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.

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.

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.

The AmLaw Daily posed the question in a piece last week and noted that at least one expert believes the bank's waiver could lead to "more lawyers getting access to privileged documents than the bank intended."

As the Securities Lawyer Blog has reported, the Securities and Exchange Commission (SEC) sued BofA for allegedly violating required shareholder disclosures in the merger with Merrill Lynch late last year. The case has been the subject of significant media attention as Judge Rakoff refused to approve the settlement between the SEC and BofA after extensive briefing and argument.

Once this occurred, the attention turned to the bank's lawyers at Wachtell, Lipton, Rosen & Katz who had represented and provided advice to the bank on the merger. BofA was under a great deal of pressure to "waive" attorney-client privilege in its communications with its lawyers as BofA had focused on its reliance on the advice of counsel in the alleged failure to follow disclosure requirements.

Last week, BofA agreed to "waive" attorney-client privilege in the SEC matter. Relying on Federal Rule of Evidence 502, BofA's counsel in the pending matter, drafted a waiver order that was presented to and signed by Judge Rakoff. The waiver also applies to the New York attorney general's investigation.

Rule 502 is intended to allow a limited disclosure of what would otherwise be privileged, so that investigation targets can disclose privileged documents to investigators without providing a broad waiver that might apply to other pending litigations.

However, Gregory Joseph who was involved in the drafting of Rule 502, believes that BofA and its lawyers did not properly word the waiver and as a result, 58 cases (including a class action) that it intended would not be subject to the disclosure, might in fact be exposed to a waiver argument.

That could hurt a great deal. Joseph's conclusion is that the order "does not operate to preserve the privilege as it is phrased because it is not authorized by Federal Rule of Evidence 502." The potential error in the drafting of the order is that according to Joseph, Rule 502 does not in fact deal with waivers, but rather allows corporations a limited disclosure, not a waiver.

Only time will tell whether other parties will attempt to use the disclosure order and its reliance on Rule 502, as a blanket waiver in the cases BofA (and the SEC which co-drafted the order) intended to protect.

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.

Even those who are not "street wise" are talking about the case. Perhaps because the Judge took it upon himself to attempt to embrace the larger issues and to do so with, shall we say, very strong language.

As noted recently in the Securities Lawyer Blog, the proposed settlement was at risk after the Judge requested more briefing. The Judge was interested in understanding why the agency had not sued individual executives, among other things. He seemed to be headed in this direction and now the case will go to trial. But the parties likely were holding out hope that the deal they had struck would put the issue to rest.

Now the public will likely see the agency go to trial against BofA on the issue of executive bonuses. A subject that seems to fire everyone up -- from Main Street to Wall Street.

The Judge had some unusually caustic words for the parties in this case, finding that the settlement "suggests a rather cynical relationship between the parties: the SEC gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger, the bank's management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense, not only of the shareholders, but also of the truth."

Ouch.

In an interview with the Huffington Post after the Judge's ruling, James Cox, a Duke University law professor and securities law expert said that he had " 'never seen this' " adding that to him, " 'it's long overdue.' "

New York Attorney General Cuomo also continues to be interested in whether shareholders were kept in the dark about the facts so that they would be more likely to approve the merger proposal.

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.

This settlement would be the second largest derivative action for stock options backdating, after the estimated $900 million settlement in the UnitedHealth Group Inc. backdating action in 2007.

Broadcom's shareholders claimed that individual defendants issued false and misleading statements to the Securities and Exchange Commission (SEC) for their own gain. The defendants are alleged to have manipulated the stock options for a period of ten years from 1997 to 2007. They ultimately were required to restate earnings downward in the amount of $2.2 billion.

The settling defendants include both current and former officers and directors, as well as Broadcom's former general counsel. These defendants deny wrongdoing as part of the settlement.

The settlement payment is to be covered by individual defendants' directors and officers liability insurance coverage. Plaintiffs' attorneys' fees and expenses in the amount of $11.5 is to be paid by Broadcom.

Several high-profile individuals are not part of this settlement. Those include former chief financial officer William Ruehle, co-founder and former chief executive Henry Nicolas, as well as co-founder Henry Samueli. Federal prosecutors filed criminal cases against Ruehle and Nicolas for stock options backdating. Samueli pled guilty last year for his role in making a false statement to the SEC.

This settlement stays a related shareholder class action against Broadcom pending the criminal trials against Ruehle and Nicolas.

Related Web Resources

If you would like to learn more about stock options backdating, visit the SEC's website.

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.

Recently, FINRA announced that Ameritas Investment Corp. located in Lincoln, Nebraska was fined $100,000, and one of its brokers fined $60,000 and suspended for nine months, for inducing investors to "take on additional mortgage and/or equity debt in order to purchase variable universal life insurance policies (VULs)" and in turn use those policies to fund retirement and college expenses. The policies have large annual premium payments and were unsuitable for many investors.

Where did Ameritas go wrong? FINRA alleged that Ameritas not only failed to adequately supervise one of its brokers, but also allowed advertising violations related to the broker's financial plans. Specifically, FINRA claimed the broker's financial plans were misleading to customers and often her recommendations that they purchase VUL's were unsuitable.

FINRA's Executive Vice President and Chief of Enforcement, Susan L. Merrill, has a solid lesson plan for firms and brokers. "Brokerage firms must exercise vigilance when their brokers recommend that customers use mortgage proceeds to purchase securities." She warns that "FINRA will aggressively pursue firms and individuals who use misleading financial plans to induce customers to purchase securities, particularly when those plans propose that customers refinance their homes or take out home equity loans to pay for the purchase of securities."

This seems obvious really. But unfortunately the Ameritas broker in question used misleading financial plans with over 220 customers that she had recruited in a separate college planning business. The plans were very complicated and to be successful, investors would have had to follow strict details for 20 years.

Investors were urged to buy a VUL from Ameritas and it was also recommended that investors refinance their home mortgages or take out home equity loans to pay for the VULs. This recommendation was targeted at those customers who had the means to pay this expense and those who were already having difficulties paying their expenses.

Don't bet the ranch. FINRA is particularly concerned about investors placing their homes at risk in the process of investing for college plans. They urge that college fund investing requires a bit more study on the part of investors seeking to save for their kids' tuitions. They suggest investors learn more about college savings plans by reviewing on-line materials on this subject as well as the risks of buying securities with the use of home equity mortgages. These materials can be found at www.finra.org.

Related Web Resources

Click here to see the FINRA press release on the college school plan fines against Ameritas and its broker.

The four principals of the firm, Radical Bunny, LLC which is located in Phoenix, Arizona, are alleged to have defrauded about 900 investors nationwide who invested a total of $197 million that was then funneled to Mortgages, Ltd.

After the funds were raised, Mortgages, Ltd. used the funds to make short-term loans at high rates of interest to commercial real estate developers in the building of malls, condo projects, office complexes and various other developments. Mortgages, Ltd. sought bankruptcy protection in June 2008 and in a tragic turn the following month, its chief executive took his own life.

The four individuals involved also invested in the venture and sustained losses. According to their attorney, the principals did not mislead investors. He noted the fact that the principals made their own investments and subsequently suffered losses along with their investors, evidences their good faith.

However, the SEC doesn't agree.

The SEC's suit claims that investors were misled by the principals of Radical Bunny through material misrepresentations not only about the safety of their investments, but also the risks involved and the nature of the underlying investments.

The SEC suit also claims that the defendants' received legal advice that the investments were subject to securities laws, but investors were told otherwise.

As in the case of many of the Madoff investors, funds were raised through word-of-mouth through the defendants' friends and family.

In its press release issued July 31, 2009, the SEC claimed that in this scheme the "promoters promised investors more than they could possibly deliver." Rosalind Tyson, Director of the SEC's Los Angeles Regional Office noted that "Even to friends and family, they repeatedly overstated the safety of the investment and their knowledge of the underlying business to which they lent investor funds. Unbeknownst to investors, more and more of their money was being shifted into fewer and riskier loans."

According to the SEC, the defendants invested over time in fewer and more risky loans while the investors were kept in the dark as to the underlying investments. The suit seeks financial penalties against the principals, as well as injunctive relief. Radical Bunny is currently in bankruptcy proceedings.

At this point, we don't need to be reminded that investors must be diligent in their knowledge of the principals of any venture and the underlying investments being made. Seeking an independent legal opinion is always a good idea.

Related Web Resources

The complaint against Radical Bunny, LLC can be read in full on the SEC's website.

The impact of the big bonuses continues to make headlines as last week the Securities and Exchange Commission (SEC) announced simultaneously that it had filed suit and settled with the Bank of America (BofA) for hefty bonuses paid out to Merrill Lynch executives. BofA, which is headquartered in Charlotte, North Carolina, neither admitted nor denied the allegations on settlement.

The claim against BofA arose from the bank's plan to pay some $5.8 billion in bonuses for the fiscal year 2008.

So what's the problem with that? Seems to be business as usual.

The SEC claimed BofA allegedly failed to disclose the bonuses in its proxy statement, which misled investors after the acquisition of the brokerage. Regulators claimed that the bank informed its shareholders that it did not intend to pay year-end bonuses when in fact this was not the case.

The SEC's Director of the division of enforcement, Robert Khuzami, noted that this failure to disclose violated the bank's duties to its shareholders and therefore warranted the significant penalty imposed.

The settlement is subject to court approval and at this point, approval is not forthcoming.

The $33 million penalty which would put the issue to rest with the federal regulators, was not warmly received by Judge Jed Rakoff at the court hearing yesterday. He has ordered more briefing from the parties as he questions the adequacy of the settlement and the lack of transparency about what was known, when and by whom about the bonuses. In heated proceedings yesterday, the Judge voiced anger over the situation and wants to know more from all parties before approving the settlement as it is fashioned now.

Unfortunately for BofA, according to CNNMoney.com, Congress may not be quite so ready to close this issue. The House Committee on Oversight and Government Reform has suggested through ranking member Rep. Darrell Issa, R-Calif., that the SEC matter served as validation of their concerns that had been swirling in an investigation concerning the Merrill acquisition as well.

But wait, there's more.

New York Attorney General Andrew Cuomo also suggested that the BofA / Merrill bonus issue may not be closed for the state either as state securities laws may also have been violated.

Related Web Resources

BofA to pay $33M fine over Merrill bonuses -- SEC charged Bank of America with failing to alert shareholders about bonus payments to Merrill Lynch, bank settles and agrees to pay fine, CNNMoney.com, August 3, 2009

What went wrong for customers? Poorly supervised brokers sold closed-end funds at the initial public offering (IPO) as short-term sales, when in fact these funds are more suitable as long-term investments.

This was a sweet deal for brokers until it all came to light and now five at Merrill Lynch were suspended for 15 days and fined $10,000 each. FINRA continues its investigation of UBS brokers with regard to these sales.

In the CEF's at issue, brokers made substantial commissions of 4.5 per cent and after the expiration of a 30-90 day penalty bid period, would recommend to investors that the CEF shares be sold, often at a loss, only to recommend another purchase of CEF at the initial offering. Internally, neither Merrill Lynch nor UBS had appropriate procedures in place to detect this practice or to warn investors of the potential risks involved in the CEF short-term sales.

FINRA fined Merrill Lynch $150,000 and UBS $100,000 for this practice and the failure to adequately supervise and safeguard against it. In imposing these fines, FINRA took into account the remediation efforts of these companies, which included over $3 million to customers by Merrill Lynch and over $2 million to customers by UBS.

Prior to the FINRA investigation, both companies had hired outside counsel to conduct internal investigations into CEF practices and had sanctioned a number of brokers involved. Both companies' remediation efforts prior to the FINRA investigation included payments to customers. This was considered in the imposition of the fines for the CEF practices.

FINRA announced that in settling these particular matters, neither company admitted or denied the charges, but did consent to entry of the FINRA findings.

Related Web Resources

FINRA Fines Merrill Lynch, UBS for Supervisory Failures in Sales of Closed-End Funds; Customers Get More Than $5 Million in Remediation; Five Merrill Brokers Suspended, Fined; Investigation of Former UBS Brokers Continues, FINRA, July 28, 2009