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FINRA receives SEC approval to streamline proficiency exams

The U.S. Securities and Exchange Commission has approved a proposal from the Financial Industry Regulatory Authority (FINRA) to streamline the process for prospective broker-dealer reps to meet their proficiency requirements, FINRA announced Thursday.

The proposal aims to reform the industry exam process, with an eye on expanding opportunities for brokers to enter, or return to, the securities industry. The new regime will take effect starting Oct. 1, 2018.

Under the new structure, aspiring brokers will be required to pass a general knowledge exam, and a revised rep-level qualification exam, such as the Series 7 exam, which is specific to their job functions, FINRA says its announcement.

“The restructured program eliminates duplicative testing of general securities knowledge on representative-level examinations and eliminates several representative-level registration categories that have become outdated or have limited utility,” the announcement says.

“This is an important change built upon the need to streamline the examination process and eliminate redundancies in qualification and registration requirements,” says Robert Cook, FINRA president and CEO, in a statement. “The new structure brings greater consistency and uniformity to the process for entering and returning to the brokerage industry.”

 

Morgan Stanley agrees to $13 million fine and restitution for supervisory lapses of UIT trading

FINRA ordered Morgan Stanley to pay $13 million in fines and restitution to clients for failing to properly supervise trades that increased charges and fees to customers of certain investment funds.  FINRA said that Morgan Stanley provided insufficient guidance to its staff on how to detect unsuitable short-term trades of unit investment trusts, or UITs.

From January 2012 through June 2015, Morgan Stanley representatives advised thousands of customers to sell their UITs before their maturity date and roll their investment into a new trust.

By selling their UIT position before the maturity date and then rolling the funds over into a new trust, clients may pay higher sale charges over time.

UITs are a type of investment fund that offers units in a portfolio of securities. At the end of the trust’s life, investors can receive cash equal to the net asset value of the units or they can roll the current value of their investments into another trust.

Finra fined Morgan Stanley $3.25 million, while the bank will have to pay about $9.78 million in restitution to more than 3,000 customers.

More information can be found at:

http://www.finra.org/newsroom/2017/finra-sanctions-morgan-stanley-13-million-failing-related-uits

SEC Charges NY based investment adviser

he Securities and Exchange Commission today charged a Westchester, New York-based investment adviser with fraud stemming from lies to retail investors about the value of their investments in a Ponzi-like scheme.

The SEC alleges that, starting in approximately 2010, Michael Scronic began to raise money from at least 42 friends and acquaintances, many of whom were from his suburban community, in order to invest in a risky options trading strategy. He allegedly lured investors by informing them that he had a long and impressive track record of proven returns. He also allegedly lied to investors about the liquidity of investments, telling one investor that “what’s cool about my fund is that i’m [sic] only in publicly traded options and cash so any redemptions are met within 2 business days so if you do need to withdraw for your business needs it will be quick and painless.” However, the SEC alleges that Scronic was actually hemorrhaging investor money through massive trading losses, with at least $15 million in investment losses since April 2010. For the period ending June 30, 2017, Scronic allegedly reported to investors total assets of at least $21,837,475 while the balance in his brokerage account on June 30, 2017 was just under $27,500.

According to the SEC’s complaint, when certain investors attempted to redeem their investments, Scronic did not disclose his inability to repay them. Rather, he allegedly provided investors with a steady stream of implausible excuses for why he could not pay them back. In other instances, Scronic sought to obtain additional investment funds from new and existing investors in order to satisfy redemption requests from other investors.

“Scronic’s alleged scheme is just another example of a so-called investment professional acting as fiduciary, but failing to deal honestly with his investors for his own financial benefit,” said Lara S. Mehraban, Associate Regional Director of the SEC’s New York Regional Office. “Investors should be wary anytime they are promised high or consistently positive returns in a complex, hard to understand investment strategy.”

The SEC also alleges that Scronic began identifying himself as an investment adviser to a fictitious hedge fund in which he purported to sell interests, or “shares.” The SEC encourages investors to check the backgrounds of people selling investments by using the SEC’s Investor.gov website to quickly identify whether they are registered professionals and confirm their identity.

SEC investigates Woodbridge Group

Court Orders Woodbridge Group of Companies LLC to Produce Documents to SEC

The Securities and Exchange Commission has obtained an order requiring the Woodbridge Group of Companies LLC, of Sherman Oaks, California, to produce the corporate documents of several company executives and employees, including Woodbridge’s President and CEO.

According to the SEC’s application and supporting papers filed in federal court in Miami on July 17, 2017, the agency is investigating whether Woodbridge and others have violated or are violating the antifraud, broker-dealer, and securities registration provisions of the federal securities laws in connection with Woodbridge’s receipt of more than $1 billion of investor funds from thousands of investors nationwide. As part of the SEC’s ongoing investigation, on January 31, 2017, agency staff in the Miami Regional Office served Woodbridge with a subpoena seeking, among other documents, the production of electronic communications that the company maintained relating to Woodbridge’s business operations. The SEC’s application alleges that although Woodbridge was required to produce these documents to the SEC, Woodbridge has failed to produce any relevant communications in response to the subpoena, including those of three high-level Woodbridge officials.

The court’s order requires Woodbridge to produce the documents subject to the SEC’s application beginning October 2, 2017.

The SEC is continuing its fact-finding investigation and to date has not concluded that any individual or entity has violated the federal securities laws.

Former broker charged for real estate scheme

The Securities and Exchange Commission today charged a former broker, his company, and his business partner in an alleged real estate investment scheme utilizing high-pressure sales tactics to pilfer $6 million from retirees and other investors while using the proceeds to fund the broker’s lavish lifestyle and start e-cigarette businesses.

The SEC alleges that Leonard Vincent Lombardo, who once worked at Stratton Oakmont and has long since been barred from the brokerage industry by the Financial Industry Regulatory Authority for multiple violations, operated the scheme from behind the scenes at his Long Island-based company The Leonard Vincent Group (TLVG) with assistance from its CFO Brian Hudlin.

According to the SEC’s complaint, more than 100 investors were defrauded with false claims that their money would be invested in distressed real estate, and some were told their investments had increased by more than 50 percent in a matter of months when in fact there were no actual earnings on their investments.  Lombardo allegedly invested only a small fraction of investor money in real estate and used the bulk of it for separate business ventures into the cigarette industry and personal expenses such as car payments on his BMW and Mercedes, marina fees on his boat, and visits to tanning salons.

“As alleged in our complaint, retirees entrusted their money to TVLG believing they were investing in high-return real estate investments, not electronic cigarettes or trips to the tanning salon,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “This is another case involving a fraudster trying to look the part of a wealthy financial advisor while doing nothing more than trying to separate people from their hard-earned money.”

The SEC received complaints from investors about how their investments were being handled, and the agency identified the perpetrators and gathered evidence to hold them accountable.  The SEC encourages investors to alert the agency by filing complaints when they suspect illegal conduct, and proactively check the background of anyone selling them investments before handing over any money, including by doing a simple search on the SEC’s investor.gov website.

Aidikoff, Uhl & Bakhtiari partner Ryan Bakhtiari to speak at 2017 Practicing Law Institute Securities Arbitration program

Aidikoff, Uhl & Bakhtiari partner Ryan Bakhtiari has been invited to participate as a speaker at the 2017 Practicing Law Institute (PLI) conference program on Wednesday, September 27, 2017. Mr. Bakhtiari’s panel is titled “Preparation for Expungement Hearings in Securities Arbitration.”  This discussion will include topics, issues and procedures involved in arbitrating expungement matters.

For more information and to register for the conference, visit http://www.pli.edu/re.aspx?pk=186672&t=LBA7_FCLTY

Former $2 billion private equity fund now nearly worthless – EnerVest Ltd.

Wells Fargo and a number of other lenders are negotiating to take control of a hedge fund previously valued at more than $2 billion that is now worth close to nothing, according to a report from the Wall Street Journal.

EnerVest Ltd., a Houston private equity firm that focuses on energy investments, manages the private equity fund that focused on oil investments. The fund will leave clients, including major pensions, endowments and charitable foundations, with at most pennies on the dollar, WSJ reported.

The firm raised and started investing money beginning in 2013 when oil was trading at around $90 a barrel and added $1.3 billion of borrowed money to boost its buying power. West Texas Intermediate crude prices closed at $46.54 a barrel on Friday.

Only seven private-equity funds worth more than $1 billion have ever lost money for investors, according to data from investment firm Cambridge Associates LLC cited in the report. Among those of any size to end in the red, losses greater than around 25 percent are extremely rare, though there are several energy-focused funds in danger of doing so, according to public pension records.

Clients included the J. Paul Getty Trust, John D. and Catherine T. MacArthur and Fletcher Jones foundations, which each invested millions in the fund, according to their tax filings, the Journal reported. Michigan State University and a foundation that supports Arizona State University also disclosed investments in the fund.

The Orange County Employees Retirement System was also an investors and has reportedly marked the value of its investment down to zero.

EnerVest – $2 billion energy investment goes bust

  • A $2 billion EnerVest fund that invested in oil and gas wells has essentially gone bust.
  • Major pensions and other investors could be left with just pennies on the dollar at best.
  • The loss is unusual for a private equity firm of EnerVest’s size and raises concerns that similar funds offered by competitors could fail.

Houston-based private equity firm EnerVest has posted a spectacular loss in one of its energy funds, a troubling sign that other firms could yet face a reckoning after a three-year oil price downturn.

EnerVest’s $2 billion energy fund that borrowed heavily to buy up oil and gas wells when crude prices were soaring has essentially gone bust, The Wall Street Journal reported. The blowup is expected to leave the pensions, endowments and charitable foundations that invested in the fund with just pennies on the dollar at best, according to the newspaper.

The fund’s lenders, which are led by Wells Fargo, are seeking to take control of the assets, people familiar with the situation.

The WSJ traced the failure to EnerVest’s strategy of taking out debt to amplify returns in the fund, which began investing in oil and gas wells in 2013 and focused on improving their output. As oil prices plunged from more than $100 a barrel in 2014 to a low of $26 a barrel last year, the value of the wells, which served as collateral on the debt, eroded. That triggered repayment demands from lenders that EnerVest could not meet.

 

Recovery for Woodbridge investors

Frank Capuano of Royal Alliance Associates, Inc. agreed to findings that he sold approximately $1.1 million in Woodbridge Mortgage Investment Funds notes to customers of the firm.  Capuano also consented to findings that he failed to obtain written approval from his firm for these transactions.
Initiated By FINRA
Resolution
Acceptance, Waiver & Consent(AWC)
Sanctions
Civil and Administrative Penalty(ies)/Fine(s)
Amount
$10,000.00
Sanctions
Suspension
Registration Capacities Affected
All capacities
Duration
12 months
Start Date
5/2/2016
End Date
5/1/2017

Barclays to Pay $97 Million for Overcharging Clients

The Securities and Exchange Commission today announced an enforcement action requiring Barclays Capital to refund advisory fees or mutual fund sales charges to clients who were overcharged.

In a settlement of more than $97 million, Barclays agreed to settle three sets of violations that resulted in clients being overbilled by nearly $50 million.  The SEC’s order finds that two Barclays advisory programs charged fees to more than 2,000 clients for due diligence and monitoring of certain third-party investment managers and investment strategies when in fact these services weren’t being performed as represented.  Barclays also collected excess mutual fund sales charges or fees from 63 brokerage clients by recommending more expensive share classes when less expensive share classes were available.  Another 22,138 accounts paid excess fees to Barclays due to miscalculations and billing errors by the firm.

“Barclays failed to ensure that clients were receiving the services they were paying for,” said C. Dabney O’Riordan, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “Each set of clients who were harmed are being refunded through the settlement.”

The SEC’s order finds that Barclays violated Sections 206(2), 206(4) and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-7 as well as Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.

Without admitting or denying the SEC’s findings, Barclays agreed to create a Fair Fund to refund advisory fees to harmed clients.  The Fair Fund will consist of $49,785,417 in disgorgement plus $13,752,242 in interest and a $30 million penalty.  Barclays will directly refund an additional $3.5 million to advisory clients who invested in third-party investment managers and investment strategies that underperformed while going unmonitored.  Those funds also will go to brokerage clients who were steered into more expensive mutual fund share classes.


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