SEC Category Archives — Page 12 of 13 — Investor Lawyers Blog Published by New York, New York Investor Attorneys

Published on: November 18, 2011

SEC Charges Dblaine Capital with Fraud

Dblaine Capital LLC and David B. Welliver, Dblaine Capital’s owner, have been charged by the Securities and Exchange Commission (SEC) with securities fraud. Welliver and his firm allegedly received loans that amounted to $4 million in a “quid pro quo” deal that was said to be undisclosed, in violation of their responsibilities and improper.

SEC Charges Dblaine Capital with Fraud

Allegedly, Dblaine Capital agreed to put these assets in “alternative investment” securities, and in doing so they caused the funds to be in violation of multiple investment restrictions and policies. According to the SEC, Dblaine Capital and Welliver defrauded the fund, provided an inaccurate valuation and put their financial interests above that of the fund. The fund’s shares were sold and redeemed at a net asset value that was inflated. According to the allegations against Dblaine Capital and Welliver, when this was discovered, the information was kept from shareholders and false and/or misleading statements were submitted to the SEC. In addition, according to the SEC, $500,000 of the loan money received was used by Welliver for personal expenses, such as college tuition, a vacation, a motor vehicle, home improvements and back taxes. According to the SEC, from December 2010 to July 2011, Welliver and his firm did not attempt to establish what fair value for the private placement was and instead valued it at acquisition cost, despite the fund’s policies.

The SEC has charged the firm and Welliver with violating the Securities Exchange Act of 1934, the Securities Act of 1933, the Investment Advisers Act of 1940 and the Investment Company Act of 1940. They are seeking permanent injunction, civil penalties, prejudgment interest and disgorgement of ill-gotten gains.

Published on: November 10, 2011

Investors Beware of Promissory Note Scams

by InvestorLawyers

One of the most prominent ways fraudsters are currently targeting investors is through promissory note scams. According to Pat Huddleston, former Security and Exchange Commission enforcer and author of the book “The Vigilant Investor,” promissory note scams are “exploding” — in no small part due to the nature of the scam, which appears to be a reasonable business investment opportunity.

Investors Beware of Promissory Note Scams

What makes promissory note scams so tricky is that investors assume the contract is legally binding. In addition, the fact that the promissory notes promise a return of your investment within nine months, plus interest, promotes the investment as safe. According to Huddleston, “It’s usually a one-page, simple contract that says, ‘I promise to pay the investor this amount of money with these amount of gains at this interest rate by this date.’”

To make the scam seem more reputable, the scammers frequently quote part of the Securities Act which appears to say that the note doesn’t have to be registered with the Securities and Exchange Commission provided its duration is nine months or less. While this is an actual section of the Securities Act, what most investors don’t know is that the exception only applies to the kinds of things that major corporations exchange, like high-grade commercial paper. This section of the act does not apply to the types of notes the average investor can invest in.

Published on: November 9, 2011

FINRA Rights Wrongs to Maintain Integrity

by InvestorLawyers

In August 2008, the Financial Industry Regulatory Authority (FINRA) provided the Securities and Exchange Commission with staff meeting minutes that had been altered, making the documents inaccurate and incomplete. FINRA’s Kansas City office was responsible for the tampering of the documents. FINRA officials know the agency must maintain its integrity in order to be a regulator for broker misconduct., so they have been diligent and cooperative in correcting this error. In response to the misconduct, FINRA rehttp://brandsplat.net/wp-admin/post.php?post=19599&action=editported the matter to the SEC, implemented new leadership in the office responsible, improved their document-handling procedures and cooperated fully with an SEC review.

FINRA Rights Wrongs to Maintain Integrity

Changes intended to improve document-handling procedures were, according to FINRA, “additional online and live ethics training for all employees with an enhanced focus on document handling and integrity.” Furthermore, FINRA will create and release a document integrity podcast for current and future employees; include the subject of document integrity at yearly meetings, gatherings and district office visits; and train employees on past problems with document integrity. FINRA has also mandated that before undergoing an on-site exam, every business will meet with counsel and senior Office of Liaison staff before documents are released to the SEC.

FINRA has been ordered by the SEC to hire an independent consultant. The job of this consultant will be to review FINRA’s current training, policies and procedures, and then determine if they are adequate or require revision. The report will be submitted to and reviewed by the FINRA board. If they find the recommendations unreasonable, the board and the consultant will attempt to find an alternative solution that satisfies the same objectives. If a compromise can be reached, the consultant will amend the report. If a compromise cannot be reached, FINRA must comply with the original recommendation. Once the report is finalized, the board will have 30 days to implement all recommendations.

Published on: November 7, 2011

Investor Education: How Stockbrokers Buy and Sell Stock

by InvestorLawyers

Investor education is an important part of avoiding broker misconduct, so it is critical that investors have a general idea of how trades work. The following is a short summary of what occurs when a stockbroker executes a buy or sell order.

Investor Education: How Stockbrokers Buy and Sell Stock

Brokers usually have a choice of markets in which they can execute a trade. If the stock is listed on an exchange, the order may be directed — by the broker — to the same exchange, a different exchange or a “market maker.” A market maker is a firm which remains ready to pay publicly-quoted prices for a stock listed on an exchange and sometimes offers “payment for order flow,” a term that refers to a payment made from the market maker to a broker in exchange for having the order routed to it. OTC stocks can be sent to an “OTC market maker.” Brokers can also use internalization, in which the order is sent to another division of the firm and is then filled from the inventory of the firm. Finally, the broker may use an ECN, or electronic communications network, in which orders are automatically matched at specified prices.

The broker may choose any of the above methods for executing a buy or sell order so long as the method falls within the limits of “best execution.” Best execution refers to the broker’s duty to seek the method that is both reasonably available and most favorable to the customer. “Price improvement” is an important part of determining which method is determined to be the best execution. When an order has an opportunity to be executed at a price that is better than the current quote, this is an opportunity for price improvement. It is important to note, however, that price improvement is an opportunity, not a guarantee.

Published on: November 2, 2011

Fraud Suit Settlement: Florida Man Must Pay $275,000

by InvestorLawyers

Justin Solomon of Florida has consented to the Security and Exchange Commission’s decision to fine him $275,000 for his part in a federal securities fraud lawsuit. The lawsuit involved a scheme in which overseas investors put money into Texas oil and gas projects that was then misused. Solomon did not confirm that he oversaw the scheme. However, Solomon was the managing official of Seisma Oil Research, Permian Asset Management and Seisma Energy Research — three of the investment businesses involved in the scam.

Fraud Suit Settlement: Florida Man Must Pay $275,000

In June 2010, Solomon and his three businesses were sued by the Securities and Exchange Commission. According to the SEC’s allegations, high-pressure sales tactics, originating in Costa Rica and Thailand “boiler room” call centers, persuaded overseas investors to contribute $25 million into six Texas gas and oil projects.

Solomon settled the lawsuit by agreeing to pay disgorgement which accounts for his own “unjust enrichment” and prejudgment interest. The disgorgement total was $265,436.06, while the interest total was $9,564.94. Both Solomon and the SEC agreed to a 36-month payment plan which will begin in 6 months. Furthermore, all three of Solomon’s companies signed consent agreements that promised they would not violate United States securities laws. At the same time as these consent agreements were signed, Solomon posted a deposit in the amount of $92,500 that will go toward the $275,000 he must pay. According to the agreement, Solomon will pay $5,000 each month for 35 months, followed by a final payment of $7,500.

Published on: October 27, 2011

Citigroup to Pay $285 Million for CDO Fraud

by InvestorLawyers

Citigroup settled charges brought by the U.S. Securities and Exchange Commission, and has agreed to pay $285 million to do so. According to the SEC, Citigroup defrauded investors by betting a toxic housing-related debt would fail, but selling the CDO to investors anyway. According to an article by Reuters, “The SEC said the bank’s Citigroup Global Markets unit misled investors about a $1 billion collateralized debt obligation by failing to reveal it had a ‘significant influence’ over the selection of $500 million of underlying assets, and that it took a short position against those assets.”

Citigroup to Pay $285 Million for CDO Fraud

Citigroup is the third major bank to settle with the SEC for failing to disclose betting against a collateralized debt obligation, or CDO, and then marketing it to customers. JPMorgan settled for $153.6 million in June and Goldman Sachs settled for $550 million in July 2010.

In November 2007, the CDO defaulted and, while investors faced losses, Citigroup made $160 million. This contributed to the 2007-2009 financial crisis and is, therefore, a part of the mission to reduce broker fraud and hold Wall Street figures accountable for triggering the recession. According to the SEC, the Citigroup employee who was primarily responsible for structuring the transaction was Brian Stoker. In response to the files charged against him by the SEC, one of his lawyers said the allegations had “no basis.”

Published on: October 12, 2011

The Risks of Self-directed IRAs

by InvestorLawyers

The North American Securities Administrators Association Inc. and the Securities and Exchange Commission issued an investor alert on September 23, which warned of the risks of self-directed IRAs. According to InvestmentNews.com, this scrutiny by regulators will likely influence the implementation of tougher restrictions on self-directed IRAs by small- to mid-sized broker-dealers.

THE RISKS OF SELF-DIRECTED IRAs

According to Brad Borncamp, a certified public accountant, “IRAs have a specific purpose: long-term investment for retirement. It’s really easy to mess up these transactions, and there’s more than meets the eye.” Self-directed individual retirement accounts allow their owners to invest in more unusual investment vehicles such as raw real estate, limited partnerships, private placements and life settlements. This is in contrast to traditional IRAs, which are usually limited to mutual funds, stocks and bonds. According to NASAA, about 2 percent of the total IRAs, or $94 billion, is estimated to be self-directed.

Because self-directed IRAs’ owners are able to hold unregistered securities, due diligence is often neglected by custodians. In addition, early withdrawals come with a penalty that encourages money to remain tied up in them longer, making these investments a frequent vehicle for stock broker fraud. Although up until now, smaller broker-dealer firms have resisted giving up the higher profit margins associated with self-directed IRAs, they will soon be following in the footsteps of their larger counterparts because of recent developments.

Published on: October 6, 2011

Not All Scams Can Be Identified As Being ‘Too Good To Be True

by InvestorLawyers

The investment community has often heard those now-familiar words: “If it seems too good to be true, it probably is” when warning against stock broker fraud. Not only is this phrase only partially true, it’s dangerous. Investors who only watch out for the investments that are “too good to be true” are still vulnerable to the ones that aren’t. Many investment scams don’t offer the high returns without risk. In fact, Pat Huddleson, a former enforcer for the Securities and Exchange Commission, stated that he’d witnessed scams that promised much smaller returns, such as 5 percent.

NOT ALL SCAMS ARE “TOO GOOD TO BE TRUE”

According to Huddleson, “If it sounds too good to be true, you’re probably talking to an amateur scam artist. That is, only a rookie or somebody who’s really dumb will promise you the moon, because that scares people away.” In fact, the clever scam artists will not promise you so much that you will think it’s a scam. A 5 percent return isn’t enough in itself to raise a red flag. Huddleson goes on to say that “they really are students of human behavior in a way that would make a Ph.D. in psychology proud. They’re really good at observing you. In the middle of a pitch they can change the way they’re approaching the thing. If they see a facial expression, even, that you’re not buying the thing they just said, they’ll change course.” Despicable as it may be, scamming is a skill and some are very talented at it.

Some ways Huddleson suggests for investors to protect themselves are to get a C.R.D. from the state securities commissioner, and to recognize your own human limitations and vulnerability to scammers. He cites Bernie Madoff’s victims as proof that even the “most sophisticated people in the world” can be victim to fraud. Put plainly, those who believe they are invulnerable to fraud create their own vulnerability.

Published on: September 19, 2011

The Truth About Insider Trading

by InvestorLawyers

“Insider trading” is one of the most widely-recognizable terms in the complex financial industry — but it is one that is often misunderstood, as well. Though some insider trading is a form of broker misconduct, it is also frequently committed by firms’ top management. An article published on August 18, 2011, “Insider Trading: CNBC Explains,” spells out the difference between legal and illegal insider trading, as well as cites major insider trading cases.

THE TRUTH ABOUT INSIDER TRADING

There are two types of insider trading: legal and illegal. Legal insider trading takes place when employees own stock or stock options in their firm that they are able to trade within a set time frame and at a set price. Because the public may not have access to all the information the employees have, it is considered insider trading but remains legal as long as the employees report their trades to the SEC within a certain time period following the trade and that the trade is made after some sort of press release or announcement makes the information on which the trade was based public. This type of insider trading can also be preformed by individuals who own at least 10 percent of a company’s stock.

Illegal insider trading takes place when any “insider” makes trades based on knowledge that the public doesn’t have. An “insider,” according to the SEC, is anyone who has access to “temporary” or “constructive” material information on a firm and is not restricted to employees of the company.

Published on: September 16, 2011

When They Say “BARRED,” They Mean It

by InvestorLawyers

John A. “Jack” Grant, a former stockbroker, was barred from associating with investment advisers, brokers and dealers in 1988, following an action that accused him of selling unregistered securities and misappropriated funds totaling $5,500,000. Grant, however, did not withdrawal from the securities business and continued advising small business and individuals on their investments and management of their assets. Some of the individuals he advised were brokerage customers from before the SEC bar.

When they say barred they mean it

As a result of Grant’s violation of the bar, the Securities and Exchange Commission filed a civil injunctive action against him, along with Sage Advisory Group LLC and Benjamin Lee Grant. Lee Grant is Sage Advisory Group’s owner, as well as Jack Grant’s son. Grant allegedly has been using his son to implement his advice to investors.

According to the complaint filed by the SEC, Grant has advised clients, through his son, from at least 1998. Furthermore, Grant’s son, who is fully aware of the bar against him, allowed him to be associated with Sage Advisory Group and neither they, nor the firm, informed their clients that Grant had been, and remains, barred from association with investment advisors. This, according to the complaint, is in violation of Section 206 and 207 of the Investment Advisers Act of 1940.