October 24, 2013

Collateral Manager Of CDO Charged With Fraud

Investment advisory firm, Harding Advisory, LLC, and its owner were charged recently by the SEC for misleading investors and breaching their fiduciary duties. According to a recent press release, the SEC alleged Harding "compromised their independent judgment as collateral manager to a CDO named Octans I CDO Ltd." The firm and owner allegedly did so for requested trades of a third party hedge firm, Magnetar Capital LLC. The SEC asserted in their press release that these trades "were not necessarily aligned with the debt investors". One example provided by the SEC of going against the interests of the debt investors is Harding giving the hedge firm rights during the process of choosing and obtaining a portfolio of subprime mortgage-backed assets. These assets were collateral for debt instruments issued to investors in the CDO and the investors were not told of the rights given to the hedge firm, according to the press release. Another allegation by the SEC is that, in favor of Magnetar's preferences, Harding's own credit analyses were disregarded. Also asserted is that Magnetar's role in selecting assets of the CDO was not disclosed in any of the marketing material produced to potential investors.

The SEC charged Harding with violating Section 17(a) of the Securities Act of 1933 and Section 206 of the Investment Advisers Act of 1940. The owner of Harding, Wing F. Chau was charged under those sections as well as being charged with aiding and abetting and causing Harding's violations.

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October 8, 2013

FDIC Against Proposed Countrywide Settlement

The FDIC recently advised a U.S. District Court Judge to reject the proposed $500 million class-action settlement between Bank of America Corp.'s Countrywide unit and investors due to the relatively small percentage of the settlement that will go the investors, Bloomberg.com reported.

The FDIC stated in their filing that only $41 million dollars would go to 91% of the investor plaintiffs from the settlement, with $85 million dollars going to the attorneys for the lead plaintiffs.

The Bloomberg.com article further states the FDIC found the entire $500 million dollar settlement amount to be lacking. The face value of the securities comprising the suit is $450.7 billion dollars.

The article states that other similar mortgage-backed securities actions have recovered an average of 1.1 percent of the face value of the securities while this settlement would only provide 0.11 percent of face value.

The settlement provides, after attorneys' fees, $267 million for claims by investors in the initial lawsuits, leaving $111 million for investors whose claims were filed too late, according to the article. A hearing on final approval for the settlement is scheduled for Oct. 28.

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October 1, 2013

$14 Million Dollar Award Paid to Whistleblower

According to an SEC press release, a recent whistleblower received $14 million dollars for assisting the SEC in an investigation. The unidentified whistleblower provided such assistance to the SEC that in less than six months, the SEC brought an enforcement action and was able to secure investor funds. This is the largest whistleblower award paid to date by the SEC.

Under the Dodd-Frank Act, whistleblowers are paid from a separate fund and the payment does not reduce the amount paid to those harmed or come from the agency's annual appropriations, according to the SEC press release.

To receive a payment from the whistleblower program, a person must provide "high-quality original information that results in an SEC enforcement action with sanctions exceeding $1 million" and the awards "can range from 10 percent to 30 percent of the money collected in a case" according to the press release.

The whistleblower program started in 2011 and since then has paid out numerous awards to persons who have significantly assisted the SEC in securing investor funds and going after wrong doers. The law protects the identities of whistleblowers; the SEC cannot disclose any information that might directly or indirectly reveal a whistleblower's identity.

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September 30, 2013

Woman Charged for Ponzi Scheme Targeting Colombian-Americans

A recent SEC press release stated that the commission filed a complaint in federal court against Jenny E. Coplan for defrauding mostly Colombian-American persons into investing in immigration bail bonds. The SEC press release, relaying from the SEC complaint, stated that she allegedly raised approximately $4 million from more than 90 investors in Florida, California, Georgia, Texas, Canada, and Colombia.

The SEC alleges that Ms. Coplan told her 90 or more investors that her company, Immigration General Services, worked with an investment broker to invest the funds in immigration bail bonds. Ms. Coplan told her investors these bonds would return a profit ranging from 60 to 108 percent annually, according to the SEC press release. The SEC also alleged that Ms. Coplan told investors that her company was insured by the Federal Deposit Insurance Corporation (FDIC) when it was not. It is alleged in the press release by the SEC that Ms. Coplan used funds from new investors to pay earlier investors what she classified as profits and also took approximately $878,000 of investor money for her own personal use.

The U.S. Attorney's Office for the Southern District of Florida has placed criminal charges against Ms. Coplan. The SEC seeks disgorgement of ill-gotten gains, financial penalties and permanent injunctions in their complaint.

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September 23, 2013

JPMorgan Chase Admits Fault in SEC Settlement

The latest news regarding JPMorgan Chase is that the SEC fulfilled their pledge to force them to admit their wrongdoing according, to a recent InsuranceJournal.com article.
JPMorgan admitted, as part of a $920 million dollar agreement, that it violated federal securities laws when it failed to catch traders hiding losses in 2012, according to the article.

The SEC, under Chairman Mary Jo White, has revamped their previous policy of allowing defendants to settle without admitting or denying any wrongdoing and now focus on having the wrong doer admit their fault. In February 2013, U.S. District Judge Jed Rakoff rejected a settlement with Citigroup Inc. in part because their was not an admission of guilt. Read more about Judge Rakoff's decision in our blog post from February 13, 2013.

This settlement, with the admission of fault, was narrowly approved 2-1 by the SEC commissioners who were eligible to vote on the matter, according to the InsuranceJournal.com article. In the past, the argument that an admission of fault would breed private lawsuits has been persuasive. However, an SEC spokesperson, quoted in the article, stated that the admission would not "disadvantage JPMorgan in a private lawsuit."

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September 18, 2013

SEC Proposes New CEO Disclosure Rule

A HuffingtonPost.com article reports the SEC is proposing a new, and hotly debated, disclosure rule for CEOs. The rule, which is actually required under the Dodd-Frank Act, will force corporations to disclose the ratio of pay between the CEO and an average worker.

The article points out that in the past, companies have complained about the potential hardship of calculating the pay of a median worker; however, many firms already publish their labor costs in various SEC filings. The HuffingtonPost.com article shed further light on the complaints of companies against the new rule, stating that exclusions of part-time and foreign workers were sought to potentially reduce the gap in pay between the CEO and the median worker.

The SEC, in their new rule, proposed statistically sampling a company's total work force to determine the median worker pay and also rejected the suggestion limit to determination of the median worker pay to only using full time domestic workers, per the article.

This proposed rule is yet another narrowly passed rule, approved with a 3-2 vote. A final rule has yet to be put into place. The article illuminated one data set regarding CEO pay- the Institute for Policy Studies found in 2012 that CEO pay to average worker pay was 354 to 1. The article also pointed out, not surprisingly, that many corporate executives and companies are against this disclosure rule.

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August 27, 2013

Colorado-Based Portfolio Manager Sanctioned by SEC

According to an SEC press release, former portfolio manager Carl Johns was sanctioned for forging documents and misleading his former firm's chief compliance officer about his personal trades.

Mr. Johns was sanctioned for failing to report or pre-clear hundreds of his personal security trades, the press release stated, and he concealed the trades by altering documents. Mr. Johns was employed at Boulder Investment Advisers.

BIA, according to the SEC press release, had in place a code of ethics that restricted trading in securities held by the firm as well as restrictions on when and how their employees could trade. Furthermore, all trades had to be pre-cleared by the firm's chief compliance officer. From 2006 to 2010, Mr. Johns circumvented these restrictions and the code of ethics by submitting inaccurate quarterly and annual reports and falsely certified his annual compliance with the code of ethics. The press release maintains that Mr. Johns not only hid his trades but also physically altered brokerage statements, trade confirmations, and pre-clearance approvals before submitting them to the firm along with his quarterly reports.

This case is the first for the SEC to charge under Rule 38a-1(c) of the Investment Company Act for misleading and obstructing a chief compliance officer (CCO). Mr. Johns will pay disgorgement of $231,169, prejudgment interest of $23,889, and a penalty of $100,000. Also, without admitting or denying the findings, Mr. Johns agreed to a five-year bar from the securities industry.

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August 22, 2013

SEC Stops LA Based Company From Issuing Public Stock

A recent press release stated that the SEC issued a stop order against Counseling International. The stop order prevented the company from offering their shares to the public. The rationale behind the stop order, according to the press release, is that the SEC determined the Los Angeles based company had false and misleading information in their registration statement.

The press release went on to state that the company's registration statement failed to disclose the identity of the company's control persons and promoters. Such disclosures are mandatory under securities law. Also, the registration statement falsely describes the circumstances under which the former CEO departed. Since August 2012, when the registration statement was first filed, Counseling International amended the statement four times.

Stop orders are a means for the SEC to proactively prevent fraud by stopping the process before there is a chance the stock can be sold to the public. Counseling International consented to the stop order and agreed to not engage or participate in any unregistered offering of securities, as stated in Rule 506 of Regulation D, for five years from the issuance of the stop order.

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August 7, 2013

Large Win for Fannie Mae and Freddie Mac Against UBS

The Federal Housing Finance Agency (FHFA), acting on behalf of Fannie Mae and Freddie Mac, settled the third of eighteen cases filed in 2011 by the FHFA as their conservator. The settlement with UBS Americas, Inc. is for $885 million, according to the FHFA press release. The settlement came after the FHFA asserted claims against UBS of alleged violations of federal and state securities laws in connection with private-label residential mortgage-backed securities purchased by Fannie Mae and Freddie Mac, according to the press release.

The suit filed against UBS stemmed from the thirty three residential, mortgage backed securities UBS sold to Fannie Mae and Freddie Mac between 2004 and 2007. The settlement calls for UBS to pay Fannie Mae approximately $415 million and Freddie Mac $470 million. The press release contains a copy of the settlement agreement.

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July 10, 2013

SEC Commission Approves JOBS Act to Lift Solicitation Ban and Disqualify Felons

The SEC Commission approved the Jumpstart Our Business Startups Act and the lifting of the ban on general solicitation according to the recent SEC press release. The JOBS Act is related to securities under Rule 506. The lifting of the ban is a measure to assist companies in finding investors and raising capital. Even if a security rests on Rule 506, the sales without the general solicitation ban are still limited to accredited investors only and the issuer must take reasonable steps to verify only accredited investors purchase. The Commission also voted on a proposal to provide for additional safeguards now that the ban has been lifted. To read more about the JOBS Act, click here. (http://www.sec.gov/spotlight/jobs-act.shtml)

In the same session, the SEC also adopted rules that disqualify felons and other bad actors from participating in certain securities offerings as required by the Dodd-Frank Act. To read the Dodd-Frank Act in its entirety, click here. (http://www.sec.gov/about/laws/wallstreetreform-cpa.pdf)

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May 2, 2013

SEC Urges an End to Mandatory Arbitrations

Armed with an argument for protecting investors' rights, SEC member Luis Aguilar went before the North America Securities Administrators Association's annual conference in Washington, D.C to argue that mandatory arbitration agreements should not be allowed, according to a recent Reuters.com article. Aguilar feels that the investor should be able to choose the forum in which they want to bring their legal claims.

These are the first really outspoken comments by Aguilar since the enactment of the 2010 Dodd-Frank Wall Street reform law, provided the SEC with new powers to raise investor protections, including the authority to scale back or completely prohibit pre-dispute arbitration agreements.

Arguments made by those who want to continue with mandatory arbitration agreements include the reduction of costs and prevention of frivolous litigation, according to the Reuters.com article.

As of yet, the SEC has not taken action on Aguilar's proposal. Aguilar is one of five voting commissioners but the article pointed out that his views on some issues have diverged from those of some of his peers on the commission.

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April 11, 2013

SEC Finally Releases Morgan Keegan Fund Distribution

A recent press by the Secretary of State for the State of Mississippi announced that the SEC has published their proposed plan for fund distribution to those injured by Morgan Keegan investments.

This comes two years after the $200 million dollar settlement with Morgan Keegan and Morgan Asset Management. The settlement funds are to be used as payments to investors who were damaged by Morgan Keegan and Morgan Asset Management's failure to "disclose risks associated with certain investments and presenting misleading marketing materials to investors", according to the Secretary of State's press release.
The settlement was to be paid originally in two parts, with the States involved in the suit distributing $100 million to injured investors and the SEC distributing the other $100 million. The States have already distributed their portion and have been waiting on the SEC, according to the press release.

Secretary Hosemann stated in his press release that, "by their own administrative rule, the SEC is required to have a distribution plan in place within 60 days of the Commission receiving funds. It has been two years". After repeated demands by the Secretary of the State, three investors filed a lawsuit against the SEC to demand payment; the Attorney General demanded action from the SEC within 14 days of the demand, the press release stated.

The SEC announced the proposed distribution plan early this April; a copy of the plan can be found http://www.sec.gov/litigation/fairfundlist.htm#morganassetmgmt.

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April 2, 2013

FINRA Bars Broker for Unsuitable and Unapproved Securities Transactions Involving 31 NFL Players

According to a FINRA press release, broker Jeffrey Rubin of Lighthouse Point, Florida, is barred from the securities industry for making unsuitable recommendations to invest in illiquid, high-risk securities issued in connection with a now-bankrupt casino in Alabama. Mr. Rubin was barred after after an investigation spearheaded by FINRA's Departments of Enforcement and Member Regulation.

Mr. Rubin, while a registered broker at Lincoln Financial Advisors Corporation and Alterna Capital Corporation, also operated a Florida-based company, Pro Sports Financial. Pro Sports Financial provided financial-related "concierge" services to professional athletes for an annual fee. Rubin recommended that one of his NFL clients invest thr majority of his liquid net worth, approximately $3.5 million, in four high-risk securities. Without informing his employer member firm and without their approval, Rubin recommended and facilitated his client investing $2 million in the now failed Alabama casino project.

Mr. Rubin referred other investors to the casino project while employed by Alterna Capital Corporation and International Assets Advisory, LLC without the firms' knowledge or approval. FINRA found that from approximately January 2008 through March 2011, 30 additional NFL player clients of Mr. Rubin's concierge firm, Pro Sports Financial, invested approximately $40 million in the casino project. These investments provided Mr. Rubin with a 4 percent ownership stake in the defunct casino and $500,000 from the project promoter for these referrals.

FINRA's Executive Vice President and Chief of Enforcement, Brad Bennett, said, "This case demonstrates how broker misconduct can target high-income, inexperienced, and vulnerable investors. Jeffrey Rubin took advantage of professional athletes who placed their trust in him." In settling this matter, Rubin neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

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March 13, 2013

The Frankowski Firm, LLC Announces Investigation of Saba Software, Inc.

Saba Software, Saba, a provider of cloud computing software used for training and conferencing, recently announced that it received a letter from NASDAQ indicating the Company's ongoing failure to comply with NASDAQ's listing requirements. The failure to comply is related to the Company's failure to timely file certain financial statements with the SEC. The Company previously announced that it will be restating previously issued financial statements for fiscal years 2008, 2009, 2010, and 2011, and is reviewing the Company's unaudited financial statements for the three months ended August 31, 2012 and the six months ended November 12, 2012. The Company also announced that its public accounting firm will resign upon the completion of the audit and restatements.

On March 1, 2013, the Company announced that its founder, director and CEO Bobby Yazdani was stepping down from all of those positions effective immediately. The Frankowski Firm is investigating whether the directors and officers of Saba Software breached their fiduciary duties owed to the Company and its shareholders in connection with the above and caused the Company damages.

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March 1, 2013

Raymond James Drops Morgan Keegan's Name After It Was Ordered to Buy Back Securities

Just a few weeks after the 11th Circuit Court ordered Morgan Keegan to buy back more of their ultra-risky auction rate securities, Raymond James dropped the name Morgan Keegan altogether. In November 2012, this blog reported that 11th Circuit Judge William Duffy dismissed an SEC claim against Morgan Keegan. According to the article underlining the blog post, District Judge Duffy dismissed the SEC claims, ruling that the brokers' misleading statements were not material and that the brokers could not predict the market. However, the Court of Appeals disagreed with Judge Duffy and remanded the case back to the judge for a non-jury trial.

The Bloomberg.com article discussed Judge Duffy's opinion, which said that the brokerage firm did not act fraudulently but some of its brokers negligently made misrepresentations and omitted important information about the securities sold. Though Morgan Keegan voluntarily bought back around $2 billion of the highly-risky auction rate securities, according to the article, Judge Duffy ordered still more of the risky securities to be purchased back from the investors adversely affected by the high-risk funds and the misrepresentations surrounding them. Morgan Keegan was also ordered to pay a fine of over $100,000 per the Bloomberg.com article.

This decision came just a month before Raymond James Financial announced plans to drop Morgan Keegan from the name of its fixed-income arm. The onwallstreet.com article quoted Raymond James CEO Paul Reilly as saying that the two companies have reached a "cultural integration." The article also quoted Mr. Reilly as saying that Morgan Keegan was the one that requested their name be dropped.

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