News and Articles

Monthly Archives: March 2012

FINRA Fines Citi International Financial Services for Excessive Markups and Markdowns

The Financial Industry Regulatory Authority (“FINRA”) fined Citi International Financial Services, LLC, a subsidiary of Citigroup, Inc., for charging excessive markups and markdowns on corporate and agency bond transactions.

FINRA’s investigation concluded that from July 2007 through September 2010, Citi International charged markups or markdowns between 2.73% and 10%, which were excessive given market conditions, the cost of executing the transactions, and the value of the services rendered to its customers, among other factors.  FINRA stated “[t]he markups and markdowns charged by Citi International were outside of appropriate standards for fair pricing in debt transactions.”  FINRA’s Rules of Fair Practice established 5% as a reasonable guideline in markups and markdowns.  FINRA fined Citi International $600,000, and ordered it to pay more than $648,000 in restitution and interest to its customers.  According to FINRA, the firm’s supervisory procedures in reference to fixed income transactions had significant deficiencies.

By accepting the settlement, Citi International neither admitted nor denied the charges.

The SEC Charges a Firm with Running a Fraudulent Stock-Collateralized Loan Business

The Securities and Exchange Commission (“SEC”) charged SW Argyll Investments, LLC (“Argyll”) and two of its senior executives for allegedly operating an illegal stock-based lending service scam.  The complaint alleged that Argyll, through its agents, deceived borrowers into pledging publicly traded stock, at a discount, promising the return of the securities at the end of the loan term.  Instead, the collateralized securities were sold within days to fund the loans.

The complaint alleged that since 2009, on at least 9 different occasions, Argyll scammed affiliates to stock-collateralized loans, under false promises that the shares would be returned to borrowers upon repayment of the loans.  The purported business began with the issuance of a “Loan Offer,” the SEC alleged.  Upon the victim’s acceptance of a Loan Offer, the victims received a “Loan Package” containing a “Loan Agreement,” a “Pledge Agreement,” a “Promissory Note,” and other documents.  The Loan Package did not permit Argyll to sell the collateral except in the event of default.

The SEC stated that Argyll’s senior executives “thought they had devised a foolproof way to make substantial risk-free profits, but their purported business model was nothing more than an illegal get-rich-quick scheme.”  Since the loans were generally valued at only 30% to 50% of the pledged stock’s market value, plus interest, Argyll received more than $8 million in unlawful gains.

SEC Charges Mortgage Executives with Fraudulent Misrepresentations and Omissions

The Securities and Exchange Commission (“SEC”) charged three mortgage executives at Thornburg Mortgage, Inc. (“Thornburg”), formerly the nation’s second largest independent mortgage company after Countrywide Financial Corporation.  According to the SEC, the executives made fraudulent misrepresentations and omissions about Thornburg’s financial condition, margin call activity and liquidity.

In August 2007, Thornburg was late in meeting margin calls from at least three lenders, thereby placing it at risk of being declared in default of its lending agreements.  Subsequently, Defendants allegedly misrepresented to Thornburg’s auditor that the firm had not experienced any non-compliance issues with its contractual obligations.  By concealing its margin crisis and making arrangements to make late payments on the defaulted margin calls, the executives mislead its auditor and the investing public.  On February 28, 2008, just a few hours after making the final late payment on its margin calls, Thornburg timely filed its annual report.  By filing timely, Thornburg avoided disclosing additional margin calls.  The annual report overstated the company’s income by more than $400 million, and falsely recorded a profit rather than an actual loss for the fourth quarter.  The executives’ intention was “to keep the current situation quiet while we deal with it.”

Thornburg eventually disclosed its problems to the SEC, and on March 11, 2008, filed an amended annual report.  By this time, Thornburg’s stock price had collapsed by more than 90 percent.  Thornburg filed for bankruptcy on May 1, 2009.

SEC Charges Former Executive at Coca-Cola Enterprises, Inc. with Insider Trading

The Securities and Exchange Commission (“SEC”) charged Coca-Cola Enterprises’s (“CCE”) former Vice President with insider trading.  The SEC complaint alleges that the Defendant had access to sensitive non-public information, including CCE’s proposed acquisition of The Coca-Cola Company’s Norwegian and Swedish bottling operations.

In the complaint, The Coca-Cola Company (“CCC”) is defined as a licensor, marketer, producer and distributor of various non-alcoholic beverage brands.  CCE is described as a marketer, producer, and distributor of CCC beverage products.

The SEC alleged that in early January 2010, the Defendant learned that CCE was considering the acquisition of CCC’s Norwegian and Swedish bottling operations.  Pursuant to CCE’s internal policies, on January 8, 2010 Defendant signed a Non-Disclosure Agreement that required him to maintain the confidentiality of any non-public information he learned about the transaction.  Additionally, the complaint states, that on February 16, 2010, CCE’s legal counsel sent an email to Defendant advising him that he was subject to a black-out period relating to the transaction at issue.

The complaint goes on to state that on February 18, 2010, Defendant was part of an internal CCE meeting, categorized as “Strictly Private & Confidential,” which discussed the status of the transaction, including the significant positive growth opportunities for CCE, as well as the fact that the transaction was internally valued at over $800 million.  On February 24, 2010, Defendant allegedly purchased 15,000 shares of CCE stock at $19.30 per share, in his wife’s TD Ameritrade brokerage account.  The next day, Defendant’s CCE position was allegedly sold at approximately $25.09 per share, enabling the Defendant to make an illicit $86,850 profit.

On September 16, 2010, Defendant was terminated by CCE in connection with his trades.  The SEC charged Defendant with violations of Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder.