Category Archives: SEC Investigation

The Financial Industry Regulatory Authority (FINRA) has issued a Regulatory Notice on a proposed rule to improve oversight of broker/dealers’ back-office operations. Specifically, the new rule would expand registration requirements to individuals who engage or supervise activities related to sales, trading support and/or handling of customer assets.

Previously, FINRA’s registration requirements only applied to brokers, investment bankers, traders or other financial professionals who gave advice to customers and handled securities transactions. Individuals who could be required to register under the new proposed rule include those who develop and approve valuation models; manage trade confirmations, account statements, trade settlement and margin; or oversee stock loan/securities lending, prime brokerage, receipt and delivery of securities, and/or financial regulatory reporting.

According to a statement from FINRA, the proposal is designed to provide “reasonable assurance” that these individuals understand their professional responsibilities, including key regulatory and control themes, as well as the importance of identifying and escalating red flags that may harm a firm, its customers, or the integrity of the marketplace or the public.

The Securities and Exchange Commission (SEC) must approve the rule change before it becomes effective.

Investment firm Piper Jaffray & Co. has been fined $700,000 by the Financial Industry Regulatory Authority (FINRA) for email retention violations, related disclosure issues and supervisory and reporting violations.

According to a statement issued by FINRA, Piper Jaffray failed to retain approximately 4.3 million emails from November 2002 through December 2008. The company also failed to inform FINRA of its email retention and retrieval issues.

This isn’t the first time Piper Jaffray has been cited for email retention deficiencies. Information on FINRA’s Web site reports that the company was sanctioned in November 2002 in a joint action by the Securities and Exchange Commission (SEC), the New York Stock Exchange Regulation and NASD following investigations tied to conflicts of interest between Piper’s investment banking and research departments. As part of that settlement, Piper Jaffray was required to review its systems and certify that it had established systems and procedures designed to preserve electronic mail communications.

In settling the latest matter with FINRA, Piper Jaffray neither admitted nor denied the findings.

Read FINRA’s action against Piper Jaffray here.

Investments deals involving CDOs have come back to haunt Morgan Stanley. Federal prosecutors apparently are investigating whether the investment bank intentionally misled investors about various synthetic collateralized debt obligations that it helped design and sometimes bet against. The story was first reported by the Wall Street Journal on May 11.

According to the story, Morgan Stanley marketed and sold the CDOs in question to investors and then subsequently placed bets that their value would fall. Among other things, investigators want to know whether the bank disclosed certain facts to investors, as well as its role in the deals themselves.

In April, the Securities and Exchange Commission (SEC) charged another investment firm – Goldman Sachs – with fraud in connection to sales of synthetic CDOs.

According to the SEC’s complaint, Goldman Sachs failed to tell investors certain details regarding the financial products, including the fact that a major hedge fund not only selected the securities held by the CDO but also bet against them to fail.

Meanwhile, the probe into Morgan Stanley’s CDO is at a preliminary stage.

The Senate investigation into Goldman Sachs unveils undeniable evidence about the risks of collateralized debt obligations (CDOs) and how Wall Street’s repackaging of the products produced not only billions of dollars in losses for investors, but also fueled a financial tsunami across the globe.

A May 2 story in the Wall Street Journal details the multiplier effect of what happened when Wall Street banks replicated certain toxic bonds into numerous securities, or CDOs. The article highlights one $38 million mortgage-related bond that was created in June 2006 and ended up in more than 30 debt pools. According to the article, that one bond ultimately caused “$280 million in losses to investors by the time the bond’s principal was wiped out in 2008.”

Goldman Sachs has spent the past week responding to questions and accusations from the Senate Permanent Subcommittee on Investigations on whether the firm and several employees helped inflate the housing bubble and then profited when the market collapsed.

On April 16, Goldman Sachs was named in civil fraud lawsuit by the Securities and Exchange Commission (SEC). The SEC accused Goldman of creating and selling a mortgage investment that was secretly intended to fail. The SEC’s lawsuit also names Goldman Vice President Fabrice Tourre, who helped create and sell the investment at the center of the SEC’s fraud allegations.

Investor complaints regarding private placements – including those linked to Medical Capital Holdings – have prompted several state and federal investigations into the private placement sales practices of broker/dealers across the country. In many instances, the investigations have revealed a significant lack of regulatory compliance.

In response, the Financial Industry Regulatory Authority (FINRA) has published new guidance for FINRA-registered firms about their obligations when it comes to customer suitability, disclosures and other requirements for selling private placements to customers. Specifically, FINRA Regulatory Notice 10-22 reinforces and details a broker/dealer’s obligation to conduct a reasonable investigation of an issuer and the securities that are recommended in its offerings.

The Notice also highlights private placement red flags and supervisory requirements, and suggests practices to help ensure that firms adequately investigate the private placements that they recommend.

Private placements under Regulation D are usually sold to “accredited” investors and a limited number of non-accredited investors. While accredited investors must meet certain income or asset tests, the Notice emphasizes that a broker/dealer’s suitability obligations require it to conduct a reasonable investigation whenever it makes a recommendation in a private placement under Regulation D.

“An increase in investor complaints regarding private placements, as well as SEC actions halting sales of certain private placement offerings, led FINRA to launch a nationwide initiative that involves active examinations and investigations of broker-dealers engaged in retail sales of private placement interests,” said FINRA Chairman and CEO Rick Ketchum, in a statement.

“That initiative has uncovered misconduct, including fraud and sales practice abuses. While several enforcement actions have been taken and additional investigations are underway, FINRA is taking this opportunity to remind firms of their substantial duties when engaging in the sale of private placement offerings,” he said.

FINRA has brought three enforcement actions in recent months involving private placement offering violations. The actions include a complaint charging McGinn, Smith & Co. and its president with securities fraud in the sales of tens of millions of dollars in unregistered securities; the expulsion of Dallas-based Provident Asset Management for marketing a series of fraudulent private placement offered by an affiliate in a massive Ponzi scheme; and fines totaling $750,000 against Pacific Cornerstone Capital and its former CEO for failing to include complete information in private placement offering documents and marketing material, as well as for advertising violations and supervisory failures.

As predicted, Goldman Sachs announced hefty first-quarter profits of $3.5 billion. The news, which comes amid fraud charges by the Securities and Exchange Commission (SEC) that Goldman knowingly duped investors, may be good for the bank but could lend further credence to the notion of Wall Street making profits at the expense of investors.

“Their reputation is at stake. Ironically, if there was a day that Goldman Sachs wishes that their results were not so good, it’d probably be today,” said Suzy Welch, business and economic issues contributor for ABC News, during an April 20 appearance on Good Morning America. “What makes people mad in the first place is the fact that Goldman makes so much money and perhaps profited off of other people’s suffering, and here they are making more money. Could it get more outrageous?”

On the April 20 earnings call, Goldman Sachs said it was “surprised” by the charges filed by the SEC on April 16. The focus of the SEC’s claims center on a risky mortgage product called Abacus that Goldman Sachs sold to investors but allegedly did not disclose details about another client, Paulson & Company, that helped selected the underlying securities in Abacus and then bet against it to fail.

The SEC claims that Paulson & Company made $1 billion from the deal, while investors lost billions. Goldman Sachs received $15 million as the “middleman” of the transaction.

Also named in the SEC’s lawsuit is Goldman Sachs Vice President Fabrice Tourre. Tourre is alleged to have created and sold the product in question while knowing its risks but keeping them to himself. In a 2007 e-mail, Tourre writes the following:

“More and more leverage in the system, the whole building is about to collapse anytime now. “Only potential survivor, the fabulous Fab … standing the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!”

In addition to the SEC’s charges, the UK’s regulatory agency also plans to begin a formal enforcement investigation into another alleged fraud scheme by the Goldman Sachs that may have cost the Royal Bank of Scotland millions of dollars.

The “Fabulous Fabrice Tourre,” as he refers to himself in an e-mail cited in an April 16 securities fraud lawsuit filed by the Securities and Exchange Commission, is reportedly set to rake in a massive bonus courtesy of his employer Goldman Sachs.

An April 18 story in the Guardian first reported the bonus news, which is set to be announced on April 20 by Goldman Sachs CEO Lloyd Blankfein as part of the first-quarter 2010 financial results for the bank.

News of Tourre’s potential bonus comes on the heels of the SEC’s lawsuit against the VP and Goldman Sachs over claims involving a package of collateralized debt obligations – called Abacus 2007-AC1 – that regulators contend was designed to fail. According to the civil complaint, Tourre knew that the hedge fund, Paulson and Company, had helped select the assets backing Abacus while at the same time betting on it fail.

The SEC further alleges that Tourre misled a collateral manager, ACA Management, about Paulson’s role.

“Marketing materials for Abacus 2007-AC1 were false and misleading because they represented that ACA selected the reference portfolio while omitting any mention that Paulson, a party with economic interests adverse to CDO investors, played a significant role in the selection of the reference portfolio,” the complaint reads.

The SEC’s complaint also includes potentially damning e-mails from Tourre about Abacus. One of those e-mails states the following:

“Only potential survivor, the fabulous Fab standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!”

According to an April 19 article in the Wall Street Journal, Tourre received a paycheck of more than $2 million in 2007. The compensation was reportedly due in part to the success of the CDO at the center of the SEC’s lawsuit. Meanwhile, Tourre apparently has taken an “indefinite vacation” but remains employed at Goldman Sachs.

The fraud lawsuit involving Fabrice Tourre and Goldman Sachs may be just the tip of the iceberg for Wall Street. On April 16, the SEC accused Tourre, a VP at Goldman Sachs, and the bank of creating and selling high-risk collateralized debt obligations tied to mortgages without disclosing to investors the role of a hedge that helped picked the underlying securities and then bet against them to fail.

A number of analysts now say the probe may prompt additional investigations in CDOs at other Wall Street firms.

“This is probably just the tip of the iceberg,” said Chizu Nakajima, director of the Centre for Financial Regulation and Crime at Cass Business School in London, in an April 19 article in Investment News. “As far as other financial institutions are concerned, they are obviously very worried. If the SEC’s action is actually successful, it could well open up the gates to other litigation worldwide.”

Besides Goldman Sachs, at least 20 banks arranged more than $400 billion CDO deals in 2007 – the same time that the U.S. housing market began to collapse. Citigroup was the leader of those deals, followed by Merrill Lynch and Deutsche Bank, according to the Investment News story.

The New York Post reported this morning that the SEC is now investigating transactions structured by other big players in the CDO market, including Deutsche Bank, UBS and Merrill Lynch.

A recent lawsuit against Fabrice Tourre may be emblematic of public sentiment regarding Wall Street. The Securities and Exchange Commission (SEC) filed a civil lawsuit against Tourre and his employer, Goldman Sachs, on April 16, accusing the duo of defrauding investors by misstating and omitting key facts about a financial product tied to mortgage-related investments.

The focus of the lawsuit is on a collateralized debt obligation that Tourre created. The performance of that CDO, called Abacus, was linked to the performance of the housing market. When the housing market tanked, so, too, did Abacus. The SEC isn’t focused on that aspect, however. Its lawsuit concerns a hedge fund, Paulson & Co., which selected the losing assets that went into Abacus and then bet against them. Goldman never revealed Paulson’s role to investors, according to the SEC.

Meanwhile, another company became involved in the deal – ACA Management. Allegedly, Goldman and Tourre convinced ACA that Paulson was investing in Abacus, instead of betting against it.

The SEC’s complaint accuses Tourre as the person principally responsible for ABACUS 2007-AC1. Tourre structured the transaction, prepared the marketing materials, and communicated directly with investors, the SEC says. Tourre also allegedly knew of Paulson & Co.’s undisclosed short interest and role in the collateral selection process.

In addition, Tourre is charged with misleading ACA into believing that Paulson & Co. invested approximately $200 million in the equity of ABACUS, indicating that Paulson & Co.’s interests in the collateral selection process were closely aligned with the interests of ACA. In reality, however, their interests were sharply conflicting.

In the end, Paulson paid Goldman $15 million for putting Abacus together. Investors lost more than $1 billion, while Paulson made a profit of $1 billion, the SEC says.

The name Fabrice Tourre probably wasn’t widely recognized – until now. The Securities and Exchange Commission (SEC) filed a civil lawsuit against the Goldman Sachs broker and his employer last week for their connection to a complex financial product – known as Abacus 2007-AC1 – that was filled with equally complex and high-risk synthetic collateralized debt obligations (CDOs).

According to the SEC’s 22-page complaint, Goldman and Tourre are alleged to have knowing deceived investors when they marketed and sold Abacus. In addition, the SEC says Goldman failed to disclose that one of its clients, Paulson & Co., actually helped choose the risky securities that were packaged into Abacus. Moreover, Goldman did not disclose that Paulson, one of the world’s largest hedge funds, had bet that the value of the securities would fall, the SEC says.

Tourre was the mastermind behind the creation of Abacus, and agreed to the deal with Paulson in April 2007, the SEC claims. Regulators allege, however, that Tourre knew the market in mortgage-backed securities was about to be hit well before April 2007.

The SEC’s April 16 lawsuit against Goldman Sachs and Tourre contains a number of potentially incriminating e-mails from Tourre, one of which reads as follows:

“More and more leverage in the system. Only potential survivor, the fabulous Fab[rice Tourre]… standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!”

Tourre, 31, currently resides in London as executive director of Goldman Sachs International. He’s apparently worked for Goldman since 2001.