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Monthly Archives: May 2014

SEC Charges Chicago-Based Investment Fund Manager With Stealing Investor Money and Conducting Ponzi Scheme

On May 29, 2014, the SEC announced fraud charges and an asset freeze against a Chicago-based investment fund manager accused of stealing money he raised from investors to pay personal and business expenses.

The SEC alleged that Neal V. Goyal told investors that the private funds he managed would invest in securities following a “long-short” trading strategy. However, Goyal actually did little trading and simply operated a Ponzi scheme that used new investor funds to pay redemptions to existing investors and fund his own lavish lifestyle. Goyal concealed the poor results of the few investments he did make by sending investors phony account statements that grossly overstated the performance of the funds.

According to the SEC’s complaint filed in federal court in Chicago, Goyal raised more than $11.4 million in the last several years for investments in four private funds that he managed and controlled. Goyal’s investment strategy lost money from the outset, but he hid those losses from investors through the Ponzi payments and phony account statements. Meanwhile, Goyal misused investor funds to make down-payments and pay the mortgages on two homes he purchased. He also siphoned away investor money to invest in a Chicago tavern, fund two children’s clothing boutiques that his wife operates in Chicago, and purchase artwork and lavish furniture.

The SEC’s complaint filed on May 28th charged Goyal and two investment advisers that he owned and controlled with violating the antifraud provisions of the Securities Act of 1933, Securities Exchange Act of 1934 and Rule 10b-5, and Investment Advisers Act of 1940. The SEC is seeking financial penalties, disgorgement of ill-gotten gains plus prejudgment interest, and a permanent injunction against Goyal, Blue Horizon Asset Management, and Caldera Advisors. The SEC named another Goyal-controlled entity Caldera Investment Group as a relief defendant in its complaint for the purpose of recovering any investor funds it received.

At the SEC’s request, Judge Rebecca R. Pallmeyer issued a permanent injunction and asset freeze on May 28th against Goyal and his firms, who consented to the order without admitting or denying the allegations in the SEC’s complaint. Under the court’s order, monetary remedies will be decided at a later date.

FINRA Fines Morgan Stanley Smith Barney LLC $5,000,000 for Supervisory Failures Related to Sales of Shares in 83 Initial Public Offerings to Retail Customers

On May 6, 2014, FINRA announced that it has fined Morgan Stanley Smith Barney LLC $5,000,000 for supervisory failures related to the solicitation of retail customers to invest in initial public offerings (IPOs). From February 16, 2012, to May 1, 2013, Morgan Stanley Smith Barney sold shares to retail customers in 83 IPOs, including Facebook and Yelp, without having adequate procedures and training to ensure that its sales staff distinguished between “indications of interest” and “conditional offers” in its solicitations of potential investors.

Firms may solicit non-binding indications of customer interest in an IPO prior to the effective date of the registration statement. An “indication of interest” will only result in the purchase of shares if it is reconfirmed by the investor after the registration statement is effective. Brokerage firms are also permitted to solicit “conditional offers to buy,” which may result in a binding transaction after effectiveness of the registration statement if the investor does not act to revoke the conditional offer before the firm accepts it.

On February 16, 2012, Morgan Stanley Smith Barney adopted a policy that used the terms “indications of interest” and “conditional offers” interchangeably, without proper regard for whether retail interest reconfirmation was required prior to execution. The firm did not offer any training or other materials to its financial advisers to clarify the policy and, as a result, sales staff and customers may not have properly understood what type of commitment was being solicited. FINRA also found that Morgan Stanley Smith Barney failed to adequately monitor compliance with its policy and did not have procedures in place to ensure that conditional offers were being properly solicited consistent with the requirements of the federal securities laws and FINRA rules.

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