The SEC charged Peter Madoff with fraud, making false statements to regulators, and falsifying books and records, in order to create the illusion that Bernard L. Madoff Investment Securities LLC’s (“BMIS”) had a functioning compliance program in place. The SEC alleged that Peter Madoff was responsible for creating compliance manuals, written supervisory procedures, reports of annual compliance reviews, and compliance certifications which were never implemented or performed. The documents were merely created to paper the file.
According to the complaint, from 1969 through December 11, 2008, Peter created compliance materials for the sole purpose of papering the firm’s files. Peter’s misconduct was instrumental up until the BMIS’s final collapse, when Bernie Madoff allegedly told Peter that there were insufficient funds to pay investors and recruited Peter to help him decide which family, friends and employees to receive what was left of the clients’ funds. At the same time, Peter rushed to withdraw approximately $200,000 for himself from BMIS’s bank account.
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced that criminal charges were filed against Peter Madoff. The SEC stated, “Peter Madoff helped Bernie Madoff create the image of a functioning compliance program purportedly overseen by sophisticated financial professionals … [t]ragically, the image was merely an illusion supported by Peter’s sham paperwork and false filings for which he was rewarded with tens of millions of dollars in stolen investor funds.” According to the SEC, Peter used these fraudulent proceeds to support a luxurious lifestyle at the expense of BMIS’s clients.
The SEC charged New York-based hedge fund adviser Philip A. Falcone and his advisory firm, Harbinger Capital Partners, LLC, for conduct that included misappropriation of client assets, market manipulation, and betraying clients. The SEC filed three separate civil actions and opened an administrative proceeding against Falcone and his firm, for a variety of fraud charges. It is unclear at this time whether investors in Falcone managed hedge funds will be able to initiate FINRA arbitrations against broker-dealers who sold the hedge funds.
According to the SEC, Falcone and Harbinger engaged in a fraudulent scheme to misappropriate $113.2 million from a Harbinger fund in order to pay Falcone’s personal tax obligation. In 2009 Falcone declined to pursue other financing options to pay his obligation, such as pledging his personal property as collateral for a bank loan, instead Falcone took out a loan from Harbinger Capital Partners Special Situations Fund, L.P. The transfer of the fund’s assets to Falcone was structured as a loan and concealed from fund investors for approximately five months. In 2011, after the SEC initiated its investigation, Falcone repaid the loan.
The SEC alleged that in another breach of Defendants’ fiduciary duties to their investors, Falcone and Harbinger implemented a ‘vote buying’ scheme. In early 2009, following the credit crisis of the previous year, one of Harbinger’s funds experienced a sharp decline in assets under management. As a result of the investment losses, many investors were seeking to redeem their interests. Falcone and Harbinger, in an attempt to stabilize the situation, proposed an amendment to impose more stringent redemption restrictions on investors. The proposed change required investor approval. To secure consent, Falcone and Harbinger made side deals with certain strategically-important investors, providing those investors with favorable redemption and liquidity terms in return for their favorable vote for the amendment. Falcone and Harbinger allegedly permitted the preferential investors to withdraw a total of approximately $169 million. These quid pro quo agreements to buy votes were concealed form fund investors and the fund’s board of directors.
In a separate cease and desist administrative proceeding, the SEC found that between April and June 2009, Harbinger violated anti-manipulation securities laws while engaged in illegal trades in connection with the purchase of common stock in three public offerings after having sold the same securities short during a restricted period. The SEC reached a settlement with Harbinger for unlawful trading. Without admitting or denying any of the Commission’s findings, Harbinger will pay disgorgement in the amount of $857,950, prejudgment interest in the amount of $91,838, and a civil monetary penalty of $428,975.
The SEC sued AMMB Consultant Sendirian Berhad (AMC), a Malaysian investment adviser, for allegedly charging a U.S. registered fund for advisory services that it did not provide. AMC served as a sub-adviser to the Malaysia Fund, Inc. (the Fund), a closed-end fund that invests in Malaysian companies. The Fund’s principal investment adviser was Morgan Stanley Investment Management, Inc. The Fund was AMC’s only client.
According to the complaint, between 1996 and 2007, AMC misrepresented to the Fund’s board of directors the services it provided. AMC’s reports falsely claimed that AMC was providing specific advice, research, and assistance to Morgan Stanley for the benefit of the fund. Based on this misrepresentation, the board renewed AMC’s contract and approved payment for their fees. AMC charged the Fund more than $1.8 million in investment advisory fees for advisory services AMC did not provide. In reality, AMC’s services were limited to providing two monthly reports based on publicly available information that Morgan Stanley did not request or use.
The SEC alleged that AMC breached its fiduciary duty with respect to compensation under the Investment Company Act of 1940. Moreover, AMC failed to adopt and implement adequate policies, procedures, and controls over its advisory business, contrary to what AMC stated in certification provided to the fund’s board of directors. In February 2008, AMC’s advisory agreement with the fund was terminated. Without admitting or denying the allegations, AMC agreed to pay $1.6 million to settle the SEC’s charges.
The SEC obtained a temporary restraining order and asset freeze against Wayne L. Palmer (“Palmer”) and his company National Note of Utah, L.C. (“National Note”), to halt operations of its Ponzi scheme. At the same time, the SEC filed a complaint against National Note and its managing member and sole owner Wayne L. Palmer, for operating a nationwide real estate-based Ponzi scheme that raised around $100 million.
According to the complaint, Palmer had been in the real-estate and real-estate financing business since 1976. Since at least 2004, Palmer had raised more than $100 million from over 600 investors in National Note. Palmer misrepresented that funds were used to buy and sell mortgage notes, underwrite and make loans, or buy and sell real estate. Palmer promised returns of 12% annually with a minimum investment of $25,000. Palmer recruited new investors primarily by word of mouth and referrals, as well as through his real-estate speaking engagements.
The SEC alleged that Respondents misrepresented and mislead investors into believing their principal was guaranteed and risk free. Palmer told investors that National Note had a perfect record, having never missed principal or interest payments. Marketing materials provided to investors showed that National Note returns did not fluctuate and stated that investors were guaranteed payment even if property owners missed payment on mortgage loans that the company held.
The SEC stated, “Palmer promised double-digit returns at his real estate seminars, where investors learned the hard way about his lies and deceit.” The SEC complaint charged National Note and Palmer with violating the anti-fraud and securities registration provisions of U.S. securities laws. Palmer also faces charges that he operated as an unregistered broker-dealer.
FINRA fined Merrill Lynch, Pierce, Fenner & Smith Inc. $2.8 million for supervisory failures that caused the firm to overcharge fees over $32 million to nearly 95,000 customers. FINRA found that from April 2003 to December 2011, Merrill Lynch failed to have an adequate supervisory system to ensure that customers in certain investment advisory programs were billed in accordance with contract and disclosure documents.
FINRA found that from July 2006 to November 2010, Merrill Lynch failed to send approximately 10,647,187 trade confirmations for 232,356 customers due to incorrect system coding. FINRA’s investigation also discovered other violations such as failure to include or state whether the firm acted as an agent or a principal on trade confirmations and account statements, failure to provide margin risk disclosure statements as well as business continuity plans, and failure to deliver proxy materials to customers or to their designated investment advisers.
FINRA said, “Investors must be able to trust that the fees charged by their securities firm are, in fact, correct. When this is not the case, investor confidence is threatened.” In a statement, Merrill Lynch said, “Following Bank of America’s acquisition of Merrill Lynch, we identified operational issues that affected certain investment advisory accounts. These were primarily the results of improper coding of accounts.” Merrill Lynch has reimbursed $32 million, plus interest, to the affected customers. In settling in this matter, Merrill Lynch neither admitted nor denied the charges, but consented to the findings and the fine.
It is unclear at this time whether the FINRA Arbitration process will be appropriate for Merrill Lynch investors. Any investor interested in speaking with a securities attorney may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324. By phone: 954.693.7577 or 800.718.1422.
The SEC charged OppenheimerFunds Inc. with making misleading statements about two of its mutual funds’ losses and recovery prospects. According to the SEC, in the midst of the financial crisis, two fixed income retail mutual funds managed by Oppenheimer suffered losses greater than those experienced by similar funds. The underperformance was mainly caused by the funds’ exposure to AAA-rated commercial mortgage-backed securities (“CMBS’) and total return swaps (“TRS”) contracts, which created substantial leverage in both funds. When the CMBS market crashed, in late 2008, the funds’ net asset values plunged to unexpected levels, creating staggering cash liabilities for the funds.
The SEC alleged that Oppenheimer was forced to liquidate large portions of their portfolio to meet TRS contract payments and was diligently trying to reduce their CMBS exposure. As the CMBS market continued to decline, Oppenheimer had to make a $150 million cash infusion into the funds to keep them from collapsing. When Oppenheimer was questioned by financial advisors and shareholders about the funds’ condition, Oppenheimer represented that the funds had only incurred paper losses that could be reversed once the credit markets returned to normal. These communications were materially misleading because the funds were committed to substantially reducing their CMBS exposure, which in turned diminished the possibility of recovering CMBS-induced losses. Additionally, the funds were forced to sell significant portions of their holdings to raise cash to meet their TRS liabilities, resulting in realized investment losses and loss of future income from the bonds. The SEC investigation also found that through 2008, Oppenheimer distributed a prospectus highlighting the funds’ cash investments without disclosing the funds’ practice of assuming substantial leverage through its use of derivatives.
Without admitting or denying the SEC’s findings, OppenheimerFunds agreed to pay a penalty of $24 million, disgorgement of $9,879,706, and pre-judgment interest of $1,487,190. This money will be deposited into a fund for the benefit of investors.
It is unclear at this time whether the FINRA Arbitration process will be appropriate for Oppenheimer investors. Any investor interested in speaking with a securities attorney may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324. By phone: 954.693.7577 or 800.718.1422.
A FINRA hearing panel ruled that Brookstone Securities of Lakeland, Florida, together with the firm’s Owner/CEO, Anthony Turbeville, and one of its brokers, Christopher Kline, made fraudulent misrepresentations and omissions of material fact in selling collateralized mortgage obligations (CMOs) to unsophisticated, elderly and retired investors. The panel fined Brookstone $1 million and ordered it to pay restitution of more than $1.6 million to customers, with $440,600 of that amount imposed jointly and severally with Turbeville, and the remaining $1,179,500 imposed jointly and severally with Kline.
The FINRA hearing panel found that all of the customers involved in this matter were unsophisticated investors who relied on brokers to assist them with their investment needs. The customers were looking for safer alternatives to equity investments. Turbeville and Kline led the customers to believe that their portfolio consisted of government guaranteed bonds that preserved capital while at the same time generating 10% to 15% returns. After a 16-day hearing, the panel found that between July 2005 and July 2007, Respondents made negligent misrepresentations and omissions to elderly and unsophisticated customers regarding the risks of CMOs. During this period, Brookstone made $492,500 in commissions on CMO bond transactions from seven customers while those same customers lost $1,620,100.
It is unclear at this time whether the FINRA Arbitration process will be appropriate for Brookstone clients. Any investor interested in speaking with a securities attorney may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324. By phone: 954.693.7577 or 800.718.1422.
FINRA fined First Midwest Securities, Inc. $75,000.00 for unsuitable recommendations, excessive trading and supervisory failures that caused customer losses of approximately $287,380.00. According to FINRA, between January 2006 and December 2009, First Midwest failed to establish, maintain and enforce a supervisory system and written procedures to reasonably identify excessive trading of equities. Due to the supervisory deficiencies, First Midwest failed to prevent excessive trading by one of its registered representatives.
FINRA’s investigation found that at various times from September 2006 through August 2008, one of First Midwest’s registered representatives recommended and engaged in excessive, unsuitable trading in the accounts of four customers. The unsuitable practices included excessive, short-term trading, and excessive use of margin that resulted in $149,000 in commissions for the registered representative.
Without admitting or denying the allegations, First Midwest agreed to pay $75,000 to settle FINRA’s charges. It is unclear from FINRA’s Letter of Acceptance, Waiver and Consent whether FINRA arbitration proceedings were initiated on behalf of the four customers whose accounts were churned, or whether the four customers were compensated.