The Securities and Exchange Commission (SEC) has received 3,001 tips and complaints following the creation of its Whistleblower Program one year ago. The statistics were made public yesterday in the SEC’s Annual Report on the Dodd-Frank Whistleblower Program for Fiscal Year 2012.

According to the report, tips have come from all 50 states, the District of Columbia, Puerto Rico and 49 countries. States with the highest percentage of tips include: California (17.4%), New York (9.8%), Florida (8.1%), Texas (6.3%), New Jersey (4.1%), Illinois (4%), and Pennsylvania(3.6%).

So far, the 3,000-plus tips are focused in three main areas: Corporate Disclosure and Financials (18.2%); Offering Fraud (15.5%); and Manipulation (15.2%).

The full report is available here.

This year, the SEC made its first award under the Whistleblower Program. On Aug. 21, 2012, a whistleblower who helped the SEC stop an ongoing multimillion dollar fraud received an award of 30% – the maximum percentage payout allowed by law.

In that case, the award recipient submitted a tip concerning the fraud and then provided documents and other significant information. The information ultimately resulted in a federal court ordering more than $1 million in sanctions.

The Bank of New York Mellon Corp. has reached an agreement with the state of Virginia concerning accusations that the bank charged hidden markups on currency transactions to Virginia’s employee pension fund. The deal also involves a $1.1 million payment to a whistleblower group.

Pension funds in Virginia, as well as in other states and municipalities, have accused Bank of New York and custodial bank State Street Corp. of deceiving them by using a least-favorable high or low range to price their currency trades and then pocketing the difference, according to a Nov. 9 Dow Jones Newswires story.

The whistleblower in the case is Grant Wilson, a Japanese yen trader on one of BNY Mellon’s foreign exchange desks in Pittsburgh. For the last two of the 10 years he worked with Mellon, Wilson collected information and documents to assist government investigators and a plaintiff legal group, FX Analytics, into the alleged practices at the bank. The information he provided detailed how the alleged scheme worked and how much BNY Mellon made as a result.

Wilson’s actions are among the first under a new initiative by the Securities and Exchange Commission (SEC) to incorporate whistleblowers into its securities fraud prevention strategies. The program, which was launched under the Dodd-Frank financial overhaul, rewards whistleblowers 10% to 30% of the proceeds in cases where penalties exceed $1 million. Since the program’s inception, tips from informants have surged.

Though it’s only a little more than one year old, the SEC’s Whistleblower Office has been inundated with more than 3,000 tips from informants about alleged securities fraud.

The program, which provides significant monetary rewards to whistleblowers who provide original information leading to a successful enforcement case, has seen a noticeable difference in the quality of information being received, said SEC Commissioner Luis Aguilar in an Oct. 18 story by Marketwatch.

According to Aguilar, the SEC receives an average of eight tips per day; so far, tips have come from around the United States and some 45 foreign countries.

On Aug. 21, the SEC issued its first reward under the Whistleblower Program. The informant, who didn’t wish to be identified, received $50,000, or 30%, of the $150,000 thus far reclaimed out of the multimillion-dollar fraud that the person prevented, the SEC says.

The SEC whistleblower program was implemented under Section 922 of the Dodd-Frank Act. It mainly intended to reward individuals who act early to expose violations and who provide significant evidence to help the SEC bring successful cases.

U.S. District Judge Robert Sweet has given final approval to the $275 million settlement between former Bear Stearns Cos. shareholders and JPMorgan Chase & Co., which bought Bear Stearns in 2008 just as the investment bank faced financial collapse.

The settlement brings to a close years of litigation between Bear Stearns, former executives of the investment firm and investors led by representatives of Michigan’s state pension funds.

Bear Stearns first agreed to the all-cash $275 million settlement in June. The money, minus legal fees, will go to shareholders who accused the company of issuing “materially false and misleading statements” about its financial results. Bear Stearns’ auditor, Deloitte & Touche, agreed to pay $19.9 million.

Shareholders initially filed a series of lawsuits against Bear Stearns beginning in 2008. Among other things, the lead plaintiff in the case claimed that Bear Stearns management had masked the firm’s failing financial health during the last year and a half of existence. During that time, Bear Stearns saw the collapse of two internal hedge funds because of deteriorating mortgage securities. Those investments are now viewed by many financial experts as one of the first key signs of the financial crisis that was to come.

 

High-yield municipal debt has become an increasingly attractive investment vehicle for fixed-income investors – and with good reason. For the three years ending Oct. 31, funds in that sector returned an average of 9.1% a year, according to Morningstar.

The positive returns do not come without their share of risks, however. And, all too often, investors may be unaware of those potential risks. As reported Nov. 5 by the Wall Street Journal, some of the risks associated with high-yield municipal debt include liquidity issues.

The size of the high-yield muni market is $65 billion, which represents only a small portion of the total municipal market. Moreover, many individual issues are small. “It can be difficult to buy in or sell out,” said James Colby, a senior municipal strategist, in the Wall Street Journal article.

Default rates are another issue facing investors of high-yield municipal debt. Since 1970, the cumulative default rate for high-yield muni debt has been 7.94%. By comparison, Moody’s says the cumulative default rate for investment-grade muni debt – i.e. issues with credit ratings from triple-A to triple-B – is 0.08%.

Convicted Ponzi schemer Tim Durham is crying foul over a presentencing report that recommends the disgraced Indianapolis businessman spend 225 years in prison and pay more than $200 million in restitution to victims of Fair Finance Company.

The presentencing report is not available to the public. However, Durham’s attorney, John Tompkins, revealed contents of the report in a 38-page filing on Oct. 31, calling the proposed sentence “absurd.”

Durham’s fate, along with co-defendants Jim Cochran and Rick Snow, will be decided on Nov. 30 by Judge Jane Magnus-Stinson. In June, a federal jury found Durham guilty on all 12 felony charges stemming from the collapse of Akron, Ohio-based Fair Finance.

Prosecutors in the case allege that after Durham and Cochran bought Fair Finance in 2002, they used it as their own personal piggy bank to fund their lavish lifestyles and to cover financial losses at various businesses they owned.

Prosecutors say that the huge withdrawals allegedly made by Durham were recorded as “loans,” and ultimately left Fair Finance unable to repay 5,000 Ohio residents who purchased more than $200 million of the company’s unsecured investment certificates.

FBI agents raided and shut Fair Finance down in November 2009.

 

Non-traded real estate investment trusts (REITs) are bringing more bad news for David Lerner Associates. Last week, the Financial Industry Regulatory Authority (FINRA) ordered the firm to pay $12 million in restitution to clients who bought shares of Apple REIT 10. In addition, FINRA fined Lerner more than $2.3 million for charging unfair prices on municipal bonds and collateralized mortgage obligations.

David Lerner, the firm’s chief executive, was fined $250,000 and suspended from the securities industry for one year. Following the ban, he faces a two-year suspension from acting as a firm’s principal. Lerner’s head trader, William Mason, was fined $200,000 by FINRA and suspended from the securities industry for six months.

“David Lerner and his firm targeted unsophisticated and elderly customers, grossly failing to comply with basic standards of suitability in selling Apple REIT 10 to thousands of customers,” said Brad Bennett, FINRA’s chief of enforcement, in a statement about Lerner.

More than regulatory problems, however, David Lerner Associates faces a slew of investor arbitration complaints from clients who bought certain REITs from the company.

Lerner was the sole distributor of Apple REITs. According to FINRA, Lerner solicited thousands of customers and, specifically, targeted unsophisticated investors and the elderly without performing adequate due diligence to determine whether the REITs were suitable investments.

To sell the Apple REIT 10, FINRA says that Lerner used misleading marketing tactics that promised 7% to 8% annual returns. What the firm reportedly did not disclose was that income from the REIT was insufficient to keep paying out distributions without taking on significant amounts of debt.

Between January and December 2011, Lerner allegedly recommended and sold more than $442 million of Apple REIT 10 to investors.

The Financial Industry Regulatory Authority (FINRA) is calling out David Lerner Associates in a big way over alleged unfair sales practices and excessive markups concerning a non-traded real estate investment trust (REIT) known as Apple REIT 10. On Monday, the regulator ordered Lerner to pay $12 million in restitution to clients who bought shares of the non-traded REIT.

David Lerner Associates was the sole distributor of the Apple REITs. According to FINRA, the company solicited thousands of customers and, specifically, targeted unsophisticated investors and the elderly. FINRA says that as Lerner sold the illiquid REIT, it failed to perform adequate due diligence to determine whether the product was suitable for investors.

FINRA noted that in order to sell the Apple REIT 10, David Lerner Associates used misleading marketing materials in which performance information for the closed Apple REITs had been presented without also disclosing that income from those REITs was insufficient to support the distributions to unit owners.

In addition to the $12 million in restitution to clients, FINRA fined David Lerner Associates more than $2.3 million for charging unfair prices on municipal bonds and collateralized mortgage obligations (CMOs) that the company sold over a 30-month period.

The firm’s founder and chief executive, David Lerner, was fined $250,000 and suspended from the securities industry for one year, followed by a two-year suspension from acting as a firm’s principal.  William Mason, the firm’s head trader, was ordered to pay $200,000 and suspended for six months.

“David Lerner and his firm targeted unsophisticated and elderly customers, grossly failing to comply with basic standards of suitability in selling Apple REIT 10 to thousands of customers,” said Brad Bennett, FINRA’s chief of enforcement.

In concluding the settlement, David Lerner Associates and Lerner neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

The Securities and Exchange Commission (SEC) is putting registered investment advisers who inflate their professional credentials on notice: They may very well be called out for their fabrications.

At a compliance conference held last week by the National Regulatory Services (NRS), the SEC revealed that it is actively reviewing the ADV forms of advisers for what it calls “suspect” information.

“Some of the areas they’re looking at are education, business background, disciplinary disclosures and credentials,” said Marilyn Miles, vice president at NRS, in an Oct. 12 story by Investment News. “They’re not taking [those items] at face value anymore.”

In other words, if an investment adviser lists summa cum laude as part of his or her educational background it’s likely to be independently confirmed by the SEC.

In addition to using the Internet and other filings to verify information, SEC examiners plan to cross-check business experience information listed on Form U-4s and compare it to the ADVs.

On Oct. 2, Vanguard Group announced that some of its mutual funds planned to drop MSCI as the provider of the market benchmarks the funds track and switch to indexes from the University of Chicago’s Center for Research in Security Prices, while six foreign stock funds will begin tracking FTSE indexes.

The news promptly caused MSCI’s share price to tumble. MSCI’s stock price was around $36 in September, but dropped to about $27 following Vanguard’s announcement.

More interesting, however, may be the footnote to the MSCI story. As reported in a blog by the Securities Litigation & Consulting Group, a substantial insider sale took place less than a month before the MSCI/Vanguard news.  The insider was C.D. Baer Pettit. Pettit, according to the Form 4 filed with the Securities and Exchange Commission (SEC), was Head of Index Business at MSCI on Sept. 7, 2012, when the transaction took place.

Pettit sold more 72,000 shares of MSCI – or more than 38% of his ownership. According to the SLCG blog, the average price Pettit received from that sale was $36.61. (The transaction was executed in multiple trades at prices ranging from $36.52 to $36.69.)

The price is nearly $10 more than what Pettit would have received had he waited a few weeks to sell his shares.

MSCI’s closing price on Oct. 1, 2012 was $35.82 and the closing price on Oct. 2, 2012, was $26.21.  The shares Pettit sold on Sept. 7, 2012, would have lost more than $694,572.

Meanwhile, Pettit’s transaction coincidentally accounted for more than 38% of MSCI shares sold by insiders during the 12 months preceding the sale.