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Archive for November, 2011

SEC fines RIA for reverse repo transaction

The SEC has ordered broker-dealer FTN Financial Securities to pay nearly $2 million for allowing a registered investment advisor, Sentinel Management, to defraud its clients through a reverse repurchase transaction.

FTN Financial Securities, headquartered in Nashville, was ordered to pay disgorgement of $1.5 million and prejudgement interest of about $377,758.73 within ten days of the SEC’s decision. That decision was made on November 17.

By engaging in the reverse repo transaction Sentinel was able to hide its poor financial health, the SEC claims. Sentinel eventually filed for bankruptcy in 2007.

Bonds designed to cover weather damage to default

The first bonds designed to cover damage exclusively from severe thunderstorms are about to become a total wipeout for investors.

Insurer Mariah Re Ltd. is poised to default on a $100 million, three-year bond that it issued in November 2010 on behalf of American Mutual Family Insurance Co., with bondholders expected to lose all of their principal.

Even in the realm of hurricanes and other natural disasters, defaults are rare. But for Mariah, at least, more are on the way. A similar batch of bonds for $100 million was issued in December 2010, and due to large losses also are in trouble.

Bearing an annual interest rate of 6.25% in 2011 and earning investors about 7% since they were issued in November 2010, Mariah’s bonds appeared to offer a healthy premium over U.S. government debt. At that time, three-year Treasury notes were yielding just 0.392%.


DBSI Claims Put DeWaay on the Ropes

DeWaay Financial Network LLC, one of several broker-dealers being sued by the trustee for DBSI Inc.’s private-actions trust, may pay the ultimate price for selling the real estate firm’s deals.

Last month, claiming that bankruptcy looms, DeWaay asked a federal judge in Delaware for a temporary injunction to halt eight arbitration claims that investors have filed with the Financial Industry Regulatory Authority Inc. stemming from their losses in DBSI securities. 

The DeWaay memorandum raising the specter of bankruptcy was one of several filings in a case that began in July when the DBSI trustee, James Zazzali, sued DeWaay and five other broker-dealers that sold DBSI deals.

Citigroup Settlement with SEC blocked by Federal Judge

A federal judge in New York on Monday threw out a settlement between the Securities and Exchange Commission and Citigroup over a 2007 mortgage derivatives deal, saying that the S.E.C.’s policy of settling cases by allowing a company to neither admit nor deny the agency’s allegations did not satisfy the law.

The judge, Jed S. Rakoff of United States District Court in Manhattan, ruled that the S.E.C.’s $285 million settlement announced last month, is “neither fair, nor reasonable, nor adequate, nor in the public interest” because it does not provide the court with evidence on which to judge the settlement.

The order could throw the S.E.C.’s enforcement efforts into chaos, because a majority of the fraud cases and other actions that the agency brings against Wall Street firms are settled out of court, most often with a condition that the defendant does not admit that it violated the law while also promising not to deny it.

FINRA Dispute Resolution Statistics

Summary Arbitration Statistics October 2011


New Case Filings through October:
2009 2010 2011 2011 vs 2010
6,114 4,768 4,033 -15%

Number of Cases Closed through October:

2009 2010 2011 2011 vs 2010
3,683 5,129 5,196 -1%

Turnaround Time* (in months) through October:

  2009 2010 2011 2011 vs 2010
Overall 11.5 12.5 14.2 14%
Hearing Decisions 14.3 14.9 15.9 7%
Simplified Decisions 6.0 6.4 6.3 -2%
* The timing of the arbitration process is heavily influenced by Code of Arbitration Procedures time limits, the parties, and the panel.

SEC Halts Scam Touting Access to Pre-IPO Shares of Facebook and Groupon

The Securities and Exchange Commission today filed an emergency enforcement action to stop a fraudulent scheme targeting investors seeking coveted stock in Internet and technology companies like Facebook and Groupon in advance of a public offering.

The SEC alleges that Florida resident John A. Mattera and several other individuals carried out the scam using a newly-minted hedge fund named The Praetorian Global Fund. They falsely claimed that the fund and affiliated Praetorian entities owned shares worth tens of millions of dollars in privately-held companies that were expected to soon hold an initial public offering (IPO) including Facebook, Groupon, and others. Taking advantage of investor interest in pre-IPO shares that are virtually impossible for company outsiders to obtain, Mattera and others solicited funds and gave investors a false sense of comfort that their money was protected by telling them that an escrow service was receiving their funds.

In reality, according to the SEC’s complaint filed in federal court in Manhattan, Mattera and his cohorts never owned the promised pre-IPO shares in these companies. The purported escrow service, headed by John R. Arnold of Florida, merely transferred investor funds to personal accounts controlled by Mattera and Arnold. After Arnold took a cut of the money for himself, Mattera stole most of the remaining funds to afford his lavish personal expenses and pay others for their roles in the scheme.


Final Judgement Entered in Insider Trading Case

The Securities and Exchange Commission announced that the Honorable Deborah A. Batts of the United States District Court for the Southern District of New York entered final judgments against Dr. Joseph F. Skowron III and Dr. Yves M. Benhamou in the SEC’s insider trading case, SEC v. Joseph F. “Chip” Skowron III, et al., Civil Action No. 10-CV-8266-DAB (S.D.N.Y.). The SEC charged Benhamou, a French doctor and medical researcher, with unlawfully tipping material, non-public information to Skowron, a former hedge fund portfolio manager, who was charged with using the inside information to trade ahead of a January 23, 2008 negative announcement, helping the hedge funds he managed avoid losses of approximately $30 million.

At the time of the alleged conduct, Skowron managed six health care-related hedge funds affiliated with FrontPoint Partners LLC. The SEC alleged that Skowron sold hedge fund holdings of Human Genome Sciences Inc. (HGSI) based on tips he received unlawfully from Benhamou, who served on the Steering Committee overseeing HGSI’s clinical trial for Albuferon, a potential drug to treat Hepatitis C. Benhamou tipped Skowron with material, non-public information about the trial as he learned of negative developments that occurred in December 2007 and January 2008. In response, Skowron ordered the sale of the entire position in HGSI stock — approximately six million shares held by the six funds. HGSI announced changes to the trial resulting from the negative developments on January 23, 2008, which led to a 44 percent drop in share price by the end of the day. The hedge funds avoided losses of approximately $30 million by selling their positions in advance of the news. The SEC alleged that, at various points in the relationship, including after the illegal HGSI trades were completed, Skowron gave Benhamou envelopes of cash both in appreciation of his work and to induce Benhamou to lie about their communications.


The Securities and Exchange Commission charged a Bethesda, Md. man and several family members and friends with conducting a multi-million dollar Ponzi scheme targeting investors in the Washington D.C. metropolitan area.

The SEC alleges that Garfield M. Taylor lured primarily middle-class residents in his community with little to no investing experience to invest in promissory notes issued by his two companies that engaged in purportedly low-risk options trading. Taylor urged investors to refinance their homes and use any available means to invest, including their personal savings and retirement funds. The SEC alleges that he promised returns as high as 20 percent per year and falsely assured investors that their investments would be protected by a “reserve account” or that he would employ a “covered call” trading strategy that would not touch the principal amount of their investment.

According to the SEC’s complaint filed in federal court in Washington D.C., Taylor and his companies instead engaged in very high-risk, speculative options trading and suffered massive losses. Taylor relied upon money from new investors to pay returns to earlier investors in typical Ponzi scheme fashion. The SEC’s complaint also alleges that he siphoned off $5 million in investor funds to pay family and friends and for other personal uses, including $73,000 to the private school his children attended.

The SEC alleges that the Ponzi scheme defrauded more than $27 million from approximately 130 investors from 2005 to 2010. The scheme ultimately collapsed in the fall of 2010 when the companies’ accounts were depleted by the trading losses and interest payments to investors.

Madoff Ponzi scheme started in 1970s

A former trader at Bernard Madoff Investment and long-time colleague is expected to plead guilty to fraud Monday and testify that Madoff’s $65 billion Ponzi scheme may have started 20 years earlier than what his ex-boss claimed, the Guardian reported.

David Kugel, who began working for Madoff in 1970, is cooperating with investigators and is expected to plead guilty in the hopes of lighter sentence, federal prosecutors said in a letter Wednesday. He is charged with conspiring to commit fraud, falsifying records and faking trades.

SEC Charges Madoff Employee

The Securities and Exchange Commission charged a longtime Bernie Madoff employee with fraud for his role in creating fake trades to facilitate the massive Ponzi scheme.

The SEC alleges that David Kugel, who worked at Bernard L. Madoff Investment Securities LLC (BMIS) for nearly four decades, was asked by Madoff to provide the firm’s investment advisory operations with backdated arbitrage trade information to be formulated into fictitious trading on investors’ account statements. Kugel’s own account at BMIS was among those in which backdated trades were entered, and he withdrew nearly $10 million in “profits” from the fictitious trading over several years.

The SEC previously charged two other longtime Madoff employees Annette Bongiorno and JoAnn Crupi for their roles in producing phony account statements that were sent to Madoff investors. According to the SEC’s complaint against Kugel filed in U.S. District Court for the Southern District of New York, Bongiorno and Crupi and other staff in Madoff’s investment advisory (IA) operations used the information provided by Kugel to formulate fictitious trades to appear on investor account statements.

The SEC alleges that sometime in the early 1970s after Kugel began his career with Madoff as an arbitrage trader in the firm’s proprietary trading business, Madoff informed Kugel that BMIS managed money for outside clients. He asked Kugel to provide the firm’s IA operations with backdated convertible arbitrage trades for inclusion on investor account statements. Some of these trades replicated successful trades that Kugel had actually made for BMIS proprietary trading operations. Other trades were based on historical information that Kugel obtained from old newspapers.

According to the SEC’s complaint, Bongiorno and Crupi regularly asked Kugel for backdated information about trades amounting to millions of dollars. After Kugel provided the information, Crupi and Bongiorno would then design trades that totaled that amount. These fictitious trades were highly profitable on an annualized basis, and appeared on account statements and trade confirmations sent to investors. Kugel, who opened his own BMIS account, received these account statements and trade confirmations as well.

The SEC alleges that Kugel provided backdated trade information for IA accounts, including his own. He withdrew the purported “profits” of these trades even though he knew they weren’t proceeds of actual trading activity. One trade in S&P index options in 2007 earned Kugel a profit of more than $375,000 in just a few weeks. Kugel withdrew almost $10 million from his BMIS IA accounts from 2001 to 2008.

The U.S. Attorney’s Office for the Southern District of New York has filed parallel criminal charges against Kugel, who has pled guilty and also agreed to settle the SEC’s civil charges. Subject to court approval, the civil case will result in a permanent injunction against Kugel, who must forfeit his ill-gotten monetary gains upon entry of a criminal forfeiture order in the criminal case.

The SEC’s complaint against Kugel alleges that by engaging in this conduct, Kugel violated and aided and abetted violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; aided and abetted violations of Sections 204, 206(1) and 206(2) of the Investment Advisers Act of 1940 and Rule 204-2 thereunder, and Sections 15(c) and 17(a) of the Exchange Act and Rules 10b-3 and 17a-3 thereunder.

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