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Archive for June, 2012

NASDAQs Facebook compensation plan to be rolled out next week

Nasdaq aims to file a plan next week with the United States Securities and Exchange Commission detailing how it will compensate market makers who lost money during the botched trading debut of Facebook, the world’s largest initial public offering this year, according to a person familiar with the matter.

The losses were caused at least in part by Nasdaq’s technical problems and a communications breakdown that prevented market makers from knowing for hours if their orders had gone through.

Nasdaq’s four largest market makers in the social networking site’s US$16 billion IPO – UBS, Knight Capital, Citadel Securities, and Citigroup – estimated they lost US$200 million from Facebook trades entered in the debut session.

More problems for Behringer Harvard

Behringer Harvard Holdings LLC, is struggling to make payments on loans in two of its offerings — and is losing real estate assets as a result.  Behringer Harvard Opportunity REIT I Inc. this month had several properties go into bankruptcy protection. And a private placement, the Behringer Harvard Short-Term Opportunity Fund I LP, this month entered a “deed in lieu of foreclosure agreement” that transferred properties to the lender. The Behringer Harvard fund had owed $20.2 million on those properties.

Behringer Harvard Opportunity REIT I saw its estimated value decline 46% at the end of 2011 to $4.12 a share, from $7.66 a year earlier.

Also as of Dec. 31, investors in the Behringer Harvard Short-Term Opportunity Fund I LP, which had about $130 million in total assets, saw its valuation drop to 40 cents a share, down drastically from $6.48 a share as of Dec. 31, 2010.

Mortgage fund Ponzi shut down

The Securities and Exchange Commission announced today that it has obtained an emergency court order to halt an alleged Ponzi-like scheme operated by Small Business Capital Corp. (“SB Capital”) and its principal Mark Feathers (“Feathers”). According to the Commission, SB Capital and Feathers raised $42 million by selling securities issued by two mortgage investment funds they controlled, Investors Prime Fund, LLC and SBC Portfolio Fund, LLC (“Funds”).

The Honorable Edward J. Davila for the U.S. District Court for the Northern District of California granted the Commission’s request for a temporary restraining order and asset freeze against Feathers, SB Capital, and the Funds and appointed Thomas A. Seaman as a temporary receiver over SB Capital and the Funds.

More than 400 investors were attracted to the Funds by promises that profits from mortgage investments would yield annual returns of 7.5 percent or more, the Commission alleged. In reality, it said Feathers operated a Ponzi-like scheme by paying returns to investors that came partly from Fund profits and partly from other investors.

The Commission said that from 2009 to early 2012, Feathers improperly transferred more than $6 million from the Funds to SB Capital to pay its expenses, including substantial payments to Feathers. According to the Commission, the defendants had the Funds account for the transfers in a way that disguised the depletion of Fund assets, and did not tell investors that SB Capital’s ability to repay the Funds was uncertain and that it was only able to make the interest payments owed to the Funds by borrowing more from them.

In addition, the Commission alleged that investors were not told that in February and March 2012, the defendants caused one Fund to sell mortgages to the other Fund at an inflated price, thus generating a “profit” for the selling Fund so it could pay SB Capital management fees of more than $575,000.

The Commission also charged Feathers and SB Capital for SB Capital’s effecting transactions in the Funds’ securities without being registered as a broker-dealer with the SEC.

SEC Approves Amendments to Rule 13204 of the Industry Code to Preclude Collective Action Claims from Being Arbitrated Under the Code

The SEC approved amendments to FINRA Rule 13204 of the Code of Arbitration Procedure for Industry Disputes (Industry Code) to preclude collective action claims by employees of FINRA member firms under the Fair Labor Standards Act (FLSA), the Age Discrimination in Employment Act (ADEA) or the Equal Pay Act of 1963 (EPA) from being arbitrated under the Industry Code.

The amendments are effective on July 9, 2012, for any claims that are part of a certified or putative collective action under the FLSA, ADEA or EPA.

Concerns over Facebook IPO

Before Facebook was allowed to sell its shares on the public market, federal regulators had a few questions about the social media company’s advertising opportunities, a strategic business partnership, and how it shared users’ data, according to correspondence made public today.

After Facebook filed its initial registration statement with the Securities and Exchange Commission, agency officials sought clarity from the company in how it planned to monetize its advertising.  The federal agency suggested the company provide regulators—and, ultimately, potential stockholders—a detailed breakdown of the overall number of ads shown on the site, the number of advertisers, the average price per ad, revenue per user, and trends in display and performance-based advertising for each of the periods presented.

Atlanta area advisor and owner charged by SEC

On Saturday, June 9, 2012, The Securities and Exchange Commission filed a civil action in the United States District Court for the Northern District of Georgia against Benjamin Daniel DeHaan and Lighthouse Financial Partners, LLC. Lighthouse, an investment advisor located in Atlanta and registered with the State of Georgia, has been owned and operated by DeHaan since 2007.

The Commission’s complaint alleges that from approximately January 2011 through early May 2012, DeHaan moved approximately $1.2 million in funds belonging to his clients from their accounts at a custodial broker-dealer into a bank account in Lighthouse’s name that he controlled, thus gaining custody and control of these client assets. DeHaan and Lighthouse told the clients that these funds would be used to open new accounts at another broker-dealer. Once in this account, at least some of these funds were moved to a personal account belong to DeHaan and to accounts used by Lighthouse for business expenses. At least $600,000 in client funds remains unaccounted for. DeHaan is also alleged to have provided false documents to the Commission’s staff and to an examiner for the State of Georgia.

Without admitting or denying the allegations in the Commission’s complaint, DeHaan and Lighthouse have offered to consent to interim relief in the form of an order providing for a preliminary injunction against violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, allowing for expedited discovery, freezing their assets, preventing the destruction or concealment of documents and requiring an accounting. The Commission may seek additional relief, such as a permanent injunction, disgorgement of any ill-gotten gains with prejudgment interest and civil penalties, at a later time.

SEC can do better with FINRA oversight

The U.S. Securities and Exchange Commission can do a better job of overseeing the Financial Industry Regulatory Authority, a government report found.

While the SEC routinely inspects many regulatory programs run by Wall Street’s industry-funded regulator FINRA, it doesn’t review whether FINRA’s rules for the securities industry are effective, according to a Government Accountability Office report released late Wednesday. It also doesn’t have a process for such a review, said GAO, an investigative arm of Congress.

Congress required the GAO’s study in the Dodd Frank financial reform law of 2010. It specifically directed the GAO to review oversight of various FINRA practices, including executive compensation practices, securities arbitration programs and governance issues.

While a federal law authorizes FINRA to regulate the brokerage industry, the SEC must oversee FINRA and approve its industry rules.

Additional charges filed in $90 million Ponzi scheme case

On May 31, 2012, the Securities and Exchange Commission amended its complaint against New York investment adviser, Brian Raymond Callahan, and Callahan’s investment advisory firms, Horizon Global Advisors Ltd., and Horizon Global Advisors, LLC, in the SEC’s emergency action filed on March 5, 2012 that halted an ongoing $90 million Ponzi scheme. The SEC’s amended complaint additionally charges Callahan’s five offshore funds with fraud and Callahan’s brother-in-law, Adam Judd Manson (“Manson”) and two of Manson’s entities, with aiding and abetting Callahan’s scheme. The amended complaint also names Callahan’s wife, Sheri Manson Callahan, as a relief defendant. Callahan’s five offshore funds have agreed to be placed under the control of the receiver that the Court appointed in an Order issued on March 27, 2012.

The SEC’s amended complaint includes the following allegations:

  • From at least 2005 to January 2012, Callahan raised over $90 million from at least 45 investors for his five offshore funds. Callahan misused a portion of investor assets to pay certain other investors seeking redemptions, misused investor assets to pay for personal expenses for himself and his wife, and improperly diverted assets of the funds to Manson’s private real estate project on Long Island.
  • Manson and his entities, Distinctive Investments, LLC and Distinctive Ventures, LLC, created a paper trail of inflated false promissory notes and false audit confirmations that helped Callahan conceal the scheme.
  • Manson and his entities provided Callahan with unsecured promissory notes, which falsely stated they were payable on demand even though they were illiquid. In addition, the face value of the promissory notes far exceeded the amount of money that Callahan provided to Manson’s real estate project. Callahan used the false promissory notes to hide his misuse of fund assets and to inflate the amount of assets under management.
  • Manson and Distinctive Investments issued audit confirmations to the auditors of Callahan’s funds that misrepresented: (1) the outstanding principal balances on the promissory notes; and (2) that the promissory notes were callable. By misleading the auditors, Manson helped hide the true financial condition of Callahan’s funds.

FINRA publishes additional guidance on suitability rule

In November 2010, the Securities and Exchange Commission (SEC) approved FINRA’s new suitability rule, FINRA Rule 2111. FINRA then issued Regulatory Notice 11-02, which announced the SEC’s approval of the new rule and discussed its requirements. FINRA also issued Regulatory Notice 11-25, which offered further guidance on the rule and announced a new implementation date of July 9, 2012. This Notice provides additional guidance on the rule in response to recent industry questions.  For more informaiton:


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