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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.

SEC Charges California Hedge Fund Manager Linked to Galleon Insider Trading Case

The Securities and Exchange Commission (“SEC”) charged hedge fund manager Douglas F. Whitman and his California based firm, Whitman Capital, LLC, with making $980,000 illegally in connection with an insider trading ring connected to Raj Rajaratnam and hedge fund advisory firm Galleon Management.

The SEC complaint stated that Whitman and his firm illegally traded Polycom, Inc. and Google, Inc. based on tips of material non-public information that Whitman obtained from an individual investor.  During 2006 and 2007, the tipper, a one-time associate of Raj Rajaratnam, provided Whitman with material non-public information on Polycom and Google.  In January 2006, the tipper, who was Whitman’s neighbor at the time, illegally tipped Whitman with information about Polycom’s quarterly financial results.  Whitman Capital accumulated 132,263 shares of Polycom stock, and then after the company announced its results, Whitman Capital liquidated its entire Polycom position for a profit of more than $360,000.  The SEC further alleged that the tipper illegally tipped Whitman with inside information about Google’s quarterly financial results before they went public, leading Whitman Capital to purchase 2,761 Google put option positions and generated ill-gotten profits of more than $620,000.

The complaint seeks a final judgment permanently enjoining the defendants from future violations of the federal securities laws, ordering them to disgorge their ill-gotten gains plus prejudgment interest, and ordering them to pay financial penalties.

Former Credit Suisse Investment Bankers Charged with Subprime Bond Over-pricing Fraud

The Securities and Exchange Commission (“SEC”) charged four former Credit Suisse employees with violating federal securities laws while engaging in fraudulent over-pricing of subprime bonds.  The investment bankers allegedly manipulated the accounting behind the pricing of the group’s investment portfolio.  The scheme was originated by a UK investment banker.

The mismarking scheme was triggered by the bankers’ desire to secure large year-end commissions and a coveted promotion to high-level senior positions in Credit Suisse’s investment banking unit.  The over-pricing scheme falsified the prices of over $3 billion of subprime bonds owned by Credit Suisse Group.

The complaint alleged that between August 2007 and February 2008, defendants ignored Credit Suisse’s policies, as well as, the U.S. Generally Accepted Accounting Principles (GAAP), to mark securities at fair market value.  Instead, defendants arbitrarily manipulated the price of Credit Suisse’s AAA bond portfolio to a deceptive higher market value.  The complaint alleged that by August 2007, as the credit markets became more distressed and less liquid, defendants had a paper loss of approximately $75 million.   Faced with this loss, the bankers took it upon themselves to fraudulently manipulate the accounting to inflate the portfolio value.  The SEC’s investigation focused on recordings of telephone conversations among the defendants.

The SEC did not press charges against Credit Suisse, their decision influenced by the isolated nature of the wrongdoing, and Credit Suisse’s immediate self-reporting and cooperation with the SEC and other law enforcement agencies, as well as prompt public disclosure of corrected financial results.  Additionally, Credit Suisse voluntary terminated the four investment bankers and implemented enhanced internal controls to prevent a recurrence of the misconduct.

FINRA Charges Charles Schwab & Co. with Violating its Customers’ Litigation Rights

The Financial Industry Regulatory Authority (“FINRA”) filed a complaint against Charles Schwab & Company for violating FINRA rules when the firm amended its Customer Account Agreements to include (1) a Waiver of Class Action or Representative Action provision, and (2), language requiring customers to waive their right to bring or participate in class actions against Schwab.

According to FINRA’s complaint, Schwab mailed improper contractual amendments to over 6.8 million clients.  FINRA alleged that Schwab’s “violative conduct is ongoing”, and that it will “likely lead millions of Schwab customers who have received the account agreements to incorrectly believe they don’t have the ability to bring or participate in class actions.”

FINRA stated that both provisions violate FINRA Rule 2268(d)(1), which prohibits member firms from placing any condition in a pre-dispute arbitration agreement that “limits or contradicts the rules of any self-regulatory organization.”  Additionally, FINRA alleges Schwab’s class action waiver is a condition that contradicts the FINRA Code of Arbitration Procedure for Customer Disputes, Rule 12204(d), which addresses how customers can bring and participate in class actions against member firms.

In response, Schwab filed a lawsuit in the U.S. District Court for the Northern District of California in San Francisco, where the company is based, against FINRA.  Schwab alleged that it added the waiver provision to all of its customers account agreements in September 2011, following the Supreme Court’s decision in AT&T Mobility LLC vs. Concepcion.  In a statement, Schwab declared that it is confident that the court will find FINRA’s action is barred by the Federal Arbitration Act.  Moreover, the company says that it is “committed to resolving customer disputes fairly and efficiently without litigation through its internal customer advocacy program or by use of FINRA Dispute Resolution.”

SEC Charges Two Brothers with Illegal Naked Short Selling

The Securities and Exchange Commission (“SEC”) alleged that the brothers engaged in illegal naked short-sales after failing to locate and deliver shares involved in short-sales to broker-dealers.  The SEC stated that “[b]y engaging in naked short selling, [Respondents] had a major advantage over competitors who complied with the law and incurred the costs associated with actually borrowing securities.”

Short selling is a legal, advanced trading strategy.  The SEC rules require short sellers to locate shares to borrow before selling them short, and they must deliver the borrowed securities by a specific date. Naked short-selling occurs when the transaction is performed without having borrowed the securities to make delivery.

According to the SEC’s order, from July 2006 to July 2007, Respondents engaged in various types of intricate investment transactions to accomplish their scam.  Respondents were able to engage in “naked” short sales by routinely engaging in combinations of “reverse conversion,” “reset”, and “assist” transactions.  Respondents generated more than $17 million in ill-gotten gains from the transactions involving stocks including Chipotle Mexican Grill, Inc., Fairfax Financial Holdings Ltd., Novastar Financial Inc., and NYSE Group.  Per his own admission, one Respondent stated in a recorded telephone call “[w]hat I sell them is not guaranteed, it never gets delivered, its funny paper.”

The SEC alleged that Respondents violated the locate and close-out requirements of Regulation SHO of the Securities Exchange Act of 1934.

SEC Charges Latvia Trader in Brazen Stock Price Manipulation Scheme

The Securities and Exchange Commission (“SEC”) charged Igors Nagaicevs, a 34 year old Latvian citizen, with conducting a widespread online account intrusion scheme in which he manipulated the prices of more than 100 NYSE and Nasdaq securities, and caused more than $2 million in harm to U.S. investors.

According to the SEC complaint, between June 2009 and August 2010, Nagaicevs hijacked online accounts and made unauthorized purchases and sales of securities.  By doing this, Nagaicevs manipulated the prices of stocks in which he already held positions, and was thereby later able to sell at a profit.  The entire pattern was always completed within the same trading day, often within minutes.  Nagaicevs engaged in this pattern on at least 159 occasions, generating more than $850,000.00 in illegal profits.  The unauthorized activity caused losses in excess of $2 million, which were reimbursed by the broker-dealer firms that carried the hijacked accounts.

Simultaneously, the SEC initiated administrative actions against the four electronic trading firms that allowed Nagaicevs to trade through their platforms without registering him as broker.  The SEC stated, “[t]hese firms provided unfettered access to trade in the U.S. securities markets on an essentially anonymous basis.”  The trading firms named in the SEC’s administrative actions relating to this scam are:  (1) Alchemy Ventures, Inc. of San Mateo, California; (2) KM Capital Management, LLC of Philadelphia; (3) Zanshin Enterprises, LLC of Boise, Idaho; and (4) Mercury Capital of La Jolla, California.  The SEC’s administrative action will determine whether the non-settling trading firms and principals violated the broker registration provisions of the federal securities laws.

SEC Charges Boiler Room Operators in Florida-Based Penny Stock Manipulation Scheme

The Securities and Exchange Commission (“SEC”) charged First Resource Group, LLC, a Fort Lauderdale, Florida based firm, and its founder, David H. Stern, with conducting a fraudulent boiler room scheme in which they hyped stocks in two thinly traded companies, while behind the scenes they allegedly sold the same stock themselves for illegal profits.

The SEC charged that from December 2008 to May 2010, First Resource signed contracts with two promoters to solicit investors to buy stock of TrinityCare Senior Living, Inc. and Cytta Corporation.  In return, First Resource received shares of each company’s stock as compensation for soliciting investors.  Stern and First Resource used telemarketers to contact investors.  While the First Resource telemarketers were recommending that investors purchase TrinityCare and Cytta stock, Stern was selling the shares he received as compensation.  Stern also allegedly manipulated the markets for the two stocks, purchasing small amounts of each stock at prices above the market to raise the market price and create the false appearance of legitimate trading activity.  Furthermore, First Resource and Stern allegedly acted as unregistered broker-dealers.  The SEC’s complaint alleged that First Resource Group and Stern violated Section 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Securities and Exchange Act of 1934 and Rule 10b-5.

FINRA Warns Investors of Email Hack Attacks

The Financial Industry Regulatory Authority (“FINRA”) has received an increasing number of complaints from investors whose funds have been stolen by fraudsters.  Hackers access investors’ email accounts and later send email instructions to the brokerage firms, seeking to transfer money from brokerage accounts.

FINRA’s Alert warns investors about the potential financial consequences of a compromised email account, and provides tips for safeguarding assets.  Simultaneously, FINRA issued a Regulatory Notice advising Members of the risks associated with accepting instructions to transmit or withdraw funds via email.  According to FINRA, brokerage firms should reassess their policies and procedures to ensure they are adequate to protect customer assets from these risks. FINRA stated, “Investors who suspect that their email account has been hacked should immediately notify their brokerage firm and other financial institutions, and anyone who suspects they have been defrauded should file a complaint with FINRA.”

This law firm was recently consulted by a client whose account was hacked.  When the client complained to the brokerage firm, the firm refused to reimburse the client, blaming the client for the hack attack.  The client’s only recourse was initiating a FINRA arbitration.

Merrill Lynch to pay $1 Million for Failure to Arbitrate Disputes with Employees

The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Merrill Lynch, Pierce, Fenner & Smith $1 million for failing to arbitrate disputes with employees relating to retention bonuses.

FINRA’s investigation found that on January 2009, when Merrill Lynch merged with Bank of America, an Advisor Transition Program (ATP) was implemented.  Under the ATP, Merrill Lynch would pay a lump sum retention payment to certain high producing registered representatives.  The ATP was structured as an up-front forgivable loan to entice Merrill Lynch’s high producing brokers to stay with the firm after the merger.

In January 2009, Merrill Lynch paid $2.8 billion in retention bonuses structured as loans to over 5,000 registered representatives.  In most cases, the loans were set up to be forgiven by Merrill Lynch on an annual basis.  If the financial advisor stayed with the firm through the duration of the forgiveness period of the loan, the broker would not have to repay the loan.  If, however, the financial advisor resigned from the brokerage firm, or was terminated, before the loan was forgiven, the broker was contractually obligated to repay the outstanding amounts owed on the loan and the Merrill Lynch could move to collect the outstanding amount still owed.

According to FINRA, Merrill Lynch designed the ATP programs so it could avoid arbitration proceedings when seeking to collect amounts due under the ATP loans.  Merrill Lynch achieved this by stating that the loans were being made to the registered representatives by a non-registered affiliate of Merrill Lynch, when in fact, the funding for the ATP loans came from Merrill Lynch.  The program was structured to allow Merrill Lynch to pursue collection of the amounts under the loans in expedited proceedings in New York state court.  FINRA rules require that disputes between firms and associated persons be arbitrated if they arise out of the business activities of the firm or associated person.  Between January and November 2009, Merrill Lynch filed over 90 of these actions in New York state court, violating FINRA Rule 2010.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “Merrill Lynch specifically designed this bonus program to bypass FINRA’s rule requiring firms to arbitrate disputes with employees, and purposefully filed expedited collection actions in New York State courts and denied those registered representatives a forum to assert counterclaims.”