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Monthly Archives: December 2013

FINRA Fines Barclays $3.75 Million for Systemic Record and Email Retention Failures

Posted byDavid Weintraub

On December 26, 2013, FINRA announced that it fined Barclays Capital Inc. $3.75 million for systemic failures to preserve electronic records and certain emails and instant messages in the manner required for a period of at least 10 years.

Federal securities laws and FINRA rules require that business-related electronic records be kept in non-rewritable, non-erasable format (also referred to as “Write-Once, Read-Many” or “WORM” format) to prevent alteration. The Securities and Exchange Commission has stated that these requirements are an essential part of the investor protection function because a firm’s books and records are the primary means of monitoring compliance with applicable securities laws, including antifraud provisions and financial responsibility standards.

FINRA found that from at least 2002 to 2012, Barclays failed to preserve many of its required electronic books and records—including order and trade ticket data, trade confirmations, blotters, account records and other similar records—in WORM format. The issues were widespread and included all of the firm’s business areas. Barclays was unable to determine whether all of its electronic books and records were maintained in an unaltered condition.

FINRA also found that from May 2007 to May 2010, Barclays failed to properly retain certain attachments to Bloomberg emails, and additionally failed to properly retain approximately 3.3 million Bloomberg instant messages from October 2008 to May 2010. In addition to violating FINRA, SEC and NASD rules and regulations, this adversely impacted Barclay’s ability to respond to requests for electronic communications in regulatory and civil matters.

Finally, Barclays failed to establish and maintain an adequate system and written procedures reasonably designed to achieve compliance with SEC, NASD, and FINRA rules and regulations, as well as to timely detect and remedy deficiencies related to those requirements.

In concluding this settlement, Barclays neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

SEC Charges Woman and Stepson for Involvement in ZeekRewards Ponzi and Pyramid Scheme

Posted byDavid Weintraub

On December 20, 2013, the SEC aannounced charges against a woman and her stepson for their involvement in a North Carolina-based Ponzi and pyramid scheme that the agency shut down last year.

The SEC alleged that Dawn Wright-Olivares and Daniel Olivares, who each now live in Arkansas, provided operational support, marketing, and computer expertise to sustain ZeekRewards.com, which offered and sold securities in the form of “premium subscriptions” and “VIP bids” for penny auctions.  While the website conveyed the impression that the significant payouts to investors meant the company was extremely profitable, the payouts actually bore no relation to the company’s net profits.  Approximately 98 percent of total revenues for ZeekRewards – and correspondingly the share of purported net profits paid to investors – were comprised of funds received from new investors rather than legitimate retail sales.

Wright-Olivares and Olivares agreed to settle the SEC’s charges.  In a parallel action, the U.S. Attorney’s Office for the Western District of North Carolina today announced criminal charges against the pair.

Pyramid schemes are a type of investment scam often pitched as a legitimate business opportunity in the form of multi-level marketing programs. According to the SEC’s complaint filed in federal court in Charlotte, N.C., the ZeekRewards scheme raised more than $850 million from approximately one million investors worldwide.

The SEC alleged that Wright-Olivares served as the chief operating officer for much of the existence of ZeekRewards.  Wright-Olivares helped develop the program and its key features, marketed it to investors, and managed some of its operations.  She also helped design and implement features that concealed the fraud.  Olivares managed the electronic operations that tracked all investments and managed payouts to investors.  Together, Wright-Olivares and Olivares helped perpetuate the illusion of a successful retail business.

The SEC’s complaint charged Wright-Olivares with violating the registration and antifraud provisions of Sections 5 and 17 of the Securities Act, and Section 10 of the Exchange Act and Rule 10b-5.  The complaint charged Olivares with violating Section 17 of the Securities Act and Section 10 of the Exchange Act and Rule 10b-5.  To settle the SEC’s charges, Wright-Olivares agreed to pay at least $8,184,064.94 and Olivares agreed to pay at least $3,272,934.58 – amounts that represent the entirety of their ill-gotten gains plus prejudgment interest.  Payments will be made as part of the parallel criminal proceeding in which additional financial penalties could be imposed in a restitution order.

FINRA Fines Deutsche Bank Securities, Inc. $6.5 Million for Serious Financial and Operational Deficiencies

Posted byDavid Weintraub

On December 19, 2013, FINRA announced that it had fined Deutsche Bank Securities, Inc. (DBSI) $6.5 million and censured the firm for serious financial and operational deficiencies primarily related to its enhanced lending program. The violations, which were originally identified during a 2009 examination, included lack of transparency in the firm’s financial records and inaccurate calculations resulting in overstated capitalization and inadequate customer reserves.

Under DBSI’s enhanced lending program, which involves mostly hedge fund customers, the firm arranges for its London affiliate, Deutsche Bank AG London (DBL), to lend cash and securities to DBSI’s customers. FINRA’s 2009 examination of the firm uncovered a number of serious problems in connection with this program. For example, the firm’s books reflected that it owed $9.4 billion to its affiliate, but neither the firm nor FINRA examiners could readily determine which portions of that debt were attributable to the customers’ enhanced lending activity, and which were attributable to DBL’s own proprietary trading. The lack of transparency in DBSI’s books and records meant the firm was unable to readily monitor the accounts originating out of the enhanced lending business.

FINRA also found that there were instances where DBSI made inaccurate calculations that resulted in the firm overstating its capital or failing to set aside enough funds in its customer reserve account to appropriately protect customer securities. For example, DBSI incorrectly classified certain enhanced lending stock loans; when it reclassified them in April 2010, DBL was obligated to pay a margin call of $3.1 billion. DBSI improperly computed its payable balance, thus reducing the firm’s reported liabilities and inaccurately overstating the firm’s net capital. Separately, in March 2010, the firm incorrectly computed its customer reserve formula. As a result, the firm’s customer reserve fund was deficient by $700 million to $1.6 billion during March 2010.

In settling this matter, DBSI neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

SEC Charges Merrill Lynch With Misleading Investors in CDOs

Posted byDavid Weintraub

On December 12, 2013, the SEC announced that it had charged Merrill Lynch with making faulty disclosures about collateral selection for two collateralized debt obligations (CDO) that it structured and marketed to investors, and maintaining inaccurate books and records for a third CDO.

Merrill Lynch agreed to pay $131.8 million to settle the SEC’s charges.

The SEC’s order instituting settled administrative proceedings found that Merrill Lynch failed to inform investors that hedge fund firm Magnetar Capital LLC had a third-party role and exercised significant influence over the selection of collateral for the CDOs entitled Octans  CDO Ltd. and Norma CDO Ltd.  Magnetar bought the equity in the CDOs and its interests were not necessarily aligned with those of other investors because it hedged its equity positions by shorting against the CDOs.

According to the SEC’s order, Merrill Lynch engaged in the misconduct in 2006 and 2007, when its CDO group was a leading arranger of structured product CDOs.  After four Merrill Lynch representatives met with a Magnetar representative in May 2006, an internal email explained the arrangement as “we pick mutually agreeable [collateral] managers to work with, Magnetar plays a significant role in the structure and composition of the portfolio … and in return [Magnetar] retain[s] the equity class and we distribute the debt.”  The email noted they agreed in principle to do a series of deals with largely synthetic collateral and a short list of collateral managers.  The equity piece of a CDO transaction is typically the hardest to sell and the greatest impediment to closing a CDO.  Magnetar’s willingness to buy the equity in a series of CDOs therefore gave the firm substantial leverage to influence portfolio composition.

The SEC’s order reflects that Magnetar had a contractual right to object to the inclusion of collateral in the Octans CDO selected by the supposedly independent collateral manager Harding Advisory LLC during the warehouse phase that preceded the closing of a CDO.  Merrill Lynch, Harding, and Magnetar had finalized a tri-party warehouse agreement that was sent to outside counsel, yet the disclosure that Merrill Lynch provided to investors incorrectly stated that the warehouse agreement was only between Merrill Lynch and Harding.  The SEC has also charged Harding and its owner with fraud for accommodating trades requested by Magnetar despite its interests not necessarily aligning with the debt investors.  

The SEC’s order found that one-third of the assets for the portfolio underlying the Norma CDO were acquired during the warehouse phase by Magnetar rather than by the designated collateral manager NIR Capital Management LLC.  NIR initially was unaware of Magnetar’s purchases, but eventually accepted them and allowed Magnetar to exercise approval rights over certain other assets for the Norma CDO.  The disclosure that Merrill Lynch provided to investors incorrectly stated that the collateral would consist of a portfolio selected by NIR.  Merrill Lynch also failed to disclose in marketing materials that the CDO gave Magnetar a $35.5 million discount on its equity investment and separately made a $4.5 million payment to the firm that was referred to as a “sourcing fee.”  On December 12, 2013, the SEC also announced charges against two managing partners of NIR.

According to the SEC’s order, Merrill Lynch violated books-and-records requirements in another CDO called Auriga CDO Ltd., which was managed by one of its affiliates.  As it did in the Octans and Norma CDO deals, Merrill Lynch agreed to pay Magnetar interest or returns accumulated on the warehoused assets of the Auriga CDO, a type of payment known as “carry.”  To benefit itself, however, Merrill Lynch improperly avoided recording many of the warehoused trades at the time they occurred, and delayed recording those trades.  Therefore, Merrill Lynch’s obligation to pay carry was delayed until after the pricing of the Auriga CDO when it became reasonably clear that the trades would be included in the portfolio.

Merrill Lynch consented to the entry of the order finding that it willfully violated Sections 17(a)(2) and (3) of the Securities Act of 1933 and Section 17(a)(1) of the Securities Exchange Act of 1934 and Rule 17a-3(a)(2).  The firm agreed to pay disgorgement of $56,286,000, prejudgment interest of $19,228,027, and a penalty of $56,286,000.  Without admitting or denying the SEC’s findings, Merrill Lynch agreed to a censure and is required to cease and desist from future violations of these sections of the Securities Act and Securities Exchange Act.

FINRA Fines Oppenheimer $675,000 and Orders Restitution of More Than $246,000 for Charging Unfair Prices in Municipal Securities Transactions and for Supervisory Violations

Posted byDavid Weintraub

On December 9, 2013, FINRA announced that it had fined Oppenheimer & Co., Inc. $675,000 for charging unfair prices in municipal securities transactions and for failing to have an adequate supervisory system. FINRA also ordered Oppenheimer to pay more than $246,000 in restitution, plus interest, to customers who were charged unfair prices. In addition, FINRA fined Oppenheimer’s head municipal securities trader, David Sirianni, $100,000, and suspended him for 60 days.

 FINRA found that from July 1, 2008, through June 30, 2009, Oppenheimer, through Sirianni, priced 89 customer transactions from 5.01 percent to 15.57 percent above the firm’s contemporaneous cost. In 54 of those transactions, the markups exceeded 9.4 percent. Sirianni purchased municipal securities from a broker-dealer on Oppenheimer’s behalf, held the bonds in inventory for at least overnight, and then made the bonds available for resale at unfair prices to the firm’s customers. Sirianni was responsible for determining the prices paid by customers in the 89 transactions.

Oppenheimer failed to detect the unfair prices charged. Oppenheimer’s supervisory system was deficient because supervisory personnel relied solely on a surveillance report that only captured intra-day transactions to review the fairness of markups/markdowns in municipal securities transactions. From at least 2005 through June 30, 2009, if an Oppenheimer trader purchased municipal securities and held those securities in inventory for a day or longer, the subsequent sales to customers would not populate the firm’s surveillance report or be subjected to a fair pricing review.

In concluding this settlement, Oppenheimer and Sirianni neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

It was unclear from FINRA’s announcement whether customers had initiated FINRA arbitrations or any other type of securities arbitrations.  Any customer who believes they have been a victim of excessive municipal markups, markdowns, or securities fraud can contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324.  By phone:  954.693.7577 or 800.718.1422.

FINRA Bars Two Brokers for Stealing $300,000 From Elderly Widow With Diminished Mental Capacity

Posted byDavid Weintraub

On December 3, 2013, FINRA announced that it had barred brokers Fernando L. Arevalo and Jimmy E. Caballero from the securities industry for wrongfully converting approximately $300,000 from an elderly widow with diminished mental capacity, and for failing to fully cooperate with FINRA’s investigation. Arevalo and Caballero’s misconduct occurred while employed as brokers with JPMorgan Chase Securities, LLC. Although JPMorgan was not a party to this action, it reimbursed the elderly customer for the money Caballero and Arevalo converted.

FINRA’s investigation found that the elderly customer maintained accounts at JPMorgan and a related bank affiliate. Between April and July 2013, the customer deposited approximately $300,000 in proceeds from the sale of two annuities into a bank account Arevalo had opened for her. The funds were then withdrawn from the account via two cashier’s checks, and on the same day, Caballero deposited the money into a joint account he opened in his name and the customer’s name at a different bank. When the bank questioned the deposits and required further confirmation before clearing the deposits, Arevalo picked up and drove the customer to the bank to confirm the source of the funds. Funds from the account were then depleted through numerous checks payable to Arevalo, and Caballero and Arevalo used the account debit card for personal expenses including payments on a real estate loan, car loan and various retail purchases. The customer was unaware of any withdrawals or purchases against the joint account by Arevalo or Caballero, and did not authorize the transactions.

In addition, Arevalo failed to provide testimony to FINRA. Although Caballero initially provided testimony to FINRA, he subsequently refused to provide additional information that was relevant to the investigation.

In concluding these settlements, Caballero and Arevalo neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

SEC Charges Miami-Based Trader With Insider Trading and Short Selling Violations

Posted byDavid Weintraub

On December 3, 2013, the SEC announced that it had charged a Miami-based trader with insider trading in the stock of a Chinese company and conducting illegal short sales in the securities of three other companies.

The SEC alleged that Charles Raymond Langston III learned confidential information in advance of a public announcement that significantly decreased the value of AutoChina International’s stock.  Langston was solicited by placement agents to invest in a secondary offering of AutoChina stock.  Despite agreeing to keep information confidential and not trade on it, he promptly sold short 29,000 shares of AutoChina stock in advance of the company’s public announcement that it had completed the secondary offering.  To avoid detection, Langston made the trades through an entity he owned using a different broker and different account than he used to purchase shares in AutoChina’s initial offering.  Langston made $193,108 in illegal profits by trading on the inside information.

The SEC’s complaint filed in federal court in Miami further alleged that Langston and two of his companies, Guarantee Reinsurance and CRL Management, violated Rule 105 of Regulation M, which prohibits the short sale of an equity security during a restricted period – generally five business days before a public offering – and the purchase of that same security through the offering.  The rule addresses illegal short selling that can reduce offering proceeds received by companies by artificially depressing the market price shortly before the company prices its public offering.  The SEC alleges that Langston through Guarantee Reinsurance and CRL Management made short sales in advance of separate secondary offerings by Wells Fargo, Mitsubishi UFJ Financial Group, and Alcoa.  He purchased shares in the same offerings.  Langston and his companies’ violations of Rule 105 resulted in unlawful gains of more than $1.3 million. 

According to the SEC’s announcement, Langston has agreed to settle the insider trading charges by paying disgorgement of $193,108, prejudgment interest of $22,204, and a penalty of $193,108.  Langston and the two companies also agreed to be enjoined for the short selling violations with monetary sanctions to be determined by the court at a later date.  Langston neither admits nor denies the allegations that he violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as Rule 105 of Regulation M of the Exchange Act.