Friday, April 22, 2016

How Widespread and Predictable is Stock Broker Misconduct?

In this paper we reconcile widely diverging recent estimates of broker misconduct. Qureshi and Sokobin report that 1.3% of current and past brokers are associated with awards or settlements in excess of a threshold amount. Egan, Matvos, and Seru find that 7.8% of current and former brokers have financial misconduct disclosures including customer complaints, awards, and settlements.

You can download the research paper here.

We replicate and extend the analysis of broker misconduct in these studies. Qureshi and Sokobin arrive at their low estimate by excluding 85% of all brokers, including those brokers most likely to have engaged in misconduct. Applying Qureshi and Sokobin's restrictive definition of potential misconduct to all brokers, we find that misconduct is much more widespread.

We also evaluate Qureshi and Sokobin's claim that its BrokerCheck website provides helpful information to investors seeking to avoid bad brokers and answer the question posed by Egan, Matvos, and Seru: If BrokerCheck data can identify broker misconduct, why don't investors use that data to protect themselves? We find that BrokerCheck is worthless in its current hobbled form, but that it could easily be modified so that market forces might substantially reduce broker misconduct.

Friday, April 8, 2016

Enforcement Actions: Week in Review


SEC Charges Four in Fraudulent “Free Dinner” Scheme
April 4, 2016 (Litigation Release No. 63)
Joseph Andrew Paul, John D. Ellis, Jr., James S. Quay and Donald H. Ellison were charged for embezzling money from victims by soliciting a “free dinner” scheme, splitting the victims’ money amongst themselves instead of on investments they proclaimed had high returns. Quay has previous convictions of fraud, and both Quay and Ellison have questionable registrations as investment professionals. The SEC has a searchable database,, which can be used to check the registration status and disciplinary history of investment professionals.

Las Vegas Sands Paying Penalty for FCPA Violations
April 7, 2016 (Litigation Release No. 64)
Las Vegas Sands Corp. (LVS) is settling the SEC’s charges against them for violating the Foreign Corrupt Practices Act (FCPA) by paying a $9 million penalty. LVS’s is being charged for having inadequate documentation and keeping inaccurate records for more than $62 million in payments to a consultant in Asia. Also, LVS has agreed to have an independent consultant for two years in order to prevent further violations, keeping up with FCPA-related internal controls.

Friday, April 1, 2016

Enforcement Actions: Week in Review


Securities Professional Charged With Defrauding Institutional Investors
March 28, 2016 (Litigation Release No. 58)
The SEC has charged Andrew W.W. Caspersen for embezzling approximately $95 million from two institutions. Caspersen deceived and offered promissory notes issued by Irving Place II SPV LLC, a name deceptively similar to a legitimate private equity fund Irving Place Capital Partners III SPV that is in no way associated with Caspersen. The U.S. Attorney’s Office for the Southern District of New York has also announced criminal charges against Caspersen.

SEC: Biotech Company Misled Investors About New Drug's Status With FDA
March 29, 2016 (Litigation Release No. 59)
AVEO Pharmaceuticals Inc. has agreed to pay $4 million to settle fraud charges concerning the concealment of the FDA’s concern about AVEO’s cancer drug Tivozanib. AVEO concealed the FDA’s concerns in conducting additional clinical trials before the drug’s approval to which the FDA denied approval of Tivozanib. The SEC is continuing the case to place charges on three of the company’s former officers (CEO Tuan Ha-Ngoc, chief financial officer David Johnston, and chief medical officer William Slichenmyer) for misleading investors about the approval of the drug in public statements.

Former TV Commentator Settles Penny Stock Fraud Charges
March 29, 2016 (Litigation Release No. 60)
The SEC has charged Tobin Smith and NBT Group Inc for fraudulently promoting IceWEB Inc., a penny stock. The SEC alleges that Tobin and NBT prepared e-mails, blog posts, articles and other media promoting IceWEB without fully disclosing their compensation. The material that was disseminated was also found to have contained false or misleading claims. Smith and NBT have agreed as part of their settlement to be barred from future penny stock offerings. They will also pay a disgorgement of $165,000, $16,893 in interest, and a $75,000 penalty.

SEC: Biotech Venture Capitalist Stole Investor Funds for Personal Use
March 30, 2016 (Litigation Release No. 61)
G. Steven Burrill, a San Franciscan venture capitalist, has agreed to settle charges with the SEC that he took money from a fund that his firm managed and spent it on his other businesses and personal expenditures. Burrill used phony “advanced” management fees in order to extract money from his fund, Burrill Life Sciences. Burrill’s firm will pay a $1 million penalty and $4.785 million disgorgement. As part of the settlement, Burrill has agreed to be permanently barred from the securities industry.

SEC: Navistar International and Former CEO Misled Investors About Advanced Technology Engine
March 31, 2016 (Litigation Release No. 62)
Navistar has agreed to pay a $7.5 million penalty to settle SEC charges for misleading investors regarding that it had developed an exhaust-gas-recirculation (EGR) technology engine that could be certified to meet U.S. emission standard. Navistar and Ustain failed to fully disclose their difficult dealings with the Environmental Protection Agency (EPA) in obtaining the EPA certification. The SEC separately charged former Navistar CEO Daniel C. Ustain with misleading investors and committing other violations.