENFORCEMENT" »

The mortgage crisis? It's not over and the SEC just reminded us of that.

Earlier this week, the Securities and Exchange Commission (SEC) charged Thomas Priore, the owner and president of ICP Asset Management, LLC (ICP) and affiliated broker-dealer and holding company firms, with fraud. The action relates to the management of mortgage investment products.

Specifically, the civil action, filed in the United States District Court for the Southern District of New York, charges that Mr. Priore and affiliates fraudulently managed collateralized debt obligations (CDO's). The defendants intend to vigorously defend themselves against these charges and have issued a statement that they acted in their clients' best interests at all times.

The filing of this action is part of the SEC's ongoing investigation surrounding the financial crisis and its relationship to such products as CDO's and the major losses suffered during this period with these sorts of investments.

The impact alleged in this case is big. The SEC's allegations include "fraudulent practices and misrepresentations" that resulted in four multi-billion dollar CDO's to lose millions of dollars. Additionally, the defendants are alleged to have secured large advisory fees and undisclosed profits related to these investments at the "expense of their clients and investors," taking advantage of the distressed market for their own benefit.

The SEC also claims that the defendants allowed trades for the CDO's knowing that the prices were inflated and that clients would be exposed to overpayment and potential losses.

The SEC's New York Regional Office Director, George S. Canellos, put it this way: "The CDOs were complex but the lesson is simple: collateral managers bear the same responsibilities to their clients as every other investment adviser." He continued saying that advisers will be held accountable when clients' trust is violated.

Related Web Resources

For more background on this case and other aspects of the mortgage crisis, go to law.com.

Continue reading "SEC Files Fraud Action Related to Housing Woes " »

The Securities Lawyer Blog has posted previously on the problems brokers and dealers face when supervisory failures arise. The Financial Industry Regulatory Authority (FINRA) recently closed a matter involving alleged supervisory failures by Citigroup Global Markets Inc.

This matter has many twists and turns and would be best presented by a visual roadmap of alleged fraud and misappropriation. But, simply stated, it boils down to supervisory violations in the handling of cemetery trust funds in Michigan and Tennessee.

Specifically, the $1.5 million sanction imposed was half for fines and half for disgorgement of commissions. The cemetery trusts will receive partial restitution from the sanction.

The Big Scheme
The problems for Citigroup are alleged to have taken place over a two-year period and involved a broker and two customers. They are alleged to have created and executed a scheme that involved more than $60 million in cemetery trust funds and included the use of trust funds to purchase cemeteries and funeral homes.

The Citigroup broker involved helped his clients open improper personal accounts. He also helped the transfer of monies from these accounts to third party accounts that were used to hide the misappropriation of funds and fake investments.

Red Flags Ignored
FINRA found that Citigroup failed to appropriately supervise these accounts and also failed to respond to red flags that could have stopped these activities. The prior employer of the broker involved in this scheme warned Citigroup of the irregularities in trust fund movement.

But Citigroup did not adequately investigate the warning. Even after a series of unusual transfers and opening of accounts in third party names, Citigroup allegedly did not pursue the matter adequately.

Whistleblower Letter
Citigroup even received a whistleblower letter that apparently was quite credible from a party whose company was involved as a trustee for the cemeteries. The letter exposed some of the broker's unusual activities, including the use of a personal email address to avoid Citigroup's monitoring systems. FINRA said that even after this, Citigroup did not respond adequately to stop the allegedly improper activity.

Related Web Resources

For more information on broker-dealer status, visit FINRA's service, BrokerCheck®.

Continue reading "Laid to Rest -- $1.5 Million FINRA Sanction Closes Citigroup Cemetery Trust Fund Supervisorial Mess" »

This week brings news of the opinion issued (after a ruling earlier this year) by Judge Rakoff in the class action case brought by the Public Employee's Retirement System of Mississippi. Judge Rakoff does not need to be introduced to Securities Lawyer Blog readers - to review prior postings on his rulings, click here and here.

Judge Rakoff weighed in this week on the ratings agencies role in evaluations for securities offerings. The plaintiffs' claimed that the defendants including Moody's and McGraw-Hill Companies' Standard & Poor's were actually acting as underwriters. This claim was dismissed with prejudice. The plaintiffs' argued that securities were issued based on ratings agency evaluations and that these evaluations formed the basis of allegedly false and misleading statements in offering documents.

Calling this claim an "extremely broad view of what constitutes an underwriter" the opinion points out that under Sections 7 and 11 of the Securities Act of 1933 the security rating that is assigned by a nationally recognized statistical rating organization is not considered part of the registration statement prepared or certified by a person within the meaning of these sections. The opinion also notes that the SEC does not interpret underwriters as falling under these definitions.

According to law.com, there are a few defendants left in the case after dismissal of Merrill Lynch subsidiaries Merrill Lynch Mortgage Lending and First Franklin Financial, JPMorgan, ABN Amro, and Credit-Based Asset Servicing and Securitization. The remaining claims are now those brought against individual Merrill executives, Merrill Lynch Mortgage Investors, and Merrill Lynch, Pierce, Fenner & Smith.

As the opinion in the class action case was issued, and quite coincidentally, as Mr. Warren Buffet weighed in on the ratings agencies after having been subpoenaed to the Financial Crisis Inquiry Commission on the business practices of the ratings agencies. Mr. Buffett testified at the same hearing as Moody's Investor Services CEO, Raymond McDaniel.

The subpoena was issued after several attempts by the Commission to bring Buffett to the table voluntarily. Berkshire Hathaway is the largest Moody's shareholder and Mr. Buffett has been a big seller of Moody shares as well.

To view Mr. Buffett's testimony on the ratings agencies click here.

Continue reading "Class Dismissed -- Claims Against Ratings Agencies Ousted by Judge Rakoff" »