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FINRA Arbitration Panel Awards $500,000 in Punitive Damages and $3.4 Million Compensatory

In an arbitration that lasted 38 hearing sessions, a Chicago panel awarded damages to a former employee of Advanced Equities, Inc. for injuries suffered as a result of the Respondents allegedly failing to pay him commissions for his efforts in raising capital for Advanced Equities funded transactions.  The arbitrators also awarded interest and expert witness fees.  This case represents a rare example of punitive damages being awarded in an employment context.  DAW did not represent the Claimants.  FINRA Arbitration No. 10-00048.

SEC Charges Former National Association of Personal Financial Advisors Chairman with Fraud

The Securities and Exchange Commission (“SEC”) charged Seattle-based financial advisor, Mark Spangler, and his firm with defrauding clients by secretly investing $47.7 million in two risky start-up companies he co-founded.  In 1990, Spangler founded The Spangler Group (“TSG”), an advisory firm that at one point managed approximately $100 million in assets with more than 50 clients.  Spangler founded the firm, served as its president, and made all of its investment decisions.

According to the SEC, between 1998 and 2011, Spangler raised more than $56 million for the private investment funds he managed.  Unbeknownst to his clients, beginning in 2003, Spangler funneled money from the private funds into two companies in which he had significant interest.  Spangler liquidated assets in the private funds and used the proceeds to invest in TeraHop and Tamarac, two of his own start-up companies.

The SEC alleged that by the summer of 2011, Spangler had invested almost $42 million in TeraHop and over $6 million in Tamarac.  These investments were inconsistent with his clients’ investment objectives.  Spangler failed to disclose to the funds’ clients that he had diverted 90% of the fund’s money into two illiquid, private companies.  Spangler did not seek his clients’ approval or consent to change their investment strategies.  Furthermore, TSG had received $830,000 in fees from TeraHop and Tamarac as “financial and operation support.”  These fees were charged on top of the advisory fees paid by TSG’s clients for Spangler’s management of their assets.

The SEC stated, “Spangler assured his clients he was investing them in publicly-traded equities and bonds, not risky start-ups in which he had a personal interest,” and “[f]or an investment adviser to put his self-interest above the best interests of his clients is a disturbing abuse of trust.”   According to the SEC’s complaint, when Spangler filed for personal and business receivership in June 2011, his clients learned the truth about how he had invested their money.  In a parallel action, the U.S. Attorney’s Office for the Western District of Washington announced it was filing criminal charges against Spangler.

SEC Charges UK-based Fund Management Group for Improper Preferential Client Treatment

The Securities and Exchange Commission (“SEC”) charged Martin Currie, Inc. (“MCI”) and Martin Currie Investment Management Ltd. (“MCIM”) with fraudulently using one of its U.S. fund clients to rescue another client.  MCI and MCIM are investment adviser firms headquartered in Scotland.  According to the SEC complaint, MCI and MCIM managed many accounts including the China Fund, Inc. (“China Fund”) and the Martin Currie China Hedge Fund L.P. (“Hedge Fund”) side by side under the direction of a single portfolio management team based in Shanghai, China.

According to the SEC, by November 2008 the Hedge Fund had invested $17 million in a Chinese printer cartridge recycling company (“Jackin.”)  As the global financial crisis deepened, the Hedge Fund and Jackin started to developed liquidity issues.  In April 2009, MCI and MCIM fraudulently caused the China Fund to make a $22.8 million convertible bond investment in a Jackin subsidiary, Ugent Holdings Ltd.  Ugent, in turn, used the proceeds to redeem $10 million of the Hedge Fund’s bonds and used the remaining $12.8 million to keep Jackin alive.

The SEC alleged that MCI and MCIM officials were aware that the China Fund’s involvement presented a direct conflict of interest and may have been unlawful.  MCI and MCIM advised the China Fund’s board to value the convertible bonds at cost while failing to disclose information that was relevant for the board to fairly value the bonds.

MCI and MCIM agreed to pay a total of nearly $14 million to the SEC and the United Kingdom’s Financial Services Authority (FSA.)

SEC Charges Manhattan Resident with Running a Complex Market Manipulation Scheme

The Securities and Exchange Commission (“SEC”) charged David Blech and his wife with running a complex market manipulation scheme involving biopharmaceutical stocks.  According to the SEC, at various points in 2007 and 2008, Blech, who in December 2000 was permanently barred from the securities industry for fraud, manipulated the stocks of Pluristem Therapeutics Inc. and Intellect Neurosciences Inc.

The SEC alleged that Blech had control of over 50 brokerage accounts in the names of family members, friends, and a private religious institution.  Blech used the accounts to engage in a complex scheme in which he bought and sold significant amounts of stock in two biopharmaceutical companies.  Blech allegedly established the illusion of an active and liquid market, in otherwise thinly traded securities, thus inflating their stock prices.  Blech also acted as an unregistered broker-dealer by soliciting investors to invest in various companies, including the two biopharmaceutical companies.

The SEC stated that “Blech hoped to avoid scrutiny by devising a complex scheme using accounts ostensibly belonging to family members and friends to place highly manipulative trades through different broker-dealers.  This enforcement action demonstrates the SEC’s ability to dissect such trades and lay bare their true economic substance.”  In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced it was filing criminal charges against Blech.

FINRA Arbitration Panel Awards $150,000 in Punitive Damages and $75,000 in Compensatory Damages Against Next Financial Group and Two Employees

In an arbitration that lasted 12 hearing sessions, a Richmond, Virginia panel awarded damages to former clients who suffered losses in variable annuities issued by John Hancock, Pacific Life, Jackson National Life, Travelers and Allianz.  DAW did not represent the Claimants.  FINRA Arbitration No. 10-04782.

SEC Charged a Hollywood Movie Producer with Insider Trading

The Securities and Exchange Commission (“SEC”) charged Mohammed Mark Amin, a Hollywood movie producer, and five of his close acquaintances, with insider trading in DuPont Fabros Technology (“DFT”). DFT owns, develops, operates and manages facilities that maintain computer servers for companies such as Yahoo!, Facebook, Microsoft, and Google. 

The SEC alleged that Mr. Amin, who served on DFT’s board of directors since 2007, along with two of his relatives and three friends, used material non-public information to purchase and ultimately illegally profit in DFT securities. As a member of the board of directors, Mr. Amin attended a special board meeting on December 22, 2008 and participated in a telephone conference call with DFT’s CEO, on January 7, 2009. During these meetings, Mr. Amin acquired inside information.

According to the SEC’s complaint, after his telephone conference with DFT’s CEO, Mr. Amin tipped his cousin and asked him to purchase $100,000.00 of DFT shares. Between January 8 and February 10, 2009, Mr. Amin and his acquaintances purchased 405,150 shares of DFT shares, generating more than $618,000.00 in illicit profits. On February 11, 2009, DFT released its 2008 earnings report, disclosing the previously non-public information, causing DFT’s stock to increase 36%.

The SEC said, “Mark Amin disregarded his board responsibilities and betrayed shareholders at DuPont Fabros in favor of giving his circle of relatives and friends an inside scoop to trade on nonpublic information.”  Mr. Mark Amin resigned from DFT’s board of directors in February 2011. Without admitting or denying the allegations, the Defendants agreed to collectively pay nearly $2 million in disgorgement, interest and penalties.

SEC Charges Paralegal and Her Father in Insider Trading Scheme

The Securities and Exchange Commission (“SEC”) charged Angela Milliard, a former paralegal for Semitool, Inc., with trading on confidential information regarding the acquisition of Semitool by Applied Materials.

According to the SEC, in October 2009 Ms. Milliard learned through her employment at Semitol, of Applied Materials’ tender order to acquire Semitool.  The tender offer of $11 per share presented a significant premium above Semitool’s then trading price of $7.83.  This information was material and confidential.

The SEC’s complaint alleged that Ms. Miller, in an effort to conceal her trades, wired money to her boyfriend’s brokerage account and used it to secretly buy Semitool stock.   Between October 28 and November 16, 2009, Ms. Milliard purchased 5,700 Semitool shares in her and her boyfriend’s brokerage accounts.  At the same time, she tipped confidential information about the merger to her father.  Her father and other family members purchased 14,800 Semitool shares.  On the morning of November 17, 2009, after Applied Materials announced its acquisition, Ms. Milliard, her father and certain family members sold their shares for profits of $68,160.11.

The SEC stated, “Angela Milliard exploited her access to confidential merger and acquisition information to illicitly enrich herself and her family.”  And “[a]s a member of a legal department entrusted with sensitive deal documents, she had a duty to safeguard that information, not trade on it.”

Ms. Milliard and her father agreed to settle the SEC’s charges by paying $175,367.01 in disgorgement, interest and penalties.

FINRA Sanctioned Four Brokerage Firms for Unsuitable Leveraged & Inverse ETF Transactions

The Financial Industry Regulatory Authority (“FINRA”) sanctioned Citigroup Global Markets Inc., Morgan Stanley & Co., LLC, UBS Financial Services, and Wells Fargo Advisors, LLC (the “firms”), for improper transactions involving leveraged and inverse exchange-traded funds.  FINRA ordered the firms to pay the following: Citigroup, $2 million fine and $146,431.00 in restitution, Morgan Stanley, $1.75 million fine and $604,584 in restitution, UBS, $1.5 million fine and $431,488.00 in restitution, and Wells Fargo, $2.1 million fine and $641,489 in restitution.

According to FINRA, leveraged and inverse ETF’s have particular risks not found in traditional ETF’s.  Most of these products “reset” daily, meaning that they are designed to achieve their stated objectives on a daily basis.  FINRA’s investigation revealed that each firm sold billions of dollars of these non-traditional EFT’s.  The firms exposed investors to risks and unpredictability factors inherent in these products, especially when held over a period longer than a day.

FINRA’s investigation found that from January 2008 through June 2009, the firms did not have adequate supervisory systems to monitor the sales of the products and failed to conduct proper due diligence regarding the risks and features of inverse ETF’s.   Furthermore, the firms’ registered representatives made unsuitable recommendations of these products to some customers with conservative investment objectives and/or risk profiles.  FINRA said, “[t]he added complexity of leveraged and inverse exchange-traded products makes it essential that brokerage firms have an adequate understanding of the products and sufficiently train their sales force before the products are offered to retail customers.  Firms must conduct reasonable due diligence and ensure that their representatives have an understanding of these products.”

By accepting the settlement, the firms neither admitted nor denied the charges.

FINRA & SEC Fined Goldman, Sachs $22 Million for Inadequate Policies & Procedures in Research “Huddles”

The Financial Industry Regulatory Authority (“FINRA”) in conjunction with the Securities and Exchange Commission (“SEC”) fined Goldman, Sachs & Co. $22 million for failure to establish adequate policies to prevent the misuse of material, nonpublic information about upcoming changes to its research.

According to the investigation, in 2006 Goldman implemented a formalized business process known as “Trading Huddles.” These were internal weekly meetings attended by equity research analysts, traders, and on occasion, may have included clients, to discuss their top short-term trading ideas. In addition to Trading Huddles, in January 2007, Goldman established a program known as the Asymmetric Service Initiative (ASI) in which analysts shared information and trading ideas from the huddles with Goldman’s high priority clients. ASI clients were typically large hedge funds and other institutional investors. These programs created significant risks that material nonpublic information could be disclosed to ASI clients, prior to its release to the general public. Goldman’s failure to properly supervise these programs gave ASI clients an unfair advantage of trading in advance of research ratings and other changes.

The SEC found that the Trading Huddles and the ASI programs were created to improve the performance of the firm’s traders and generating increased commission revenues from ASI clients. Furthermore, FINRA alleged that Goldman made clear to analysts the importance of the programs to their performance evaluations which would impact their compensation.

The SEC stated, “[f]irms must understand that they cannot develop new programs and services without evaluating their policies and procedures,” and that “Goldman failed to implement policies and procedures that adequately controlled the risk that research analysts could preview upcoming ratings changes with select traders and clients.” Both the Trading Huddles and the ASI programs were discontinued in 2011.

The SEC and FINRA sanctions come 10 months after Massachusetts regulators fined Goldman for the same practice.

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.