SEC ENFORCEMENT ACTIONS
Merrill Lynch Admits Using Inaccurate Data for Short Sale Orders, Agrees to $11 Million Settlement
June 1, 2015 (Litigation Release No. 105)
An SEC investigation found some of Merrill Lynch’s programs to execute short sale trades were using inaccurate and old data. Merrill Lynch and other broker-dealers are required to maintain an up to date easy-to-borrow (ETB) list composed of stocks that are readily accessible to borrow for short sale orders. Merrill Lynch appropriately removed stocks from their ETB list when access became restricted, but their execution platforms would continue processing short sale orders on these securities until the end of the day. The execution programs would not receive the updated ETB list until the beginning of the next trade day. Additionally, for a period leading up to 2012, Merrill Lynch’s platforms would occasionally access day-old data when constructing ETB lists. Merrill Lynch has admitted to wrongdoing, paid $11 million in penalties and disgorgement, and agreed to retain an independent compliance consultant.
SEC Charges Investment Adviser with Defrauding Retired Teachers
June 1, 2015 (Litigation Release No. 106)
The SEC charged Phil Donnahue Williamson with operating a Ponzi scheme through his investment fund Sterling Investment Fund. Williamson primarily targeted public sector retirees, such as teachers and law enforcement officials, who sought safe investments to preserve their retirement savings. Williamson advertised that his fund mostly invested in mortgages and real estate in Florida and Georgia and promised 8 to 12 percent annual returns. However, like other such Ponzi schemes, new investments deposits would often go to Williamson’s personal accounts or to pay returns to previous investors. Williamson has agreed to settle the case and will pay $748,050.01 in disgorgement.
SEC Charges Four with Insider Trading Ahead of Secondary Offerings
June 3, 2015 (Litigation Release No. 107)
A former day trader Steven Fishoff, his brother-in-law Steven Costantin, and his two friends Ronald Chernin and Paul Petrello, the later a former day trader himself, were charged with insider trading for stealing confidential information from investment banks and trading on that information. The group of four posed as portfolio managers to deceive investment banks into sharing confidential information about upcoming secondary offerings. They would then short sell the issuer’s stock, which would typically decrease following the public announcement of the secondary offering. Their scheme eventually included buying stocks prior to positive corporate announcements. The scheme involved 15 stocks and created $4.4 million in profits. The U.S. Attorney’s Office for the District of New Jersey also announced criminal charges against the four men.
SEC Warns of Purported Financial Professionals Using False Credentials to Attract Investors
June 3, 2015 (Litigation Release No. 108)
The SEC’s Office of Investor Education and Advocacy issued an investor alert cautioning investors to conduct proper background checks on people claiming to have impressive credentials or an impressive past performance record. Investors can check if someone is licensed and registered with the SEC, Financial Industry Regulatory Authority, or a state regulatory authority in the “Ask and Check” section of SEC’s Investor.gov website. The SEC announced two cases of fraud against investment advisers. The first against Michael G. Thomas of Oil City, Pa who claimed he was named a “Top 25 Rising Business Star” by Fortune Magazine, an award that does not exist, and misrepresented his past investment performance to promote his private fund Michael G. Investments LLC. Todd M. Schoenberger of Lewes, Del was also charged for fraud for soliciting investors to purchase promissory notes issued by his firm LandColt Capital LP. Schoenberger claimed he would repay the notes through fees he earned from managing his private fund. In reality, LandColt was not only not a registered advisory firm, Schoenberger never actually launched the fund or had any capital investments to the fund. Both Schoenberger and Thomas have settled their charges with the SEC.
SEC Staff Provides Additional Analysis Related to Proposed Pay Ratio Disclosure Rules
June 4, 2015 (Litigation Release No. 109)
The SEC released new analysis on its proposed rules on pay ratio disclosure, conducted by its Division of Economic and Risk Analysis (DERA). The rules, proposed by the commission back in 2013, required public companies to report the median compensation for all employees, the total annual compensation for the CEO, and the ratio of the median compensation for all employees to the annual compensation of the CEO. The analysis done by DERA considered the potential effects of excluding different percentages of employees from the pay ratio calculation. Employees that might be excluded from the calculation include employees in foreign countries and part-time or temporary workers.
SEC Freezes Profits from Scheme to Manipulate Avon Stock
June 4, 2015 (Litigation Release No. 110)
The SEC froze two U.S. brokerage accounts for connections to the manipulation schemes of Avon and other stocks. Last month, a false Avon tender offer was filed on the SEC’s EDGAR sytem by PTG Capital Partners Ltd to artificially boost the price of Avon’s stock. Strategic Capital Partners Muster Ltd and Strategic Wealth Investments Inc. each held one of the frozen brokerage accounts that profited off of Avon. The two accounts were also involved in a similar scheme in 2014 where a false press release on Tower Group International Ltd resulted in more than $20,000 in profits between the two accounts.
SEC Charges CSC and Former Executives with Accounting Fraud
June 5, 2015 (Litigation Release No. 111)
Computer Sciences Corporation (CSC) and former executives have been charged with accounting fraud for manipulating and concealing financial results from the company’s largest contract with United Kingdom’s National Health Service (NHS). The SEC alleges that the fraud began when the company learned it would lose money on its multi-billion dollar contract with NHS because it wouldn’t be able to hit certain deadlines. To avoid the large hit on earnings, financial executives allegedly altered accounting models to base profits on proposed amended contracts CSC sent NHS instead of the actual contract they already had. CSC was able to avoid reporting earning reductions in 2010 and 2011 even though these proposed contracted were rejected by NHS. To cover their tracks and meet their cash flow targets, CSC agreed in a prepayment arrangement with NHS where CSC would borrow large sums of money from NHS at a high interest rate. This prepayment arrangement was also concealed from investors. Five out of the eight former executives charged with fraud have settled. The other three, Robert Sutcliffe, Edward Parker, and Chris Edwards, are contesting the charges.
Daniel Gregus Named Associate Director for Broker-Dealer Exam Program in Chicago
June 5, 2015 (Litigation Release No. 112)
The SEC has named Daniel Gregus to be the Associate Director for the broker-dealer examination in the Chicago Regional Office. Gregus is a graduate of the University of Illinois College of Law where he graduated magna cum laude. He spent seven years in private practice before joining the SEC’s enforcement division in 1993. He joined the broker-dealer examination program in Chicago in 2007 and has been acting as the Associate Director since February 2014.
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