Securities Lawyer Blog

Earlier this week, Judge Jed S. Rakoff put his judicial foot down on the proposed settlement that had been reached between the SEC and Citigroup. The settlement would have resolved the SEC's allegations that the firm had mishandled the marketing of collateralized debt obligations (CDO's) that Citigroup sold.

In Judge Rakoff's words, the firm "dump[ed] some dubious assets on misinformed investors" and the settlement was reached before sufficient facts had been brought to light about the funds set up for the CDO's. He said that without "cold, hard, solid facts" to satisfy the public's interest, he could not approve the settlement.

The consent judgment would have resolved the matter. The SEC's agreement with the firm was to require it to return profits, interest and penalties in the amounts of $160 million, $30 million and $95 million, respectively. The firm was also putting into place various measures that would require a more stringent review and accountability for investment worthiness and related public statements.

In his opinion, the Judge stated that the enjoining of future violations was not sufficient and that the United States Supreme Court has held the public interest must be considered in the issuance of permanent injunctive relief. He concluded that the "proposed consent judgment is neither fair, nor reasonable, nor adequate, nor in the public interest."

Both the SEC and Citigroup issued statements about the opinion, with which Citigroup said it "respectfully" disagrees. The SEC's said its focus was not so much on the need for an admission of wrongdoing, which the Judge found lacking, but rather in the the disgorgement, penalties and reforms that would be forthcoming and avoid both the risk and expense of trial.

Citigroup said it had begun making the reforms that were agreed to and that the court's decision was not aligned with similar precedent. Other federal courts had approved similar settlements in major CDO cases. If the case were to go to trial, Citigroup's spokesperson noted that they will present substantial legal and factual defenses.

The Securities Lawyer Blog will keep you posted on the next developments in this matter.

The lawyers of Gusrae Kaplan Nusbaum, PLLC advise broker-dealers and firms in all aspects of securities regulation and compliance, as well as representation before all tribunals and agencies. Please contact our law offices for more information on representation and our securities litigation practice.

Earlier this week, the SEC settled a civil matter against the firm Long Term-Short Term, Inc. as well as its d/b/a BetterTrades and its president. The defendants in this matter neither admit, nor deny the charges, but have consented to judgments that enjoin further violations of the anti-fraud provisions of the federal securities laws.

The civil penalties amount to close to $1 million. The firm has agreed to enforce internal trading guidelines to ensure compliance and avoid future violations.

BetterTrades' core business is in providing seminars, workshops and the sale of materials and software that are intended to instruct the trading of options, as well as the actual facilitation of options trading through their software products.

The SEC alleged that for a period of at least one year, instructors involved with BetterTrades misrepresented themselves as having great success in the sale of options and in the use of the products sold by the company to make these trades. In addition, the SEC alleged that the defendants allowed these claims to be made in marketing materials and infomercials, but that the accuracy of these claims was not verified by the company even after red flags arose. The company's president was represented as having created his own wealth through options trading and the company's software, rather than the company's operations which was, according to the SEC, the actual source of his wealth.

An important and valuable component of this settlement was the SEC's view of the remediation efforts which were made voluntarily by the defendants. The SEC took into account what they viewed as significant remediation steps which included the retention of counsel to review the manner in which the company sells and promotes the classes it offers, adoption of various standards and policies to ensure proper behavior on the part of the company's instructors and mandatory training of the instructors with regard to those policies.

Other efforts that impressed the SEC were retention of traders' records, review of traders' claims of success and more careful vetting of these claims. DIsciplinary actions taken by the company against non-compliant instructors were also part of the voluntary remediation.

Remediation and / or compliance programs established with the support of experienced securities counsel are part of New York's Gusrae, Kaplan & Nusbaum, PLLC significant securities law practice on behalf of broker-dealers and other entities. Please contact our New York or Florida offices to learn about our law practice and speak with one of our our highly-experienced attorneys.

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.

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.

The summer solstice is the longest day of the year and it happened yesterday. There was blue sky until well into the evening.

It was probably far too long a day for JP Morgan as the SEC announced its settlement with the firm for nearly $154 million saying that the firm "misled investors in a complex mortgage securities transaction just as the housing market was starting to plummet. Under the settlement, harmed investors will receive all of their money back." The firm has also agreed to make improvements to their review and approval of mortgage securities transactions.

The SEC has posted a PDF chart of these Collateralized Debt Obligation transactions for those who would like a visual representation to understand the way they were structured.

We have seen in previous enforcement proceedings against Goldman Sachs for example, that betting against your investors is not a strategy that works in the long run. In this case, the SEC claimed that the firm "structured and marketed a synthetic collateralized debt obligation (CDO) without informing investors that a hedge fund helped select the assets in the CDO portfolio and had a short position in more than half of those assets." This meant that if the CDO assets defaulted, the hedge fund would benefit.

In a separate action, the SEC also claims that Mr. Edward S. Steffelin acted negligently. Mr. Steffelin was at the head of the registered investment adviser group that was involved in the hedge fund's selection of the investment portfolio as well as in creating the marketing materials for the JP Morgan offering called Squared CDO 2007-1 (Squared). The SEC alleges that his involvement was in violation of Sections 17(a)(2) and (3) of the '33 Securities Act and Section 206(2) of the Investment Advisers Act of 1940.

In the SEC's press release on this matter, Robert Khuzami, Director of the Division of Enforcement stated that the firm "... marketed highly-complex CDO investments to investors with promises that the mortgage assets underlying the CDO would be selected by an independent manager looking out for investor interests," but did not disclose to investors "that a prominent hedge fund that would financially profit from the failure of CDO portfolio assets heavily influenced the CDO portfolio selection. With today's settlement, harmed investors receive a full return of the losses they suffered."

The settlement must be reviewed by Manhattan federal district court judge Richard Berman, who will determine whether or not to approve it. The action against Mr. Steffelin is not being settled and is assigned to Manhattan federal district court judge Miriam Cedarbaum.

The Wall Street law firm, Gusrae Kaplan Nusbaum PLLC has decades of experience in advising and representing members of the broker-dealer community. Please contact us at any time to consult with one of our lawyers.