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Archive for December, 2011

SEC Charges Broker for Assisting Investment Adviser

On December 15, 2011, the Securities and Exchange Commission filed a civil injunctive action against Stephen M. Folan, a former registered representative in the Chicago office of FTN Financial Securities Corp. (“FTN”), for assisting Sentinel Management Group, Inc. (“Sentinel”), a bankrupt former investment adviser, in its fraud against its advisory clients.

The SEC’s complaint alleges that over year-end 2006 and the first few days of 2007, Sentinel and FTN engaged in a five-day reverse repurchase transaction (“Repo Transaction”) involving approximately $35 million of collateralized debt obligations (“CDOs). Folan acted as the primary advocate for the Repo Transaction within FTN and served as the conduit between Sentinel, his best customer, and FTN’s management. The complaint further alleges that recorded telephone calls show that although Folan had information indicating that Sentinel would use the Repo Transaction for an improper purpose, he did not share this information with his superiors at FTN.

According to the SEC complaint, Sentinel used the Repo Transaction to mislead its clients by temporarily reducing the outstanding bank loan balance in its year-end 2006 financial statements by approximately 10% without disclosing that the source of the reduction was an atypical, non-recurring event and by understating its liabilities by failing to record any liability associated with its obligation to repurchase the CDOs when the Repo Transaction was unwound.

SEC Charges Former Fannie Mae and Freddie Mac Executives

The Securities and Exchange Commission (SEC) on Friday, December 16, 2011, charged six former top executives of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) with securities fraud, alleging they knew and approved of misleading statements claiming the companies had minimal holdings of higher-risk mortgage loans, including subprime loans.

Fannie Mae and Freddie Mac each entered into a Non-Prosecution Agreement with the Commission in which each company agreed to accept responsibility for its conduct and not dispute, contest, or contradict the contents of an agreed-upon Statement of Facts without admitting nor denying liability. Each also agreed to cooperate with the Commission’s litigation against the former executives. In entering into these Agreements, the Commission considered the unique circumstances presented by the companies’ current status, including the financial support provided to the companies by the U.S. Treasury, the role of the Federal Housing Finance Agency as conservator of each company, and the costs that may be imposed on U.S. taxpayers.

In the complaint filed in the U.S. District Court for the Southern District of New York (S.D.N.Y.), the SEC alleges that Fannie Mae and three former executives of Fannie Mae, Daniel Mudd, former CEO, Enrico Dallavecchia, former CRO, and Thomas Lund, former EVP of the Single Family business made or substantially assisted others in making materially false and misleading statements regarding Fannie Mae’s exposure to subprime and Alt-A loans.

In a separate complaint filed in the U.S. District Court for the Southern District of New York (S.D.N.Y.), the SEC alleges that Freddie Mac and three of its former executives, Richard F. Syron, former Chairman and CEO of Freddie Mac, Patricia Cook, Former Executive Vice President of Investments and Capital Markets and Chief Business Officer, and Donald Bisenius, former Senior Vice President for Single Family Guarantee, led investors to believe that the firm used a broad definition of subprime loans and was disclosing all of its subprime loan exposure in its Single-Family guarantee portfolio. Unbeknown to investors, as of December 31, 2006, Freddie Mac’s Single Family business was exposed to approximately $141 billion of loans internally referred to as “subprime” or “subprime like,” accounting for 10 percent of the portfolio, and grew to approximately $244 billion, or 14 percent of the portfolio, as of June 30, 2008.

The SEC’s complaint also alleges that, among other things, Syron, Cook and Bisenius made, or substantially assisted Freddie Mac or each other in making, materially false and misleading statements regarding the company’s subprime exposure. In particular, the complaint alleges that Syron and Cook each personally made public speeches or statements that led investors to believe that Freddie Mac, in words or in substance, had “basically no subprime exposure.” As the most-senior credit risk officer for the Single Family business, Bisenius had personal knowledge of the company’s exposure to high risk loans internally characterized as “subprime,” “subprime-like” or “otherwise subprime.” Despite this knowledge, each of the defendants certified or sub-certified to the company’s written disclosures, including its materially misleading subprime disclosures.



SEC Charges Madoff Employee

On December 19, 2011, the Securities and Exchange Commission charged a longtime Bernie Madoff employee with falsifying books and records in order to hide Madoff’s fraudulent investment advisory operations from regulators.

The SEC alleges that Enrica Cotellessa-Pitz, who worked at Bernard L. Madoff Investment Securities LLC (BMIS) for more than 30 years, assisted in falsifying BMIS’s internal accounting records in order to misclassify hundreds of millions of dollars of income purportedly generated by BMIS’s investment advisory operations. Cotellessa-Pitz also falsified financial statements filed with the SEC and other regulators as well as materials that were prepared to deceive SEC staff examiners, federal and state tax auditors, and other external reviewers.

The SEC previously charged BMIS’s Director of Operations David Bonventre with falsifying books and records to hide and obfuscate Madoff’s advisory operations. According to the SEC’s complaint against Cotellessa-Pitz filed in U.S. District Court for the Southern District of New York, she played a central role in falsifying these records as directed by Madoff and Bonventre. Madoff used the false records to artificially improve the firm’s reported revenue and income as well as to deceive regulators who sought to review the firm’s operations and financial results.

CFTC To Pass New Swap Rules

The Commodity Futures Trading Commission on Tuesday approved rules requiring trading firms to turn over data about the buying and selling of over-the-counter derivatives products.  The new rules will for the first time give regulators a window into the market for “swaps,” a previously unregulated corner of the financial markets that played a role in the 2008 financial crisis.

“Leading up to the financial crisis, there was no required reporting about swaps trading, and this lack of market transparency made the risk that had spread throughout the financial system all the more difficult to identify,” CFTC Chairman Gary Gensler said at the agency meeting.

The rules, which were passed unanimously, require traders, banks and new data repositories for the swaps market to record trading data and turn over some of the information to regulators. Regulators are required to make part of the data available to the public at least twice a year but have indicated they could eventually release data reports more frequently.

SEC Charges Rudy Ruettiger and Others in Penny Stock Scheme

The Securities and Exchange Commission announced charges today against Daniel “Rudy” Ruettiger and twelve other individuals who participated in a pump-and-dump scheme involving the stock of Rudy Nutrition, a now defunct Nevada corporation. The SEC’s complaint, filed in the United States District Court for the District of Nevada, alleges that Rudy Ruettiger, who is known for having inspired the motion picture “Rudy,” founded Rudy Nutrition to compete with Gatorade in the sports drink market. The SEC alleges that while Rudy Nutrition produced and sold modest amounts of a sports drink called “Rudy,” with the tagline “Dream Big! Never Quit!,” the company primarily served as a vehicle for a pump-and-dump scheme in 2008. As alleged in the complaint, participants in this scheme made false and misleading statements in company press releases, SEC filings, and promotional materials, and engaged in manipulative trading to artificially inflate the price of Rudy Nutrition stock, while selling unregistered shares to investors. The complaint alleges that the scheme generated more than $11 million in illicit profits.

SEC Appeals Judge Rakoff’s Rejection of Citigroup Settlement

The U.S. Securities and Exchange Commission appealed a federal judge’s decision to reject its proposed $285 million settlement with Citigroup.  

The appeal, filed today in the US Court of Appeals in New York, challenged U.S. District Judge Jed Rakoff’s rejection last month of the settlement, which involved claims that Citigroup misled investors in a $1 billion financial product linked to risky mortgages.  “We believe the district court committed legal error by announcing a new and unprecedented standard that inadvertently harms investors by depriving them of substantial, certain and immediate benefits,” SEC Enforcement Director Khuzami said today in a statement.

Rakoff criticized the agency’s practice of resolving cases without requiring the subject of the allegations to admit wrongdoing. In his ruling, Rakoff said the settlement didn’t provide him with “any proven or admitted facts” to inform his judgment.  Khuzami said the judge’s decision “is at odds with decades of court decisions that have upheld similar settlements.”. Rakoff’s approach “could in practical terms press the SEC to trial in many more instances, likely resulting in fewer cases overall and less money being returned to investors,” he said in the statement.

More Madoff Litigation – Trustee Sues Credit Suisse

Lawyers who are trying to recover money for the far-flung victims of the Bernard Madoff Ponzi scheme have moved to recover $375 million from banking giant Credit Suisse.

The trustee who is amassing the pool of money to pay back Madoff investors, filed a lawsuit late Monday in U.S. Bankruptcy Court in Manhattan against Credit Suisse and several affiliates, accusing it of harboring money that belongs to the estate of Mr. Madoff’s collapsed investment firm.  Most of that money flowed to the bank through Fairfield Sentry Ltd., the biggest feeder of investor funds into Mr. Madoff’s Ponzi scheme, according to the lawsuit. Other money went through Kingate Global, the lawsuit said.

Both of those funds are liquidating in the wake of the Madoff scam, which came undone in December 2008.

SEC v. Securities Investor Protection Corporation

On December 12, 2011, the Securities and Exchange Commission filed an application with the federal district court in the District of Columbia to compel the Securities Investor Protection Corporation (SIPC) to file an application to begin a liquidation proceeding with regard to Stanford Group Company (SGC), a broker-dealer registered with the Commission and a SIPC-member brokerage firm.

In February 2009, the Commission brought a civil enforcement action against Robert Allen Stanford, SGC, and others, alleging that they operated a multi-billion dollar Ponzi scheme. As a result of that enforcement action, a federal district court in Texas ordered that SGC be placed into receivership.

On June 15, 2011, the Commission directed SIPC to take steps to initiate a liquidation proceeding with regard to SGC because there were customers in need of the protections of the Securities Investor Protection Act of 1970 (SIPA). Among other things, SIPA provides for coverage of up to $500,000 to customers of a defunct brokerage firm in the event that funds available at the firm are insufficient to satisfy claims covered by the statute. This coverage is provided from a fund maintained by SIPC.

Despite the Commission’s directive, SIPC has failed to take steps to initiate a liquidation proceeding as to SGC. Accordingly, the Commission filed an application with the district court seeking an order compelling SIPC to do so.

Tom Petters Conviction and Sentence Upheld by Appeals Court

A federal appeals court Friday upheld the 2009 conviction and 50-year prison sentence of Minnesota businessman Tom Petters, who was found guilty of orchestrating a $3.7 billion Ponzi scheme.

The Eighth U.S. Circuit Court of Appeals ruled that Petters got a fair trial.  A three-judge panel rejected defense claims that the U.S. District Judge Richard Kyle prevented his attorneys from presenting a complete defense by restricting their ability to question a key prosecution witness, Larry Reynolds, a convicted felon and disbarred lawyer who was in the witness protection program, about his links to organized crime.

The panel also said the judge acted properly when he rejected proposed jury instructions that would have highlighted Petters’ claims that he was an unwitting participant in a fraud conceived by others, and that he acted in good faith on advice from his attorney.  It ruled that the judge did not err by denying a change in venue due to the extensive media coverage the case generated. The panel also rejected defense claims of procedural errors in Petters’ sentencing.  A jury found Petters guilty of 20 counts of wire fraud, mail fraud, money laundering and conspiracy.

SEC Poised to Sue Securities Investor Protection Corp. (SIPC) over Stanford Ponzi Scheme

The Securities and Exchange Commission has decided to take the unprecedented step of suing the agency that insures U.S. brokerage accounts to force it to pay victims of Allen Stanford’s  alleged $7 billion Ponzi scheme.

The SEC plans to sue the Securities Investor Protection Corp. as early as Monday or Tuesday to compel a liquidation to compensate Stanford customers, according to the Wall Street Journal.

The lawsuit would be the first ever by the SEC against SIPC, according to officials from both agencies, and would come just days after negotiations between the agencies appear to have reached an impasse.

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