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Archive for January, 2012


FINRA Fines Merrill Lynch $1 Million for Failure to Arbitrate Disputes With Employees

The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Merrill Lynch, Pierce, Fenner & Smith $1 million for failing to arbitrate disputes with employees relating to retention bonuses. Registered representatives who participated in the bonus program had to sign a promissory note that prevented them from arbitrating disagreements relating to the note, forcing the registered representatives to resolve disputes in New York state courts.

FINRA found that Merrill Lynch, after merging with Bank of America in January 2009, implemented a bonus program to retain certain high-producing registered representatives and purposely structured it to circumvent the requirement to institute arbitration proceedings with employees when it sought to collect unpaid amounts from any of the registered representatives who later left the firm. FINRA rules require that disputes between firms and associated persons be arbitrated if they arise out of the business activities of the firm or associated person.

In January 2009, Merrill Lynch paid $2.8 billion in retention bonuses structured as loans to over 5,000 registered representatives. The promissory notes required registered representatives to agree that actions regarding the notes could be brought only in New York state court, a state which greatly limits the ability of defendants to assert counterclaims in such actions. Also, Merrill Lynch structured the program to make it appear that the funds for the program came from MLIFI, a non-registered affiliate, rather than from the firm itself, allowing it to pursue recovery of amounts due in the name of MLIFI in expedited hearings in New York state courts to circumvent Merrill Lynch’s requirement to arbitrate disputes with its associated persons. Later that year, after a number of registered representatives left the firm without repaying the amounts due under the loan, Merrill Lynch filed over 90 actions in New York state court to collect amounts due under the promissory notes, thus violating a FINRA rule that requires firms to arbitrate disputes with employees.

SEC Charges Fund Managers, Analysts in Insider Trading Case

SEC Charges Seven Fund Managers and Analysts In Insider Trading Scheme, and Also Charges Hedge Fund Firms Diamondback Capital and Level Global

On January 18, 2012, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the Southern District of New York charging two multi-billion dollar hedge fund advisory firms as well as seven fund managers and analysts involved in a $78 million insider trading scheme based on nonpublic information about Dell’s quarterly earnings and other similar inside information about Nvidia Corporation.

The charges stem from the SEC’s ongoing investigation into the trading activities of hedge funds. The U.S. Attorney for the Southern District of New York today announced criminal charges against the same seven individuals.

The SEC alleges that a network of closely associated hedge fund traders at Stamford, Conn.-based Diamondback Capital Management LLC and Greenwich, Conn.-based Level Global Investors LP illegally obtained the material nonpublic information about Dell and Nvidia. Investment analyst Sandeep “Sandy” Goyal of Princeton, N.J., obtained Dell quarterly earnings information and other performance data from an insider at Dell in advance of earnings announcements in 2008. Goyal tipped Diamondback analyst Jesse Tortora of Pembroke Pines, Fla., with the inside information, and Tortora in turn tipped several others, leading to insider trades on behalf of Diamondback and Level Global hedge funds.

According to the SEC’s complaint, the illicit gains in the Dell insider trades exceeded $62.3 million, and the illicit gains in the Nvidia insider trades exceeded $15.7 million. For his role in the scheme, Goyal was paid $175,000 in soft dollar payments that were deposited in a brokerage account of an individual affiliated with him.

The SEC alleges that after obtaining the inside information from Goyal in advance of Dell’s first and second quarter earnings announcements in 2008, Tortora tipped his portfolio manager at Diamondback, Todd Newman of Needham, Mass. Newman traded on the information on behalf of the Diamondback hedge funds he controlled. Tortora also tipped Spyridon “Sam” Adondakis, an analyst at Level Global. Adondakis tipped his manager Anthony Chiasson, who then traded on the inside information on behalf of Level Global hedge funds. During this time period, both Adondakis and Chiasson lived in New York City.

According to the SEC’s complaint, Tortora also tipped two others at firms other than Diamondback or Level Global with the Dell inside information: Jon Horvath of New York City and Danny Kuo of San Marino, Calif. Horvath caused insider trades at his firm that resulted in approximately $1.4 million of illicit gains. Kuo similarly caused the firm where he worked to execute profitable insider trades in Dell securities.

The SEC further alleges that Kuo also obtained inside information about Nvidia Corporation’s calculation of its revenues, gross profit margins, and other financial metrics in advance of the company’s first quarter 2010 earnings announcements, which was made in May 2009. Kuo again caused his firm to trade on inside information. Kuo’s insider trades in Dell and Nvidia resulted in approximately $270,000 in ill-gotten gains. Kuo also tipped Tortora at Diamondback and Adondakis at Level Global with the nonpublic information about Nvidia. Tortora again tipped Newman, who made more insider trades on behalf of the Diamondback hedge funds. The illegal trades in Dell and Nvidia securities resulted in $3.9 million in illicit gains for Diamondback. At Level Global, Adondakis tipped Chiasson who made the insider trades on behalf of those hedge funds. Chiasson’s insider trades in Dell and Nvidia resulted in approximately $72.6 million of illicit gains for the Level Global hedge funds.

SEC charges St. Louis-based private investment funds and their principal with fraud

The Securities and Exchange Commission today announced that it has filed charges and obtained emergency relief, including an asset freeze and the appointment of a receiver, against several St. Louis, Missouri private investment funds and management companies. The SEC alleges that Burton Douglas Morriss, the principal of these entities, misappropriated over $9 million of investor assets.

The SEC alleges that Morriss told investors that his private investment funds and management companies would invest their money in a portfolio of financial services and technology companies. However, investors were unaware that for the past several years, Morriss had been misappropriating their money to the tune of millions of dollars through a series of fraudulent transfers to himself and another entity he controlled. To conceal his fraud, Morriss later disguised these fraudulent transfers as personal loans.

According to the SEC’s complaint filed in federal court in St. Louis, Missouri, at various times between approximately 2003 and 2011, Morriss, his two private investment funds, MIC VII, LLC and Acartha Technology Partners, LP, and his management firms, Gryphon Investments III, LLC and Acartha Group, LLC, raised at least $88 million from at least 97 investors to invest in preferred shares or membership interests in the defendant entities. The defendants represented to investors that the investment funds would invest in early to mid-stage companies in the financial services and technology sectors.

The SEC alleges that unbeknownst to investors, for the past several years, Morriss has misappropriated investor funds through transfers from his companies to himself and another entity he controlled, Morriss Holdings, LLC, to pay for personal expenses, including, mortgage and alimony payments, payment of personal loans, pleasure trips, and household expenses. In an attempt to conceal his scheme, the fraudulent transfers that Morriss made to himself were recorded as “loans” on the defendant entities’ books. In fact, these transfers were never truly loans because Morriss did not intend to repay them at the time of his misappropriation. Moreover, the funds transferred to Morriss for his personal use were inconsistent with the disclosures contained in the offering materials provided to investors.

Raymond James set to purchase Morgan Keegan

Raymond James is nearing an agreement to buy Region’s Morgan Keegan brokerage unit for about $930 million in cash.  Raymond James may tap Morgan Keegan Chief Executive Officer John Carson as its president and head of fixed income according to news reports. Adding Morgan Keegan would bring Raymond James one of the top underwriters of U.S. municipal bonds and would expand its retail brokerage network, placing it among the nation’s biggest firms. Raymond James has about 5,100 financial advisers compared with 1,200 at Morgan Keegan.  Regions plans to collect a $250 million dividend from Morgan Keegan before the sale, boosting the amount of cash proceeds to about $1.2 billion.

Operators of real estate programs agree to settle SEC charges

The Securities and Exchange Commission announced today the resolution of an enforcement action filed by the Commission on March 1, 2010 in federal district court in Massachusetts against several Massachusetts-based parties who offered real estate investments. The court entered final judgments by consent against several defendants on January 10, 2012, and the Commission agreed to dismiss the case against certain of the other parties.

The Commission’s complaint charged Kathleen S. Dobens and Charles T. Dobens, husband and wife business partners from Duxbury, Massachusetts; their business partner, Joseph A. Roche of Braintree, Massachusetts; and four entities through which they operated (Silex Group, LLC, Preakness Apartments I & II, LLC, Cherry Hills Apartments of Fort Worth, LLC, and Clear River Partners, LLC). The complaint alleged that the defendants committed securities law violations with respect to real estate investments that they offered. The Commission also charged four other entities as relief defendants.

Without admitting or denying the allegations in the Commission’s complaint, the three individual defendants (Kathleen S. Dobens, Charles T. Dobens, and Joseph A. Roche) agreed to the entry of final judgments that: (a) permanently enjoin them from violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder; (b) order the individual defendants to pay, jointly and severally, disgorgement of $284,399 plus prejudgment interest of $20,775; (c) order Kathleen S. Dobens and Charles T. Dobens to each pay a civil monetary penalty of $80,000, but not imposing any civil penalty against Roche based on the representations in Roche’s sworn statement of financial condition; (d) order that any money, assets, or other benefit received by the individual defendants from their ownership interest in defendant Preakness Apartments I & II, LLC be applied toward partial satisfaction of the outstanding disgorgement orders against them; and (e) orders that the individual defendants comply with an undertaking forbidding them from having any control over expenditures made by or on behalf of Preakness Apartments I & II, LLC.

Three of the entity defendants (Silex Group, LLC, Cherry Hills Apartments of Forth Worth, LLC, and Clear River Partners, LLC), also agreed, without admitting or denying the allegations in the Commission’s complaint, to the entry of final judgments permanently enjoining each of them from violating Sections 5(a), 5(c) and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

Finally, the Commission agreed to dismiss its charges against defendant Preakness Apartments I & II, LLC and the relief defendants East Coast Investment Solutions, LLC, The Dobens Company, LLC, Crosscreeks Apartments I and Crosscreeks Apartments II, LLC.

SEC to change policy of admission of guilt

The Securities and Exchange Commission, in a fundamental policy shift, said Friday that it would no longer allow defendants to say they neither admit nor deny civil fraud or insider trading charges when, at the same time, they admit to or have been convicted of criminal violations.

The change is the first time that the S.E.C. has stepped back from its longstanding practice of allowing companies to settle fraud charges by paying a fine without admitting wrongdoing. The new policy will also apply to cases where a company or an individual enters an agreement with criminal authorities to defer prosecution or to not be prosecuted as part of a settlement.

 

SEC v. Life Partners Holdings, et al.

The Securities and Exchange Commission today charged Texas-based financial services firm Life Partners Holdings, Inc. and three of its senior executives for their involvement in a fraudulent disclosure and accounting scheme involving life settlements.

Life Partners is a Nasdaq-traded company that generates virtually all of its revenues from brokering life settlements. Life settlements involve the purchase and sale of fractional interests of life insurance policies in the secondary market. In life settlement transactions, life insurance policy owners sell their policies to investors in exchange for a lump-sum payment. The dollar amount offered by the investor takes into account the insured’s life expectancy and the terms and conditions of the insurance policy.

The SEC alleges that Life Partners chairman and CEO Brian Pardo, president and general counsel Scott Peden, and chief financial officer David Martin misled shareholders by failing to disclose a significant risk to Life Partners’ business: the company was systematically and materially underestimating the life expectancy estimates it used to price transactions. Life expectancy estimates are a critical factor impacting the company’s revenues and profit margins as well as the company’s ability to generate profits for its shareholders.

The SEC further alleges that Life Partners and the three executives were involved in disclosure violations and improper accounting that Life Partners used to overvalue assets held on the company’s books and create the appearance of a steady stream of earnings from brokering life settlement transactions. The SEC further charged Pardo and Peden with insider trading in their shares of Life Partners stock while in possession of material, non-public information indicating that the company had systematically and materially underestimated life expectancy estimates.

According to the SEC’s complaint filed in federal district court in Waco, Texas, Life Partners misrepresented and failed to disclose in public filings with the Commission that the company’s systematic use of materially underestimated life expectancy estimates constituted a material risk to the company’s revenues. Beginning in 1999, the company used life expectancy estimates provided by Dr. Donald T. Cassidy, a Reno, Nev.-based doctor with no actuarial training or prior experience rendering life expectancy estimates. The SEC alleges that Life Partners and Pardo failed to conduct any meaningful due diligence on Cassidy’s qualification to act as a life expectancy underwriter and instructed the doctor to use a life expectancy methodology that was created by the company’s former underwriter, a part-owner of Life Partners. The SEC also alleges that Pardo, Peden and Martin were aware that the Cassidy-rendered life expectancy estimates were systematically and materially short.

Convicted Ponzi scheme architect may implicate others

 Over two grueling weeks, convicted Florida Ponzi schemer Scott Rothstein laid out in incriminating detail how far the tentacles stretched in his $1.2 billion fraud, pointing the finger at numerous lawyers, bankers, business people, relatives, friends and unnamed law enforcement officials and politicians.

The testimony, made public in hundreds of pages of transcripts, could form the outline of another wave of indictments that federal prosecutors have been promising for months. Rothstein, a 49-year-old disbarred lawyer, was questioned in December by about 30 attorneys representing investors who lost money and some people who could face charges.

Rothstein, whose scam involved supposedly lucrative investments in phony legal settlements, was testifying in several lawsuits arising from the implosion of his Ponzi scheme and bankruptcy of the once high-flying law firm Rothstein Rosenfeldt Adler.

He insisted throughout the deposition that he was telling the complete truth in hopes that a federal judge will shave time off his 50-year prison sentence. Rothstein initially fled to Morocco with $15 million when the scam imploded in fall 2009 and considered suicide, but said he had a change of heart.

“I made a decision to come back, turn myself in, go to prison and tell the government everything I knew about everyone else that had committed crimes,” Rothstein testified. “And everything about my crimes.”

SEC Sues Georgia Attorney

 The Securities and Exchange Commission has sued a Georgia attorney and his client for securities fraud for failing to disclose the client’s criminal indictment in offering documents related to the 2006 sale of $2.96 million of industrial redevelopment revenue bonds by Raleigh County, W. Va.

The SEC’s complaints, filed in federal courts in Georgia and West Virginia late last week but released Tuesday by the commission, seek to recover penalties and ill-gotten gains from Charles Aiken, 38, a Columbus, Ga. resident and Chalmer E. Detling 3d, 35, an attorney who lives in Marietta, Ga, stemming from fraudulent misrepresentations and omissions during the transaction.

Specifically, in the months leading up to the bonds’ issuance, Aiken and Detling failed to disclose to key participants — including the issuer, the underwriter, underwriter’s counsel and the trustee for the bondholders —  material information about Aiken’s 2005 criminal indictment for financial fraud, according to the SEC’s complaints.

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