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Archive for January, 2016


Former advisor wins $500,000 FINRA arbitration award against Wells Fargo

A Merrill Lynch investment adviser who handles money for high-profile union pension accounts won a $500,000 arbitration award last month against his former employer whom he had accused of trying to ruin his reputation in the wake of his departure.

The victory comes seven years after the adviser was sued in federal court by Wachovia Securities just after he left the firm for Merrill Lynch, taking with him two employees and roughly $2 million in annual revenue.

Movement between brokerage firms is commonplace in the securities industry, where good advisers are always being recruited by competitors. The disputes that follow typically end up being settled amicably out of court or before an arbitrator.

The adviser alleged that Wachovia Securities, which became Wells Fargo Advisors in 2009, went out of its way to paint him as the villain in the lawsuit and a subsequent arbitration case, both of which were dismissed.

He also claimed a Wachovia broker made false statements about his handling of client documents in a meeting with a client days after his departure, in an attempt to try to wrestle the account from him.

The allegations formed the basis for the complaint filed against Wells Fargo in 2009 with FINRA, a non-government group that regulates the brokers and settles industry disputes.

In the complaint, the adviser alleged that he had been subjected to slander and “malicious prosecution” by Wachovia and Wells Fargo.

SEC Charges Goldman Sachs With Improper Securities Lending Practices

According to the SEC’s order instituting a settled administrative proceeding, broker-dealers such as Goldman Sachs are regularly asked by customers to locate stock for short selling.  Granting a “locate” represents that a firm has borrowed, arranged to borrow, or reasonably believes it could borrow the security to settle the short sale.  The SEC finds that Goldman Sachs violated Regulation SHO by improperly providing locates to customers where it had not performed an adequate review of the securities to be located.  Such locates were inaccurately recorded in the firm’s locate log that must reflect the basis upon which Goldman Sachs has given out locates.

“The requirement that firms locate securities before effecting short sales is an important safeguard against illegal short selling,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division.  “Goldman Sachs failed to meet its obligations by allowing customers to engage in short selling without determining whether the securities could reasonably be borrowed at settlement.”

The SEC’s order finds that when SEC examiners questioned the firm’s securities lending practices during an examination in 2013, Goldman Sachs provided incomplete and unclear responses that adversely affected and unnecessarily prolonged the examination.

“SEC exams ensure that market participants are following the rules, so there will be consequences, including in the determination of remedies, when a registrant fails to provide complete and clear responses to examination staff,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

According to the SEC’s order, Goldman Sachs employees who were members of the firm’s Securities Lending Demand Team routinely processed customer locate requests by relying on a function of the Goldman Sachs order management system known as “fill from autolocate,” which was accessed via the “F3” key.  This function enabled employees to cause the system to grant locate requests based on the amount of reliable start-of-day inventory reported to Goldman Sachs by large financial institutions, even though its automated system had already deemed this inventory to be depleted based on locate requests processed earlier in the day.

The SEC’s order finds that when Goldman Sachs employees used this function to grant locate requests, they relied on their general belief that the automated model was conservative and the granting of additional locates would not result in failures to deliver when the securities became due for settlement.  In doing so, the Goldman Sachs employees did not check alternative sources of inventory or perform an adequate review of the securities to be located.

The SEC’s order also finds that Goldman Sachs’s documentation of its compliance with Regulation SHO was inaccurate as it failed to sufficiently differentiate between the locates filled by its automated model and those filled by the Demand Team using the “fill from autolocate” function.  In both cases, the locate log simply mentioned the term “autolocate” to refer to the start-of-day inventory utilized by the firm’s automated model as the source of securities underlying the grant of a locate.

The SEC’s order finds that Goldman Sachs violated Rule 203(b)(1) of Regulation SHO and Section 17(a) of the Securities Exchange Act.  Without admitting or denying the findings, Goldman Sachs consented to the order and agreed to pay the $15 million penalty.  The order censures Goldman Sachs and requires the firm to cease and desist from committing or causing any violations and any future violations of Rule 203(b)(1) of Regulation SHO and Section 17(a) of the Exchange Act relating to short sale locate records.

Investor Losses to Follow Arch Coal Bankruptcy

Arch Coal Inc. joined the ranks of bankrupt coal miners as the U.S. continues to shift toward cheaper, cleaner-burning natural gas, threatening the dominance of one of the world’s dirtiest sources of energy.

The holder of the second-largest reserve of coal in the U.S. filed for creditor protection Monday. The company said it has an agreement with a majority of its senior lenders to erase $4.5 billion in debt from its balance sheet and allow it to keep operating without interruption. Arch has been losing money since 2012.

The Sierra Club called the filing “the end of an era,” but another environmentalist group cautioned that the bankruptcy could affect reclamation — the restoration of land after coal is extracted.

“The announcement significantly reduces the likelihood that several Arch Coal projects across Montana and Washington State will move forward,” the Sierra Club said in a statement. Arch dramatically increased pay for its executives while failing to adapt to public health concerns about coal pollution and the increasing demand for clean energy, the San Francisco-based group said.

 Arch owns the country’s second-largest coal mine, Black Thunder in Wyoming’s Powder River Basin. Powder River Basin Resource Council, a preservation group, said the company’s more than 90 square miles of coal mines in the area have a $458 million reclamation liability.

“State and federal taxpayers must not be left with the bill,” the group said in a statement.

The court filing listed $5.8 billion in assets and $6.5 billion in debt. The company has agreed to the terms of a $275 million loan to keep it operating during bankruptcy. The loan includes a $75 million carve-out for environmental reclamation obligations, according to court papers.

Coal’s share of electricity generation in the U.S. fell to 30 percent in April, as the historically popular fuel was overtaken by gas for the first time. Coal still generated more than 40 percent of electricity globally and is used in the production of 70 percent of the world’s steel, according to the World Coal Association.

St. Louis-based Arch’s output has put it among the top five U.S. metallurgical coal producers and made it the second-biggest thermal coal miner, behind Peabody Energy Corp.

As of the end of 2014, Arch estimated that its pension benefit obligations were $353 million, according to court filings. The company said it doesn’t expect its pension plan, which is well-funded, to be affected during the bankruptcy.

The bankruptcy filing followed in-fighting among hedge funds holding different layers of Arch debt. GSO Special Situations Master Fund LP, a Blackstone Group LP affiliate, even filed a lawsuit seeking to clear the way for a debt exchange.

Arch has also had to cope with the effects of its 2011 purchase of International Coal Group Inc. The $3.4 billion acquisition, made when metallurgical coal was selling for $330 a metric ton, increased its exposure to a thermal coal from Appalachia, which has been particularly hard hit as cheaper thermal coal is mined in the Midwest.

Central Appalachian coal fell 13 percent in 2015, capping a fifth annual decline on the New York Mercantile Exchange. Prices closed at $44.33 a metric ton on Friday.

Swift Energy Co. Files For Bankruptcy, Investor Losses Likely

Swift Energy Co. has become the latest U.S. shale driller to succumb to the brutal downturn in crude prices, seeking Chapter 11 bankruptcy.

The Houston driller filed paperwork on Thursday to become the 40th North American oil producer prodded into bankruptcy court as crude exporters Russia and Saudi Arabia keep prices depressed by pumping crude all-out, jockeying for a bigger corner of the global oil market. It was the 20th driller headquartered in Texas to file for bankruptcy in the past year.

Swift Energy, founded in 1979 by Aubrey Earl Swift, had trimmed 60 percent of its capital budget, cut 20 percent of its workforce and reduced its office space to cope with the 68-percent slide in U.S. crude prices over the past 19 months. But like several small rivals, Swift is running out of financial levers to pull.

In a restructuring deal subject to bankruptcy court approval, Swift has agreed with its creditors to convert its senior debt to equity. Company officials were not immediately available for comment on Saturday.

Swift, which pumps oil in the Eagle Ford Shale in South Texas and in Louisiana fields, listed about $1 billion in assets and $1.35 billion in debt. The company’s third-quarter revenues sank 55 percent from the same period the prior year, and it posted a $354.6 million net loss from July to September, mostly because it had to write down the value of its oil and gas properties. In November, lenders cut $45 million from Swift’s $375 million borrowing base. The company said it has 228 employees.

SEC Announces Fraud Charges Against Investment Adviser

The SEC alleges that Atlantic Asset Management LLC (AAM) invested more than $43 million of client funds in illiquid bonds issued by a Native American tribal corporation without disclosing the conflict of interest that the bond sales generated a private placement fee for the broker-dealer, whose parent company partially owns AAM.

“As alleged, Atlantic violated a fundamental duty to its clients by placing its own financial interests ahead of client interests,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “AAM’s clients should have been informed that the investments in illiquid bonds would financially benefit people with ownership control over AAM.”

According to the SEC’s complaint filed in federal court in Manhattan:

  • AAM is partially owned by an entity called BFG Socially Responsible Investing Ltd., although BFG’s ownership is not disclosed in AAM’s public SEC filings.
  • At the suggestion of a BFG representative, AAM purchased the dubious, illiquid bonds on behalf of clients while aware that the sales would generate a private placement fee for a broker-dealer affiliated with BFG.  AAM also was aware that proceeds from the bond sales were to be used to purchase an annuity provided by BFG’s parent company.
  • An AAM officer evaluating whether or not to make the investments discussed balancing the “fiduciary duty” owed to the placement agent with the duty owed to AAM’s clients.
  • AAM ultimately decided to put its owner’s financial interests first, approving the bond purchases without telling clients about the conflict of interest.
  • Upon learning about the investments in the bonds, several AAM clients expressed concern over the bonds’ valuation and suitability.  They demanded, unsuccessfully, that the investments be unwound.

The SEC complaint charges AAM with violations of the antifraud provisions of the Investment Advisers Act of 1940 and related rules as well as violations of Section 207 of the Advisers Act by failing to disclose BFG’s ownership interest in the Form ADV filed with the SEC.

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