FinancialCounsel

SEC Informs State Street Bank And Trust Co. That It Could Face Charges For Securities Violations Tied To Investments In Sub-Prime Mortgages

State Street Corp. disclosed on Monday in a regulatory filing that the Securities and Exchange Commission could bring civil charges against its main subsidiary for possible securities violations tied to past investments in subprime mortgages.

State Street Bank and Trust Co. received a so-called "Wells" notice from the SEC tied to the ongoing investigation by the SEC into disclosures and management of the bank's fixed-income investments during 2007 and earlier periods.

In 2007, ahead of the collapse of the housing market, State Street's fixed-income investment unit increasingly invested in securities and bonds backed by subprime mortgages -- loans given to customers with poor credit history.  As the housing market unraveled in late 2007 and defaults on mortgages began to skyrocket, the value of those investments plummeted leading to losses in the investment funds.

The losses led some investors to file lawsuits, questioning whether State Street's investments fit strategies consistent with those of more traditional fixed-income funds.  During the fourth quarter of 2007, State Street established a reserve fund of $625 million to settle claims.

About two-thirds of the fund has been spent settling claims since then.  As of March 31, there was about $207 million remaining in the reserve fund.

The Wells notice indicates the possibility of an enforcement action and allows for the trust bank to provide its perspective on the investigation before any formal proceedings begin.

Source:  AP

SNSFE Investigating Michael Regan And Regan & Company Of Massachusetts Following SEC Ponzi Scheme Fraud Charges

SEC charges Massachusetts-based money manager in multi-million dollar Ponzi scheme. 

The SEC alleges that Michael Regan and his firm Regan & Company fraudulently obtained at least $15.9 million from dozens of investors nationwide by selling securities in his now defunct River Stream Fund. Regan provided fake account statements and tax forms to investors showing artificially inflated account balances and concealing that he did no securities trading at all for several years and suffered substantial losses on investments that he did make.  Regan falsely claimed that he earned an MBA from a major New York university and promoted a phony track record of successful securities trading and investment expertise.  Regan is not registered as an investment adviser with the SEC or any other securities regulator.

The SEC's complaint, filed in the U.S. District Court for the Southern District of New York, alleges that Regan misrepresented to investors that because of his trading expertise and successful investment track record, they could expect annual returns averaging 20 percent with minimal risk to their principal.  He promised investors that their money would be pooled into a "fund" that he would invest on their behalf in securities using a conservative, low-risk trading strategy that he claimed was based upon "short-term price trends."

The SEC alleges that Regan actually used less than half of the funds entrusted to him for trading purposes.  Instead of protecting the investors' principal and delivering the promised returns, Regan misappropriated millions of dollars in investor funds to satisfy withdrawal requests from some investors.  He used at least $2.4 million for his personal expenses, including support payments to various family members.

Separately, the U.S. Attorney's Office for the Eastern District of New York announced criminal charges against Regan for the same misconduct alleged in the SEC's complaint.

SNSFE lawyers are investigating this matter, including those entities and individuals who might have referred clients to Michael Regan and his firm Regan & Company.  Those with information should feel free to contact attorneys at SNSFE.

Source:  SEC Press Release 2009-143

SEC Chairman Mary Schapiro Outlines Improvements To Investor Protection And Market Integrity

Chairman Mary Schapiro recently testified before the Senate Subcommittee on Financial Services and General Government on the ways in which the Securities and Exchange Commission (SEC) is seeking to restore investor confidence.  Her remarks come at a time when both investor protection and market integrity need substantial improvement.  Let's highlight the key areas that the SEC is focusing upon.

Continue...

SNSFE Continuing To Investigate As New Hampshire Securities Regulator Sues UBS Over Sales Of Principal Protected Notes

The New Hampshire Bureau of Securities Regulation has filed a Cease and Desist order against UBS Financial Services alleging unfair sales practices and unsatisfactory supervisory procedures and for recommending unsuitable investments to more than 40 New Hampshire investors.  The action relates to products underwritten by the now defunct Lehman Brothers and sold to the public by UBS.  Over $2.5 million is at risk for New Hampshire investors.

The products in question are complicated investment vehicles, so-called "structured products," many of which were sold promising principal protection.  These are notes connected to complex derivatives that are linked to various investments, such as Asian and other foreign currencies.  In theory, if the market value of the investment declined at maturity, Lehman Brothers Bank would ensure that each investor receives his or her initial investment back.  However, because Lehman Brothers declared bankruptcy in September 2008, investors who held these notes stand to lose much if not all of their principal.

According to Jeff Spill, Director of Securities Regulation for Enforcement, "UBS presented these notes as simple, safe investments when in fact they are highly volatile and are subject to shifting market conditions.  The safety of these products was exaggerated.  We believe UBS engaged in unfair and unlawful sales practices when presenting these investments."

Putting the action in context, Director of Securities Regulation, Mark Connolly, explained, "The Bureau believes UBS sold these products to New Hampshire investors without adequately explaining the potential for loss. UBS also failed to alert customers as to the declining financial condition of Lehman Brothers, which would affect the principal protection on the investment.  The Bureau believes UBS wrongly sold complex products to investors in our State.  The company violated a long standing legal requirement that a broker must recommend investments which meet the goals of the investor and are within his or her tolerance for potential gains and losses."

"We believe that 'principal protection' meant one thing to investors, but something entirely different to UBS," Kevin Moquin, staff attorney for the Bureau said.  "New Hampshire investors would never have invested in derivative-based investments had they understood what they were buying."

Connolly stated, "UBS has not been proactive in addressing regulatory issues at either the Federal or State level.  We understand that other regulators have experienced similar inflexibility.  We publicly encourage UBS to examine how it conducts its securities business.  Changes need to be made."  Connolly summarized, "The environment has changed and the system will not tolerate insufficient standards for suitability and supervision."

SNSFE continues to investigate the actions and inactions, representations and misrepresentations made by UBS in connection with principal protected notes.  Those with information should feel free to contact attorneys at SNSFE.

Source:  New Hampshire Securities Regulation Press Release

A Primer On CFP Board's Ethical Standards And Enforcement Process

Recently I had the pleasure of participating in a panel discussion before an audience of financial planners to address customer complaint issues.  One of my co-panelists, Michael P. Shaw, CFP Board’s Managing Director of Professional Review and Legal, discussed CFP Board’s ethical standards and enforcement process.  That is a topic that should be of great interest not only to financial planners but also to investors who benefit from the work of CFP Board.  Let’s examine why.

Continue...

SNSFE Investigates James Putnam And Wealth Management LLC Of Wisconsin Following Charges Of Fraud And Kickbacks Filed By The SEC

A past NAPFA President has been charged in a kickback scheme.

A former president of the National Association of Personal Financial Advisors has been charged with taking kickbacks from unregistered investment pools in which his Wisconsin advisory firm placed $102 million in client assets.

James Putman, founder, majority owner and CEO of Wealth Management LLC in Appleton, Wisconsin and Simone Fevola, the firm's former president, a minority owner and chief investment officer, each accepted $1.24 million in undisclosed payments derived from investments made by the unregistered investment pools, according to a civil complaint filed by the Securities and Exchange Commission.  Putman could not be reached for comment on the charges by press time.

The SEC announced that it obtained an emergency court order freezing Wealth Management's assets because the firm is charged with engaging in a kickback scheme and other fraudulent conduct involving six unregistered investment pools it managed.  The SEC also alleges that Wealth Management, Putman and Fevola misrepresented the safety and stability of the two largest investment pools and placed clients into these investments even though they were inconsistent with some clients' objectives.

The ADV for Wealth Management LLC lists seven funds for which Wealth Management is a partner, manager or advisor, with a total value of approximately $104 million and minimum investments ranging from $50,000 to $1 million.  The largest of these funds is the WML Gryphon Fund, with $38 million in assets, and the WML Watchstone Partners fund with $50 million in assets.

According to the SEC's complaint, Wealth Management, Putman and Fevola caused clients to invest in the pools from May 2003 through August 2008, and Wealth Management claims to currently have approximately $102 million of its clients' assets invested in these pools.  The SEC's complaint alleges that the pools' assets are largely illiquid, the reported values of their assets appear to be substantially overstated, and Wealth Management and Putman have been providing redemptions to investors based on likely overstated valuations.

The SEC's complaint charges each of the defendants with violations of the antifraud provisions of the federal securities laws, and Putman and Fevola with aiding and abetting Wealth Management's violations.  In addition to seeking emergency relief, the SEC's complaint seeks permanent injunctions barring future violations of the charged provisions of the federal securities laws, disgorgement of the defendants' ill-gotten gains plus pre-judgment interest, and financial penalties from the defendants. 

The SEC's investigation is continuing as well as SNSFE's investigation.  Those with information should feel free to contact SNSFE attorneys. 

Source: SEC Release 2009-119

FINRA Proposes Significant Changes To Suitability And Know-Your-Customer Rules

Recently, securities regulators proposed to revise the Suitability and Know Your Customer obligations.  In Regulatory Notice 09-25, FINRA is proposing to add a great deal more to Suitability and Know Your Customer obligations.

Specifically, under the revised Rules: 

A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the facts known by the member or associated person or disclosed by the customer in response to the member’s or associated person’s reasonable efforts to obtain information concerning the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the member or associated person considers to be reasonable in making recommendations.

Likewise, with respect to the Rule regarding suitability obligations, the FINRA Rule proposes the following:

There are three main suitability obligations under Rule 2111: reasonable-basis suitability, customer-specific suitability and quantitative suitability. The reasonable-basis obligation requires a member or associated person to have a reasonable basis to believe, based on adequate due diligence, that the recommendation is suitable for at least some investors. In general, what constitutes adequate due diligence will vary depending on, among other things, the complexity of and risks associated with the security or investment strategy and the member’s or associated person’s familiarity with the security or investment strategy. The customer-specific obligation requires that a member or associated person have reasonable grounds to believe that the recommendation is suitable for a particular customer based on that customer’s profile, as delineated [above] in Rule 2111(a). Quantitative suitability requires a member or associated person who has actual or de facto control over a customer account to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together in light of the customer’s profile, as delineated [above] in Rule 2111(a). No single test defines excessive activity, but factors such as the turnover rate, the cost-equity ratio, and the use of in-and-out trading in a customer’s account may provide a basis for a finding that a member or associated person has violated the quantitative suitability obligation.

Additionally, FINRA proposes to add the following:

Customers’ Financial Ability. Rule 2111 prohibits a member or associated person from recommending a transaction or investment strategy involving a security or securities or the continuing purchase of a security or securities or use of an investment strategy involving a security or securities if such recommendation is inconsistent with the reasonable expectation that the customer has the financial ability to meet such a commitment.

Finally, the Know Your Customer Rule is amended as proposed as follows:

Every member shall use due diligence, in regard to the opening and maintenance of every account, to know (and retain) the essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer.

Likewise, FINRA proposes, for purposes of this Rule facts essential to “knowing the customer” include the customer’s financial profile and the investment objectives or policy.

This Regulatory Notice provides some significant ramifications both to brokers and investors regarding securities obligations.

Source:  FINRA Regulatory Notice 09-25

SEC's Sanction Against Royal Alliance For Failure To Detect Adviser's Ponzi Scheme Provides Valuable Lessons To Investors And Advisers

The SEC (Securities and Exchange Commission) has censured Royal Alliance Associates, Inc. and fined it $500,000 due to its failure to supervise one of its former advisers, David McMillan.  From at least January 1999 until December 2004, McMillan was able to operate a Ponzi scheme and defraud no less than 28 investors "by lying about purchases and sales of securities, by misappropriating funds for his personal use, and by sending certain investors falsified statements relating to their investment accounts."  Let's review how McMillan perpetrated this fraud and why the SEC severely has sanctioned Royal Alliance for failing to prevent and/or detect it.

Continue...

Morgan Keegan Faces Possible SEC Action Over Its Failure To Disclose Risks Associated With Auction-Rate Securities

Regions Financial may face SEC charges.

The U.S. Securities and Exchange Commission may launch a civil proceeding against the Morgan Keegan & Co. brokerage unit of Regions Financial Corp. 

In its quarterly report filed with the SEC, Regions said the regulator filed a "Wells Notice" in March against Morgan Keegan.  Such a notice indicates that civil action is possible, and gives the recipient a chance to mount a defense.

Regions said the SEC is investigating the adequacy of Morgan Keegan's disclosures of liquidity risks associated with auction-rate debt, and whether it sold a large volume of the debt after its ability to support the auctions was diminished.  It said Morgan Keegan has cooperated with the SEC, and is buying back auction-rate debt it sold to retail customers.

Rates on auction-rate debt reset in periodic auctions.  Regulators say brokerages misled investors into believing the debt was safe and the equivalent of cash.  After the $330 billion market seized up in February 2008, many investors could not sell the debt or could sell it only at a loss.

Lawyers at SNSFE continue to investigate the auction-rate debacle.  Investors should feel free to contact lawyers at SNSFE.

Source:  Reuters

SEC Charges Attorneys And Others In Connection With Issuing Bogus Rule 144 Opinion Letters As Part Of A Legal Opinion Mill

The Securities and Exchange Commission has charged attorneys for fraudulent legal opinions used by promoters in Pump-and-Dump scheme:

The SEC alleges that attorneys Albert Rasch, Jr. and Kathleen Novinger together with Sandra Masino and her company 144 Opinions, Inc. drafted and executed at least 24 legal opinion letters that fraudulently induced the removal of restrictive legends on unregistered shares of Mobile Ready Entertainment Corp.  As a result, certificates representing more than 22 million shares of Mobile Ready were sold to the public in violation of Rule 144, which governs the conversion of restricted stock that otherwise cannot be sold to the public.  The SEC previously charged Mobile Ready and two of its officers in connection with the fraudulent pump-and-dump scheme that was made possible, in part, by the bogus opinion letters.

"The market relies on lawyers to act as gatekeepers who exercise their function in good faith," said Katherine Addleman, Regional Director of the SEC's Atlanta Regional Office.  "As alleged in our complaint, these defendants disregarded the investing public by operating a legal opinion mill of fraudulent letters that misrepresented critical facts and cited to non-existent documents."

The SEC's complaint, filed in the U.S. District Court for the Northern District of Georgia, alleges that after the fraudulent letters were prepared and issued, Masino and 144 Opinions made further false statements to a transfer agent to induce the removal of the restrictive legends on the respective shares of Mobile Ready.  The fraudulent legal opinion letters contained false and misleading statements about the origin of the securities at issue, the existence of adequate public information concerning Mobile Ready, the existence of agreements between Mobile Ready and the relevant shareholders, and the applicability of Rule 144 promulgated under the Securities Act of 1933 to the restricted shares identified in each of the Mobile Ready Legal Opinions.

Source:  SEC Press Release 2009-103