Category Archives: SEC Investigation

As reported by The Wall Street Journal on October 13, 2015 (“UBS in $19.5 Million Settlement Over Structured Notes”), UBS Group AG has agreed to pay $19.5 million to settle charges from the U.S. Securities and Exchange Commission that the firm had provided false or misleading information to investors in materials related to structured debt securities that were linked to a proprietary foreign exchange trading strategy.

Between $40 billion to $50 billion of structure notes are registered with the SEC per year, with many of those notes sold to relatively unsophisticated retail investors.

The case is reportedly the SEC’s first enforcement action involving misstatements and omissions by an issuer of structured notes, a complex financial product that typically consists of a debt security with a derivative tied to the performance of other securities, commodities, currencies, or proprietary indexes.

UBS, one of the largest issuers of structured notes in the world, agreed to settle the SEC’s charges that it misled U.S. investors in structured notes tied to the V10 Currency Index with Volatility Cap by falsely stating that the investment relied on a “transparent” and “systematic” currency trading strategy using “market prices” to calculate the financial instruments underlying the index, when undisclosed hedging trades by UBS reduced the index price by about five percent.

According to the WSJ article and the SEC’s settlement order, UBS offered and sold about $190 million of medium-term notes linked to the V10 Currency Index to roughly 1,900 individual investors in the U.S. between December 2009 and November of 2010.

According to the SEC’s order instituting a settled administrative proceeding:

• UBS perceived that investors looking to diversify their portfolios in the wake of the financial crisis were attracted to structured products so long as the underlying trading strategy was transparent.  In registered offerings of the notes in the U.S., UBS depicted the V10 Currency Index as “transparent” and “systematic”;
• Between December 2009 and November 2010 approximately 1,900 U.S. investors bought approximately $190 million of structured notes linked to the V10 index;
• UBS lacked an effective policy, procedure, or process to make the individuals with primary responsibility for drafting, reviewing and revising the offering documents for the structured notes in the U.S. aware that UBS employees in Switzerland were engaging in hedging practices that had or could have a negative impact on the price inputs used to calculate the V10 index;
• UBS did not disclose that it took unjustified markups on hedging trades, engaged in hedging trades with non-systemic spreads, and traded in advance of certain hedging transactions;
• The unjustified markups on hedging trades resulted in market prices not being used consistently to calculate the V10 index.  In addition, UBS did not disclose that certain of its traders added spreads to the prices of hedging trades largely at their discretion; and
• As a result of the undisclosed markups and spreads on these hedging transactions, the V10 index was depressed by approximately five percent, causing investor losses of approximately $5.5 million.

The SEC settlement includes a civil penalty of $8 million and a combined $11.5 million of disgorgement and prejudgment interest.

The SEC’s release relating to this enforcement action can be accessed at http://www.sec.gov/ news/pressrelease/2015-238.html and the SEC’s Order can be accessed at http://www.sec.gov/ litigation/admin/2015/33-9961.pdf.

If you are an individual or institutional investor who has any concerns about your investment in structured notes, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

LPL Financial Holdings Inc. will pay more than $3.4 million to settle two separate regulatory probes into how the brokerage sold certain complex investment products.

In one instance, the Boston-based firm must pay $2 million to settle allegations by the Massachusetts Attorney General’s Office and the Delaware Justice Department stating LPL failed to supervise its financial advisers who caused clients to hold ETFs for extended periods. Leveraged ETFs are typically designed to deliver a multiple of an index’s performance each day, but results over longer periods can be far different from what the daily objective might suggest.

According to LPL spokesman, “LPL will make enhancements to its oversight of leveraged ETFs including implementation of a renewed training and monitoring program to ensure the proper and effective use of leveraged ETFs as part of investors’ overall financial plans”.

The other instance, is with the North American Securities Administrators Association, which represents state securities regulators, LPL must pay civil penalties of $1.425 million for lapses regarding the firm’s sale of nontraded real-estate investment trusts.

, including the Financial Regulatory Authority and Securities Exchange Commission, for inadequate disclosure of risks and their high fees, which typically range from 12% to 15% at the time of sale.

LPL is the leading securities firm serving so-called independent investment representatives, who typically own their own local business and sell securities as a financial investor of a separate securities firm. In 2014, the firm spent $36.3 million to settle regulatory charges. These regulatory charges have weighed financially on LPL. They continue to resolve remaining compliance issues, resulting from a period of rapid growth.

After receiving a Wells notice from the SEC, about some Pimco securities that contain bundled mortgages, Pimco released a statement disclosing the possibility of facing a federal lawsuit over how it valued positions held by one of its enormous bond funds.

Between Feb. 29^th and June 30^th 2012, Pimco may have misrepresented the value of certain securities purchased by its Total Return Active Exchange-Traded Fund (BOND).

The Total Return Active ETF has more than $2.5 billion net assets, according to Pimco, and invests primarily in low-risk debt securities. The fund has a year-to-date return of about 2%.

“The Wells process provides us with our opportunity to demonstrate to the SEC staff why we believe our conduct was appropriate, in keeping with industry standards, and that no action should be taken,” Pimco said in a statement.

Indianapolis Securities Firm, Veros Partners, has been sued by the SEC for an assumed Ponzi scheme that raised $15M in two farm-loan offerings. The lawsuit states that, Veros owes millions of dollars to over 80 investors in past payments. Named in the suit are Veros President Matthew Haab, Fishers attorney Jeffery Risinger, and CEO of Pin Financial Tobin Senefeld. All the assets of those named in the suit have been frozen. This is not Senefeld’s first time being pursued by the SEC. In 1999, he paid a $25,000 fine and 12 month suspension with working with broker dealers, as a result of securities violations.

Oppenheimer & Co. has been charged by the SEC for violating federal securities laws while wrongly selling penny stocks in unregistered offerings on behalf of clients. Oppenheimer admitted their wrongdoing and will pay $10 million to settle the SEC’s charges, as well as another $10 million to settle a parallel action by the Treasury Department’s Financial Crimes Enforcement Network.

The SEC found Oppenheimer engaged in two courses of misconduct.  The first involved aiding and abetting illegal activity by a customer and ignoring red flags that business was being conducted without and valid exemption from the broker-dealer registration requirements of the federal securities laws. Oppenheimer failed to recognize the resulting liabilities and expenses in violation of the books-and-records requirements, and improperly recorded transactions for customers in Oppenheimer’s records. Oppenheimer also failed to file Suspicious Activity Reports as mandatory under the Bank Secrecy Act to report potential misconduct and its clients, and the firm failed to properly report, withhold, and remit more than $3 million in backup withholding taxes from sales profits. .

The second course of misconduct involved Oppenheimer again engaging on behalf of another client in unregistered sales of billions of shares of penny stocks. The firm’s liability stems from its failure to react to red flags and conduct a searching inquiry into whether the sales were exempt from registration requirements of the federal securities laws, and its failure reasonably to supervise with a view toward detecting and preventing violations of the registration provisions. The SEC’s investigation, which is continuing, discovered that the sales generated approximately $12 million in profits of which Oppenheimer was paid $588,400 in commissions.

The SEC’s order is requiring Oppenheimer to stop and abstain from committing or causing any violations and any future violations of Section 15(a) and 17(a) of the Securities Exchange Act of 1934 and Rules 17a-3 and 17a-8, and of Section 5 of the Securities Act of 1933.  In addition to the financial remedies, Oppenheimer agreed to be censured and undertake such corrective measures as retaining an independent consultant to review its policies and procedures over a five-year period.

The Securities and Exchange Commission (SEC) wants investors who were scammed by R. Allen Stanford in a $7 billion fraud scheme to be treated as brokerage customers by the Securities Investor Protection Corporation (SIPC). If that happens, investors would stand a chance of getting some of their money back.

The SIPC works as an insurance fund, and is backed by member brokerages. While it isn’t designed to cover investment losses, it is supposed to provide a measure of protection for investors in the event that their brokerage goes bankrupt or fails because of alleged fraud. The protection amounts up to $500,000 per customer.

In the Stanford case, the SIPC has been unwilling to pay up, even though the SEC told it to do just that more than two years ago. The SIPC, however, says the protection provided to investors does not apply to those who were bilked by Stanford because the bogus certificates of deposit they bought were sold through Stanford’s bank in Antigua, rather than being held by the brokerage.

That technicality was the subject of a March 7 congressional hearing, in which legal analysts and lawmakers offered their thoughts on the issue, along with recommendations for improving the SIPC.

Seniors are often an easy target for investment fraud – so much so that the Financial Industry Regulatory Authority (FINRA) is warning some broker/dealers about the use of designations that may imply special expertise in working with elderly investors.

In a regulatory notice issued earlier this month, FINRA reminded firms of their supervisory obligations regarding how they use certifications or designations that imply expertise, training or specialty in advising senior investors. The notice also outlines findings from a survey FINRA conducted with broker/dealers and their use of senior designations.

Among other things, findings from the survey showed that some supervisory procedures were not discerning enough when it came to the quality of the designations. And, in some cases, the senior designations approved by various broker/dealers did not require rigorous qualification standards.

As reported Nov. 15 by Investment News, regulators have been concerned for some time now regarding the use of senior designations, as well as the marketing practices used by many broker/dealers to sell products to elderly investors. One of those practices is the “free-lunch seminar,” which has often been used to lure people – especially the elderly – into investing in unsuitable or even fraudulent products.

According to the Securities and Exchange Commission (SEC), these types of lunches are typically held at upscale hotels, restaurants, retirement communities and golf courses. In addition to providing a free meal, the firms and individuals conducting the gatherings often use other incentives such as door prizes, free books, and vacation deals to encourage attendance. The real purpose of the meetings, however, is often to entice attendees’ to open new accounts with the sponsoring firm and, ultimately, in buy into the investment product being touted.

The most commonly discussed products at the sales seminars include private placements, variable annuities, real estate investment trusts, equity indexed annuities, mutual funds, private placements of speculative securities (such as oil and gas interests) and reverse mortgages, the SEC says.

Exchange-traded funds (ETFs) are the latest investment product to find themselves in the hot seat with the Securities and Exchange Commission (SEC). At a Senate Banking subcommittee hearing held today, the SEC announced that it was launching a sweeping review of exchange-traded funds.

Among other things, the SEC says it will be looking at investor disclosures, the transparency of the underlying instruments in which ETFs invest, liquidity levels, fair valuations, and the potential impact of ETFs on market volatility.

The SEC’s review also entails “gathering and analyzing detailed information about specific products,” said SEC Investment Management Director Eileen Rominger.

Recent scrutiny of exchange-traded products has been fueled, in part, by the growth of more complex exchange-traded products that many experts contend are far too complex and confusing for the average retail investor. In particular, regulators are concerned about leveraged and inverse ETFs – funds designed to amplify short-term returns by using debt and derivatives.

Three days and counting. That’s the time remaining before Jefferson County Commission must decide whether it will pursue more talks with creditors over a $3.2 billion sewer bond debt or opt for the largest-ever U.S. municipal bankruptcy.

The problems for Jefferson County, Alabama, date back to the 1990s, when the county began a huge upgrade of its outdated sewer system. Acting on the recommendations of consultants from JP Morgan and others, the county entered into a series of disastrous deals that involved complex and risky variable-rate investments, auction-rate debt and interest rate swaps.

The deals later backfired, and the county became stuck with huge loan payments. Meanwhile, then-Birmingham Mayor Larry Langford and a former president of the Jefferson County Commission, ex-Commissioner Chris McNair and others were convicted of rigging the transactions responsible for Jefferson County’s financial downfall.

In 2009, the Securities and Exchange Commission (SEC) charged JP Morgan Securities and two of its former managing directors – Charles LeCroy and Douglas MacFaddin – for their roles in an unlawful payment scheme that allowed them to win business involving municipal bond offerings and swap agreement transactions with Jefferson County.

As part of the settlement, J.P. Morgan agreed to forfeit $647 million of interest-rate swap termination fees, as well as pay a penalty of $25 million to the SEC and $50 million restitution to Jefferson County.

The Securities and Exchange Commission (SEC) may pursue civil charges against Daniel Mudd, former CEO of Fannie Mae, over allegations that the mortgage giant failed to tell investors about the extent of its exposure to risky loans.

On March 14, Mudd, who is now CEO of Fortress Investment Group, received a Wells Notice from the SEC. Receipt of a Wells Notice indicates civil charges are likely forthcoming.

Mudd was fired from Fannie Mae in 2008. That same year, the federal government seized control of Fannie Mae and Freddie Mac.

At issue is how Fannie Mae informed investors about the mounting losses it sustained from high-risk mortgage loans and how those loans were valued. The SEC says exposure to the mortgages was drastically understated.