Tuesday, December 23, 2014

Enforcement Actions: Week in Review


SEC Charges Investment Manager F-Squared and Former CEO With Making False Performance Claims
December 22, 2014 (Litigation Release No. 289)
It’s been announced today that F-Squared Investments has agreed to settle with the SEC over charges that they defrauded investors of their AlphaSector indices. The SEC alleged that F-Squared falsely claimed a seven year performance track record, created by applying their model to historical data. The backtested record is also alleged to have been calculated with a performance inflating mistake. Despite this error being brought to the attention of then-CEO Howard Present in September of 2008, the backtested record was used in advertising for the following five years. F-Squared has agreed to admit to wrongdoing and pay $35 million. Present has been charged separately.

SEC Charges Corporate Attorney and Wife With Insider Trading on Client’s Confidential Information
December 22, 2014 (Litigation Release No. 290)
The SEC has charged Shivbir and Preetinder Grewal with insider trading for their sales of Spectrum Pharmaceuticals days before a press release that resulted in a 35% decline in stock price. The SEC has alleged that Shivbir Grewal, during his employment as their outside counsel, learned that Spectrum Pharmaceuticals was about to announce a decline in projected revenue stemming from decreased sales of Fusilev, their number one selling drug. Within days, Shivbir Grewal sold his stake in the company and relayed the information to his wife, Preetinder Grewal, who sold her shares. The couple avoided losses of roughly $45,000. The couple have agreed to settle charges for $90,000. Additionally, Shivbir Grewal has been barred from representing any company under the regulation of the SEC in his capacity as an attorney.

SEC Charges Two Traders in Chile With Insider Trading
December 22, 2014 (Litigation Release No. 291)
Juan Cruz Bilbao Hormaeche and Tomás Andrés Hurtado Rourke have been charged by the SEC with insider trading. The SEC alleges that Bilbao was present during board meetings of CFR Pharmaceuticals in which a tender offer by Abbott Laboratories was being discussed. He is then alleged purchased millions of dollars of CFR Pharmaceuticals, through Hurtado, who also purchased shares for himself. From the tender of their shares, Bilbao and Hurtado received $10.6 million in illegal profits.

SEC Charges California-Based Stock Promoter With Defrauding Investors Seeking Pre-IPO Facebook and Twitter Shares
December 23, 2014 (Litigation Release No. 292)
The SEC charged Efstratios Argyropoulos and Prima Capital for violating the antifraud provisions and broker-dealer registration provisions. Argyropoulos had raised nearly $3.5 million by embezzling investors who sought Pre-IPO Facebook and Twitter shares. Argyropoulos settled the SEC charges and has been suspended from working for an investment advisor or broker-dealer. Also, the SEC separately charged Khaled A. Eldaher for being involved with Argyropoulos’s fraudulent actions, violating the Exchange act by selling unregistered securities; Eldaher was receiving 50 percent of the mark-up Facebook shares that he sold while also working for a registered broker-dealer. Eldaher was released from working for the registered broker-dealer, and a public hearing is to be scheduled to determine if any remedial actions will be placed.

SEC Issues Annual Staff Reports on Credit Rating Agencies
December 23, 2014 (Litigation Release No. 293)
The SEC issued its annual staff report on credit rating agencies that are registered as nationally recognized statistical rating organizations (NRSROs). Also, the SEC has submitted a separate report to Congress on NRSROs, fulfilling the requirement to the Credit Rating Agency Reform Act of 2006. The 2014 examinations concluded that there were noticeable improvements concerning compliance resources, monitoring, culture document retention, and governing committee oversight. Recommendations for further improvement included management of conflict of interest related to the rating of business operations and use of affiliates in the credit rating process. Furthermore, the report included a discussion of new NRSRO requirements meant to improve the quality of credit ratings and increase credit rating agency accountability.

Friday, December 19, 2014

Enforcement Actions: Week in Review


SEC Charges Massachusetts-Based Scientific Instruments Manufacturer with FCPA Violations Rules
December 15, 2014 (Litigation Release No. 280)
The SEC charged Bruker Corporation approximately $2.4 million for violating the Foreign Corrupt Practices Act (FCPA). Bruker Corporation had insufficient internal controls which lead to approximately $230,000 in improper payments to various Chinese government officials. The improper payments enabled Bruker to realize approximately $1.7 million in profits from sales contracts. Bruker Corporation settled the SEC’s charges by paying $1,714,852 in disgorgement, $310,117 in prejudgment interest, and a $375,000 penalty.

SEC Charges New Orleans-Based Energy Company and Executives With Fraudulent Stock Manipulation
December 15, 2014 (Litigation Release No. 281)
The SEC charged Treaty Energy Corporation and executives Blackburn, Reid, Gwyn, Mulshine, and Schlesinger for securities fraud and violations of the registration and reporting violations of the federal securities laws. The Treaty Energy Corporation and executives orchestrated a stock trading scheme which involved deceptive claims of striking oil in Belize and illegally distributing restricted shares to the public. By manipulating the price of the company’s stock, they illicitly obtained at least $3.5 million in profits. Investors were misled by claims of a low-risk working interest and a yield return of 111.42 percent over a 10-year period, but in actuality, these claims were baseless since the well was only producing marginal amounts of oil. Furthermore, executives concealed that Blackburn, a convicted felon of federal income tax evasion, was controlling the company.

SEC Announces Charges Against Owner of Equity Research Firm Accused of Manipulative Trading
December 16, 2014 (Litigation Release No. 282)
The SEC has announced charges against Pollack and his firm Montgomery Street Research LLC for engaging in wash trading. Pollack had organized at least 100 wash trades within about a one-year period; these wash trades consisted of simultaneously purchasing and selling publicly traded stock within 90 seconds of each other with identical prices and quantities. The SEC alleges that Pollack and his firm had violated federal securities laws by failing to register with the SEC before acting as brokers on behalf of the company; more than $2.5 million from 11 investors has been raised from this manipulative trading scheme. Remedial actions, if any, are to be decided proceeding the public hearing.

SEC Announces Charges in Alleged Gold Mining Investment Scheme
December 16, 2014 (Litigation Release No. 283)
The SEC has announced charges against Michael Crow, Alexandre Clug, and their Miami based companies. The SEC alleges that Crow and Clug raised capital for two companies, Aurum Mining LLC and PanAm Terra Inc, by deliberately misinforming their investors. It is alleged that Aurum Mining, through false claims of “quick-to-production” mines, raised $3.9 million, of which none was returned to investors. PanAm Terra raised $400,000 to be invested in South American farmland, which the SEC alleges was never used to purchase land. Other details of the companies were not disclosed to investors such as Crow’s personal bankruptcy and bar by the SEC from working in the securities industry. A public hearing will be scheduled.

SEC Imposes Sanctions Against Hong Kong-Based Firm and Two Accountants for Audit Failures
December 17, 2014 (Litigation Release No. 284)
Today, Hong Kong based audit firm, Baker Tilly Hong Kong Limited, was sanctioned by the SEC for improper practices in their auditing of China North East Petroleum Holdings Limited, a company which the SEC has charged with fraud. Baker Tilly, its director Andrew Ross and former director Helena Kwok, have been found by the SEC to have ignored discrepancies between China North East Petroleum’s internal accounting records and their year-end 2009 financial statements. All three have agreed to settle with the SEC through monetary penalties and temporary professional restrictions.

SEC Charges Avon With FCPA Violations
December 17, 2014 (Litigation Release No. 285)
The SEC has charged Avon Products Inc. for failing to have adequate internal controls which led to having inaccurate books and false records of payments, violating the Foreign Corrupt Practices Act. The SEC alleged that $8 million worth of cash payments was made by Avon’s subsidiary in China in order to access a direct selling business license. In order to retain the license and keep a respective corporate image, the company made various improper payments which included paid travel for Chinese government officials as well as luxurious gifts and merchandise. Avon settled the SEC charges by paying the aggregate settlement amount of around $135 million while also agreeing to retain an independent monitor to review its FCPA compliance program for 18 months.

SEC Names Deputy Directors in the Division of Trading and Markets
December 17, 2014 (Litigation Release No. 286)
The SEC has announced that Gary Barnett and Gary Goldsholle will be named as deputy directors in the Division of Trading and Markets, succeeding former directors James Burns and John Ramsay. Barnett will be assigned to responsibilities of the Office of Broker-Dealer Finances as well as the Office of Derivatives Policy and Trading. Goldsholle will be assigned to the responsibilities of overseeing the Chief Counsel, Clearance and Settlement, and Market Supervision offices. Barnett has served the SEC as the director of the Division of Swap Dealer and Intermediary oversight at the Commodity Futures Trading Commission since August 2011. Goldsholle has been the general counsel of the Municipal Securities Rulemaking Board since 2012.

SEC Charges Staten Island-Based Firm With Operating Boiler Room Scheme Targeting Seniors
December 18, 2014 (Litigation Release No. 287)
The SEC has charged Premier Links Inc. along with its president Dwayne Malloy, and two sales representatives Chris Damon and Thierry Ruffin for operating a boiler room scheme that targeted vulnerable seniors. Malloy, Damon, and Ruffin had fraudulently obtained approximately $9 million from targeting more than 300 older investors through cold-calling sales tactics. The older investors’ obtained money was going to other entities controlled by Premier Links Inc. rather than being used for purchasing shares (IPOs) for these investors. The SEC has placed charges on Premier Links, Malloy, Damon, and Ruffin for violating antifraud provisions as well as selling securities without an SEC filed registration. Financial penalties are being placed, and actions are being taken in efforts of ordering the Premier Links to pay back the illegal profits.

SEC Proposes Amendments to Implement JOBS Act Mandate for Exchange Act Registration Requirements
December 18, 2014 (Litigation Release No. 288)
In compliance with the Jumpstart Our Business Startups Act, the SEC has put forth a series of amendments to its registration process. The proposed amendments to the Exchange Act include changing definitions and threshold levels in relation to registration, termination and suspension.

Friday, December 12, 2014

Enforcement Actions: Week in Review


SEC Sanctions Eight Audit Firms for Violating Auditor Independence Rules
December 8, 2014 (Litigation Release No. 272)
The SEC sanctioned the following firms for violating auditor’s independence criteria: BKD LLP, Boros & Farrington Accountancy Corporation, Brace & Associates PLLC, Robert Cooper & Company CPA PC, Lally & Co LLC, Lerner & Sipkin CPAs LLP, OUM & Co LLP, and Joseph Yafeh CPA Inc. While performing audits for their broker-dealer clients, these firms also prepared their clients’ financial statements, jeopardizing the impartiality of the audits. The firms agreed to settle their cases and will collectively pay $140,000 and comply with several undertakings to prevent future violations.

SEC Sanctions Operator of Bitcoin-Related Stock Exchange for Registration Violations
December 8, 2014 (Litigation Release No. 273)
The SEC sanctioned Ethan Burnside for operating two online exchanges (BTC Virtual Stock Exchange and LTC-Global Virtual Stock Exchange) without registering the venues as broker-dealers or stock exchanges with the SEC. The two exchanges offered account holders the opportunity to trade securities using the virtual currencies Bitcoin and Litecoin. The two exchanges executed nearly 430,000 trades. Burnside will be fined $68,387.07, $58,387.07 in profits he made from the websites plus interest and a $10,000 penalty, and will be barred from the securities industry for at least two years.

SEC Penalizes Morgan Stanley for Violating Market Access Rule
December 10, 2014 (Litigation Release No. 274)
The SEC has fined Morgan Stanley $4 million for violating the market access rule, which requires broker-dealers to implement sufficient risk controls prior to giving customers access to security markets. The violation occurred when a trader from Rochdale Securities LLC purchased approximately $525 million in Apple Stock via Morgan Stanley’s electronic trading desk, even though Rochdale’s pre-set daily trading limit only amounted to $200 million. The trader was committing fraud as he altered a customer order to purchase 1,625 Apple shares into a purchase of 1,625,000 shares. The trader has been charged and sentenced to 30 months in prison.

SEC Announces Fraud Charges Against Buffalo-Based Firm and Co-Owners Accused of Misleading Investors in Hedge Fund
December 10, 2014 (Litigation Release No. 275)
The SEC announced fraud charges against Timothy S. Dembski and Walter F. Grenda Jr. for advising their clients at Reliance Financial Advisors to invest in Prestige Wealth Management, a hedge fund managed by Scott M. Stephan. Both Dembski and Grenda greatly exaggerated Stephan’s experience in the securities industry and convinced their clients to invest approximately $12 million in his hedge fund. The hedge fund began trading in April 2011, but did not generate positive returns and lost about 80 percent of its value by late 2012. In addition, the SEC alleges Grenda borrowed $175,000 from two of his clients to grow his advisory business, but he instead spent the money on personal expenses. Stephan has agreed to be permanently barred from the securities industry.

SEC Names Karol Pollock to Lead Exam Program in Los Angeles Office
December 10, 2014 (Litigation Release No. 276 )
The SEC announced that Karol Pollock will be named as the new Associate Director of the exam program in the Los Angeles Office. As Associate Director, she will oversee around 60 examiners, accountants, and attorneys responsible for examining firms in Southern California, Nevada, Arizona, Hawaii, and Guam. Pollock has 25 years of experience in securities enforcement and has notably played a role in the case against the former CEO and CFO of Gemstar-TV Guide International for their complex scheme that inflated licensing and advertising revenues.

SEC Announces Agenda for Meeting of the Advisory Committee on Small and Emerging Companies
December 11, 2014 (Litigation Release No. 277 )
The Advisory Committee on Small and Emerging Companies meeting on December 17 will focus on the definition of an “accredited investor” the SEC announced today. Certain securities are not required to be registered with the SEC if the securities are sold to an accredited investor. The meeting will begin at 9:30 in the multipurpose room at the SEC Headquarters in Washington D.C. The meeting is open to the public and will also be webcast live on the SEC’s website.

SEC Files Securities Fraud Charges Against Owner of Home Restoration Business in Upstate New York
December 12, 2014 (Litigation Release No. 278 )
The SEC announced securities fraud charges against David Fleet for selling unsecured notes to finance his real estate business Cornerstone Homes Inc. Fleet failed to inform his investors about many important aspects about his business, including lying about using bank financing after mortgaging company-owned real estate. After the real estate market went down, Fleet used investor money to secretly invest in stock options to try and save his business. Fleet subsequently lost $3-$4 million in investments and Cornerstone filed for bankruptcy.

SEC Charges Manhattan-Based Attorney With Conducting Ponzi Scheme
December 12, 2014 (Litigation Release No. 279 )
The SEC charged attorney Charles A. Bennett for running a Ponzi scheme and defrauding his clients. Bennett claimed he had a close connection with a Wyoming-based investment fund, which mainly invested in European real estate mortgage-backed securities. Bennett claimed these securities yielded anywhere from 6 to 25 percent over short periods of time. Bennett was able to raise around $5 million, but he did not have a connection with a Wyoming-based investment fund and did not use the investors’ money to purchase any securities. Instead, Bennett used the money to finance his own expensive lifestyle.

Friday, December 5, 2014

Enforcement Actions: Week in Review


SEC Charges California Resident With Fraudulent Sales of Stock
December 2, 2014 (Litigation Release No. 268)
The SEC has charged Vinay Kumar Nevatia for fraudulently selling $900,000 of private shares of CSS Corp. The SEC contends that Kumar, living in Palo Alto under several aliases, sold shares in 2011 and 2012 that he had already sold in 2008. Kumar has never been registered with the SEC.

SEC Announces Fraud Charges Against Two Executives in Scheme Involving Fake Occupants at Senior Residences
December 3, 2014 (Litigation Release No. 269)
Ex-CEO Laurie Bebo and ex-CFO John Buono have been charged by the SEC for fraud. The SEC alleges that during their management of Assisted Living Concepts Inc. they falsely claimed additional residents in order to meet minimum occupancy rates outlined in their facilities’ lease agreements. Failing to meet those terms would have meant default on their lease with Ventas Inc., a Chicago based REIT.

SEC Charges Montana Man in Pump-and-Dump Scheme Involving Virginia-Based Penny Stock Company
December 4, 2014 (Litigation Release No. 270)
The SEC has charged Montana penny stock promoter, Matthew Carley, with security fraud. The SEC alleges that Carley, acquired shares of Red Branch Technologies through reverse merger. Following this, Carley promoted Red Branch through email campaigns at the same time false information regarding Red Branch’s operations was released. Following a rise in price, Carley sold his shares for $789,478. He has agreed to settle with the SEC.

SEC Charges Virginia Beach-Based Bank Holding Company With Accounting Violations
December 5, 2014 (Litigation Release No. 271)
A Virginia holding company and its former CFO, Neal Petrovich, have agreed to settle with the SEC over improper accounting practices. Hampton Roads Bankshares overstated their deferred tax asset, not including a valuation allowance in spite of their own internal reports. Losses on their income statements for 2009 and the first quarter of 2010 were understated as a result. The company and ex-CFO have agreed to pay $200,000 and $25,000 penalties, respectively.

Thursday, December 4, 2014

El Costo de 15 Días para los Clientes de UBS en Puerto Rico fue por Encima de $1 Billón

Por Craig J. McCann, PhD, CFA English Version

En las últimas entradas a nuestro blog hemos demostrado que UBS suscribió $1.7 billones en bonos inmercadeables de la Administración de los Sistemas de Retiro (ASR) y los compró para colocarlos en sus Fondos UBS PR. Usted puede encontrar nuestra entrada anterior aquí. UBS creo cupo para estos bonos de la ASR al vender otros bonos no suscritos por UBS. UBS compró los bonos que suscribió de la ASR en el 2008 porque nadie más los compraría.

Recientemente, habíamos ilustrado como el conflicto de intereses creado por la compra de bonos suscritos por UBS por los fondos de UBS PR causaron pérdidas de tres a cuatro veces más que el resto de los valores de la cartera de los Fondos. Véase nuestra entrada El Infierno Forjado por UBS PR.

¿Qué Sabía UBS y Cuándo lo Supo?

En el pasado hemos resaltado el cambio sustancial en las Ofertas Planeadas por la ASR en el 2008. Véase En el 2008, UBS Sucumbe Ante Conflictos y Compra $1.7 Billones en Bonos de la Administración de los Sistemas de Retiro para Colocarlos en sus Fondos de Bonos Municipales de Puerto Rico.

Nuestra atención se centró en la evolución de UBS al entender que no había mercado fuera de Puerto Rico para los bonos Serie B y aún menos mercado en Puerto Rico para los bonos de la ARS a los términos ofertados.

La Circular de Oferta de los Bonos de la ASR Serie A del 29 de enero de 2008 está disponible aquí. La Circular de Oferta de la ASR Serie B del 28 de Mayo de 2008 está disponible aquí. Y la Serie C está disponible aquí.

Pero se Pone Más Interesante…

El Reporte del 10 de Octubre de Conway MacKenzie, Inc., “Revisión de los Hechos y Decisiones que Han Llevado a la Actual Crisis Financiera de los Sistemas de Retiro de los Empleados del Gobierno de Puerto Rico” está disponible en inglés aquí. Este encontró que Merrill Lynch trató sin éxito alguno de vender en el 2007 $7 billones en Bonos de Obligaciones de Retiro de la ASR y fue reemplazada por UBS como asesor y suscritor principal el 20 de enero de 2008 para la oferta de la Serie A de la ASR.

En algún momento entre el 2007 y el 2008, el plan de la ASR y Merrill Lynch de emitir $7 billones en Bonos de Obligaciones de Retiro de la ASR para inversionistas no residentes de la isla se transformó en el plan de la ASR y UBS de vender $2.94 billones de los cuales los Fondos UBS tuvieron que comprar $1.7 billones de esta emisión.

El 4 de enero de 2008, Moody’s publicó el Reporte de Rating disponible aquí y el 14 de enero de 2008 Standard & Poor’s publicó su Reporte de Rating disponible aquí. Está claro que al menos hasta el 14 de enero de 2008 la ASR y UBS tenían la intención de emitir $4 billones en bonos de la ASR en las últimas dos semanas de enero de 2008 y otros $3 billones más tarde en el 2008.

Lo que haya pasado en los 15 días entre el 14 de enero de 2008 y el 29 de enero de 2008 fue dramático.La ASR y UBS se dieron cuenta que sólo podrían vender $1 billón –en vez de $4 billones- de bonos de la ASR a los términos ofertados en enero de 2008. De los $1.6 billones en bonos Serie A, $650 millones fueron comprados por Fondos UBS, dígase que sólo había mercado para casi $1 billón. Debió haber quedado claro que nadie más compraría los bonos y que UBS estaba a punto de perder lucrativas tarifas de suscripción.

La correspondencia interna a UBS y entre UBS y la ASR durante el mes de enero de 2008 debe de ser una lectura fascinante. Nuestro interés no es pura curiosidad. Los inversionistas de los fondos UBS perdieron $1 billón de los $1.7 billones en bonos de la ASR colocados en los Fondos.

15 Days in Puerto Rico Cost UBS Clients Over $1 Billion

By Craig McCann, PhD, CFA Versión en Español

We’ve shown in recent posts that UBS underwrote $1.7 billion of unmarketable ERS bonds and bought them into the UBS PR Funds. You can find our earlier blog posts here. UBS made room these ERS bonds by selling out of the Funds other bonds UBS didn’t underwrite. UBS bought the ERS bonds it underwrote in 2008 because there was no other market for the bonds it was underwriting.

Recently we illustrated how UBS-underwritten conflicted bonds purchased by UBS into the funds in 2008 caused losses in the UBS funds at three to four times the rate as the rest of the Funds’ portfolio holdings. See our post What Hell Hath UBS PR Wrought.

What Did UBS Know and When Did it Know It

We’ve highlighted in the past a substantial change in the planned 2008 ERS Offerings. See UBS Succumbed to Conflicts and Purchased $1.7 Billion of Employee Retirement System Bonds into its Puerto Rican Municipal bond Funds in 2008.

Our focus was on the evolution of UBS’s understanding that there was no non-Puerto Rican market for the Series B bonds and not even a Puerto Rican market for the ERS bonds on the terms they were being offered.

The January 29, 2008 Series A Offering Circular said the Series B bonds would only be sold to non-Puerto Rican investors but by the time the May 28, 2008 Series B Offering Circular game out, the bonds were only going to be sold to Puerto Rican residents, effectively really only to be bought by the UBS Puerto Rican Funds.

The January 29, 2008 ERS Series A Offering Circular is available here. The ERS May 28, 2008 Series B Offering Circular is available here. The ERS Series C Offering Circular is available here.

But It Gets More Interesting…

A Conway MacKenzie, Inc., October 2010 report, Review of the Events and Decisions That Have Led to the Current Financial Crisis of the Employees Retirement System of the Government of Puerto Rico available here found that Merrill Lynch attempted unsuccessfully to sell $7 billion of ERS Pension Obligation Bonds in 2007 and was replaced by UBS as advisor and lead underwriter of the January 29, 2008 ERS Series A Offering.

Sometime between 2007 and 2008 ERS and Merrill Lynch’s plan to issue $7 billion in Pension Obligation Bonds to investors off the island transformed into ERS and UBS’s plan to sell $2.94 billion of which $1.7 billion had to be bought by the UBS Funds.

I just came across Moody’s January 4, 2008 Ratings Report available here and Standard & Poor’s January 14, 2008 Ratings Report here. It is clear that at least as late as January 14, 2008 ERS and UBS were intending to issue $4 billion of ERS POBs in the two weeks left in January 2008 and another $3 billion later in the year.

Whatever happened in the fifteen days between January 14, 2008 and January 29, 2008 it was dramatic. ERS and UBS realized they could only sell $1 billion – not $4 billion – of the ERS bonds on the terms they were being offered in January 2008. $650 million of the $1.6 billion Series A bonds were bought by the UBS Funds so there was a market for at most $1 billion. It must have become clear no one else would buy the bonds and UBS was about to lose out on lucrative underwriting fees.

The correspondence within UBS and between UBS and ERS in January 2008 would make for fascinating reading. Our interest isn’t idle curiosity. Investors in the UBS Funds lost $1 billion on the $1.7 billion of ERS bonds UBS stuffed into the Funds.