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

Published on: September 14, 2011

Insider Trading Lande Ex-Hedge Fund Trader in Prison

Galleon Group LLC ex-hedge fund trader Craig Drimal pleaded guilty to six counts of conspiracy and securities fraud in April. He has now been sentenced to five-and-a-half years in prison. Drimal admitted to insider trading based on information from lawyers at Ropes & Gray LLP, a firm based in Boston. The transactions involved Axcan Pharma Inc., 3Com Corp., Hilton Hotels Corp. and Kronos Inc.

Insider trading lands weston man in prison

Drimal personally profited $6.5 million from trades in 3Com Corp. and Axcan Pharma Inc., $4.3 million from trades related to Hilton Hotels Corp. and just over $950,000 from trades related to Kronos Inc., totaling more than $10 million in personal net profit as a result of his broker misconduct.

According to prosecutors, Federal Bureau of Investigation agents approached Drimal in 2009, seeking his cooperation. Contrary to the FBI’s instructions, Drimal contacted another Galleon Group trader, informing him of the government’s probe. In addition, Drimal lied to the SEC about his motivations for buying Axcan stock in a July 2008 interview.

Published on: September 12, 2011

FINRA Evaluating High Frequency Trading

by InvestorLawyers

High-frequency trading — a process in which computer algorithms are used to trade shares, foreign exchange and derivatives at superfast speeds — earns profits by extricating tiny price differences thousands of times a day, across trading platforms. The algorithms being used are treated by their owners as top secret; in fact, many have taken legal action against ex-employees who have allegedly stolen them. But this high-frequency trading may be a threat to market security.

Banks and other members of exchanges, along with broker-dealers, are being asked by the Financial Industry Regulatory Authority (FINRA) to hand over their high-frequency trading strategies and/or the software code so that the agency might watch for unusual trading patterns. Proponents of high-frequency trading claim that these strategies tighten the spread of market prices, but FINRA is concerned that they could hide potential market abuse.

FINRA, along with other securities authorities, has been trying to evaluate how high-frequency trading affects capital markets, and this request for strategy details and software code is just one more step toward that end. It would be possible for this technology to manipulate share prices, and so it is necessary for authorities to evaluate potential threats to prevent market abuse.

Published on: August 31, 2011

RESOURCES FOR INVESTOR PROTECTION

by InvestorLawyers

Though investors who have already been “burned” by stock broker fraud or broker misconduct may have a perfectly understandable fear of getting back into the securities game, there are ways investors can help protect themselves in the future. One of the most significant protective measures an investor can take is to look into the background and credentials of a potential stock broker or investment adviser before working with them.

Resources for investor protection

Any time a business hires a new employee, they run a background check — so why wouldn’t an investor do the same when hiring a stock broker or financial adviser? According to a Financial Industry Regulatory Authority (FINRA) survey, only 15 percent of investors perform a background check when hiring an adviser. In addition, just because they’re registered when you hire them doesn’t mean you’re finished. Investors should check broker registration yearly.

To find out if your broker has had any arbitrations, criminal records, investment-related investigation, bankruptcy or disciplinary actions, utilize FINRA’s BrokerCheck. Other information available through BrokerCheck includes employment history, licenses held and where the broker is registered. While not every stock broker or brokerage firm can be found in BrokerCheck, the database is extensive, including around 1.3 million brokers and 17,000 firms.

Published on: August 25, 2011

FIDUCIARY DUTY: THE DIFFERENCE BETWEEN BROKERS AND ADVISERS

by InvestorLawyers

Financial advisers are bound by their fiduciary duty. Put simply, fiduciary duty is when one party (in this case, the financial adviser) must, by law, act in the best interest of another party (in this case, the client). Financial advisors have a legal obligation to act in the best interest of their client as they are entrusted with the care of their money. If a financial advisor does not adhere to his or her fiduciary duty, then securities arbitration can be brought against that person.

Fiduciary duty: the difference between brokers and advisers

Broker-dealers, on the other hand, only must adhere to the far less rigid “suitability standard.” This means they only have to make “suitable” recommendations. This makes sense in the old view of a broker as a salesman. After all, a clothing retailer isn’t required to only sell you jeans that don’t make you look fat. However, brokers aren’t simply salesmen anymore. Especially in recent years, the line that separates brokers from advisers has grown fuzzy and all but disappeared. Advisers buy for their clients and brokers advise clients in their purchases. It is for this reason that many believe that brokers should be held to the same, or at the very least similar, standards as advisers.

In January of this year, the SEC recommended that brokers be held to a common fiduciary duty as advisers. According to the SEC’s Study on Investment Advisers and Broker-Dealers, “Broker-dealers and investment advisers are regulated extensively, but the regulatory regimes differ, and broker-dealers and investment advisers are subject to different standards under federal law when providing investment advice about securities. Retail investors generally are not aware of these differences or their legal implications.”

Published on: August 17, 2011

THE SEC’S “OFFICE OF THE WISTLEBLOWER” OPENS

by InvestorLawyers

The SEC’s new whistleblower office, which officially opened August 12, hopes to have a significant effect on corporate and stock broker fraud.

The SEC’S “office of the whistleblower” opens” OPENS

Under this new program, cash awards will be issued to corporate employees who report fraud to the SEC in order to expose corporate crime. Individuals who report fraud under this program could receive up to 30 percent of the amount that is collected from the guilty party. To qualify, the tipster must volunteer new information that leads to a successful collection of at least $1 million in fines.

“Through their knowledge of the circumstances and individuals involved, whistleblowers can help the commission identify possible fraud and other violations much earlier than might otherwise have been possible," SEC officials say. "That allows the commission to minimize the harm to investors, better preserve the integrity of the United States’ capital markets, and more swiftly hold accountable those responsible for unlawful conduct.”

Published on: August 16, 2011

SEC ADJUSTS RULE 205-3 FOR INFLATION: CHANGES EFFECTIVE SEPTEMBER 19

by InvestorLawyers

As is required by the Dodd-Frank Act, the SEC has adjusted rule 205-3’s performance fee eligibility thresholds for inflation. These adjustments were announced by the SEC on July 12. The order will be published in the Federal Register and will go into effect 60 days post-publication, or September 19, 2011. The revised dollar amounts take into account inflation from 1998, the year in which it last was adjusted, to the end of 2010. Furthermore, the amounts will be revised more frequently from this point forward — every five years.

Sec adjusts rule 205-3 for inflation: changes effective september 19

According to the SEC, rule 205-3 “permits investment advisers to charge certain clients performance or incentive fees.” However, in order for investors to charge these fees, clients must meet one of two criteria. The adviser must either have a minimum of $1 million of the client’s money under his or her management, or the client must have a minimum of $2 million net worth. When determining a qualified client based on their net worth, according to the SEC, “a qualified client means a natural person who or a company that the investment adviser entering into the contract (and any person acting on his behalf) reasonably believes, immediately prior to entering into the contract, has a net worth (together in the case of a natural person, with assets held jointly with a spouse) of more than $2,000,000 at the time the contract is entered into.”

Under the same rule, as it was set in 1998, the client needed to have a minimum of $750,000 managed by the adviser or a net worth of at least $1.5 million to qualify for the fees.

Published on: August 4, 2011

JANNEY SETTLES SEC CHARGES FOR $850,000

by InvestorLawyers

Janney Montgomery Scott, a broker-dealer from Philadelphia, and his firm, Janney Montgomery Scott LLC, will pay $850,000 in his settlement with the Securities and Exchange Commission for not taking proper precautions to prevent insider trading. According to securities regulators, Janney didn’t establish proper policies and, in some cases, didn’t enforce what policies were in place, to prevent potential insider trading.

Janney Settles SEC Charges for $850,000

The firm’s lax policies and lack of adherence to them continued for more than four years, from January 2005 until July 2009. The policies in question affected the firm’s Equity Capital Markets division. This division included trading, equity sales and research departments. Problems with policies included a lack of enforcement and failure to follow policies as written. This misconduct made it possible for nonpublic information to be used in insider trading — a clear violation of the law that states a firm should seek to prevent this possible misuse of material.

In addition, Janney did not require pre-clearance for personal trades of its investment bankers or approval for its employees to have brokerage accounts at other firms. The firm also failed to maintain a proper firewall between the email of investment banking staff and research staff. These measures are necessary to properly supervise and maintain accountability that would prevent insider trading. Insider trading creates an unfair advantage in the market and, therefore, unbalances it, perhaps causing major repercussions.

Published on: July 27, 2011

EX-UBS EMPLOYEE KOBAYASHI CHARGED BY THE SEC

by InvestorLawyers

Steven T. Kobayashi, a former financial adviser for UBS, was charged by the SEC on March 3, 2011. He was charged with misappropriating investors’ funds totaling $3.3 million.

Ex-UBS Employee Kobayashi Charged by the SEC

Allegedly, Kobayashi established a pooled life insurance policy investment fund, Life Settlement Partners LLC, and then solicited funds from many of his UBS customers. The problem, however, arose when he began using the funds as his own personal financing for gambling debts, expensive cars and prostitutes. Starting in 2006, Kobayashi spent at least $1.4 million on these personal and frivolous expenditures.

In an effort to cover his tracks, Kobayashi then defrauded more of his UBS customers, asking them to liquidate securities and transfer the money to more of his accounts in the fall of 2008. This second theft, which amounted to $1.9 million, was committed in an effort to repay Life Settlement Partners LLC before his initial theft was discovered. Kobayashi’s wrongdoings came to light when he could not pay the life settlement policy premiums on LSP and later when clients demanded their investment returns. A complaint was issued to UBS in September 2009 in which a customer accused Kobayashi of stealing hundreds of thousands of dollars from multiple accounts, including her own. The customer’s complaint went on to claim that he had forged documents and lied directly to investors about his intentions for their money. Kobayashi has not worked for UBS since the morning after the complaint was filed, when he tendered his resignation.

Published on: July 20, 2011

INVESTMENT CHURNING: A SLIPPERY SLOPE OF BROKER MISCONDUCT

by InvestorLawyers

The nature of “churning” within an investor’s account is difficult to prove. According to the S.E.C., “churning refers to the excessive buying and selling of securities in your account by your broker, for the purpose of generating commissions and without regard to your investment objectives.” In short, churning is a form of broker misconduct in which the broker performs excessive trading to generate personal profit. If an investor feels they may be a victim of churning, he should check his monthly statements for numerous stock trades and then contact a stock broker fraud attorney. If you believe you are a victim of churning, contact the law office of Christopher J. Gray, P.C. for information and guidance.

Investment Churning: A Slippery Slope of Broker Misconduct

Although churning is clearly prohibited in both the Securities Exchange Act of 1934, Section 10(b) and the Securities Exchange Commission Regulation 10(b)(5), proving it in arbitration can be a challenge. Two critical factors of determining if churning has occurred are time and frequency of transactions. In addition, the broker must be acting willfully and not in the best interests of the investor. Finally, the broker must be in control of the trades that occurred. If the account is a discretionary account or if the broker is recommending most, or all, of the trades to the customer, the broker is said to be in control of the trades.

A case against churning is one in which the entire picture must be taken into account. A stock broker fraud attorney must analyze a large amount of data because of the high number of trades that occur in churning. Furthermore, the attorney must look at the Annualized Turnover Ratio, the Commission/Equity Ratio, the Total Cost/Equity Ratio, the commissions of the broker and factors that affect broker motivation. Above all, the trades must be done for the benefit of the broker, rather than the investor.