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Category Archives: SEC News

SEC Orders Merrill Lynch to Reimburse Investors for Violating Mutual Funds Share Class Selection Disclosures

Today the SEC announced settled charges against Merrill Lynch, Pierce, Fenner & Smith, Incorporated and two other self-reporting advisory firms and ordered more than $139 million to be returned to investors as part of the agreement.  According to the Order, against Merrill Lynch, the proceedings arise out of breaches of fiduciary duty and inadequate disclosures in connection with its mutual fund share class selection practices and the fees it received.  During the relevant period, Merrill Lynch purchased, recommended, or held for advisory clients’ mutual fund share classes that charged higher fees instead of lower-cost share classes of the same funds for which the clients were eligible. Mutual Funds typically offer investors different types of shares or shares classes.  Each class represents an interest in the same portfolio of securities with the same investment objective; making the fee structure their main difference.   For instance, Institutional shares, or Class I shares typically pay lower annual fund operating expenses over time, equaling to higher returns than other classes that charge 12b-1 fees.   The recurring 12b-1 fees are included in the total annual fund operating expenses and deducted automatically from the mutual funds’ assets.  These recurring fees are paid generally to the broker-dealer that distributed or sold the shares, Merrill Lynch, in this case.    Additionally, the SEC found that Merrill Lynch failed to disclose these conflicts of interest relating to its receipt of the fees and/or its choice of mutual fund class that would pay such fees.  

The order states that they are censured, and that they cease and desist from future related violations and that they pay disgorgement and prejudgment interest totaling over $425,000 and that they comply with certain undertakings, including returning the money to investors.   It’s worth noting that, Merrill Lynch, self-reported to the SEC the aforementioned violation. 

SEC Awards Over $27 Million to Whistleblower

Today the SEC announced an award of more than $27 million to a whistleblower who alerted the agency to misconduct occurring, in part, overseas.  The record demonstrated that the informer voluntarily provided original information to the Commission that led to the successful enforcement of the action.  The whistleblower provided a substantial amount of ongoing assistance and cooperation by meeting with staff numerous times and providing relevant documents and critical investigative leads that advanced the investigation and saved the Commission a significant amount of time and resources.  Additionally, the SEC noted that the informant repeatedly and strenuously raised its concerns internally. 

The SEC has awarded approximately $430 million to 80 individuals since issuing its first award in 2012.  All payments through this program are made from an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators.  The Commission emphasizes, that no money has been taken or withheld from harmed investors to pay whistleblower awards.  The informant’s award is based on a percentage of the money collected in fees and sanctions paid by the violators they uncovered, and if they provided the SEC with original, timely, and credible information that leads to a successful enforcement action.  Whistleblower awards can range from 10% to 30% of the money collected when the monetary sanctions exceed $1 million.

As set forth in the Dodd-Frank Act, the SEC protects the confidentiality of whistleblowers and does not discloses information that could reveal a whistleblower’s identity.  If you believe you have information of a material information that would be helpful to the SEC’s mission, David A. Weintraub, P.A. may be able to represent you in connection with your whistleblower claim.

Alabama Securities Commission Issues a Cease and Desist Order Against Ultra BTC Mining LLC

The Alabama Securities Commission issued a Cease and Desist Order against Ultra BTC Mining LLC aka Ultra Mining (Ultra) and its CEO and registered agent David Taylor, as well as Laura Branch, an agent for Ultra. Through the Order the Commission requested the parties to stop a purportedly fraudulent cryptocurrency cloud mining scheme. Ultra is also under investigation for its fraudulent misrepresentations related to Coronavirus 2019 (COVID-19) donations.

The Commission reviewed Ultra’s website representations and found that the firm claims to provide a modern, high efficiency platform for rental services for cryptocurrency cloud mining. The firm offers an investment opportunity, on their website, in the form of “mining plans” where investors invest in two-year plans for the purpose of mining cryptocurrencies. The mining activities are to be performed or leased by Ultra and the investment return is based on the hash rate purchased. Through its website Ultra offers an earnings-calculator to simulate investment returns of approximately 105% per annum. These projections are unrealistic based on any reasonable investment assumptions, unsustainable, and are per se fraudulent. According to the website, investors will benefit from the connection to mining pools. It also offers an “affiliate program” wherein investors earn a commission for referring business to the company. Furthermore, the Order states that Ultra placed an unsubstantiated claim on their website that they had donated $100,000 to UNICEF to fight COVID-19.

The Commission asserted that neither Ultra nor Ms. Branch had any registrations or licenses, in any capacity. Furthermore, Ultra violated Alabama’s securities laws by issuing and acting as agents in the sales of securities, in this case the mining plans. The Order does not prevent the Commission from seeking such other civil or criminal remedies that are available. If you believe you have been the victim or this or other investment scams, David A. Weintraub, P.A. would be interested in speaking with you.

Jury Finds Investment Adviser and its Owner Liable for Fraud.

On March 16, 2020 jurors in a Connecticut federal court returned a verdict in favor of the SEC and finding Westport Capital Markets, LLC and Christopher McClure guilty of fraud.  According to the complaint, Westport and McClure had a fiduciary duty to their investment advisory clients and were obligated to manage their clients’ portfolios in the clients’ best interests.  Instead, they violated their fiduciary duty and defrauded their clients.   The complaint stated that Westport and McClure received undisclosed mark-ups when Westport, acting as principal, sold securities from its proprietary brokerage account to client accounts but failed to disclose its financial conflict of interest to clients.  Westport Capital Markets, LLC is a Westport, Connecticut registered investment adviser and broker dealer.  It has been registered since 1996.  It provided services to a variety of clients, including retirees and elderly persons who relied on investments in their Westport advisory accounts for income.  Christopher McClure is Westport’s President, Chief Financial Officer and Chief Compliance Officer.  Since 2007, McClure controlled Westport and has been the sole or majority owner of the firm.  

Since 2011, Westport entered into a Selling Dealer arrangement with investment banks.  As a selling dealer, Westport purchased shares of offerings in its own brokerage account at a discount.  Then, it sold those securities to its advisory clients’ accounts at the full public offering prices, obtaining mark-ups.   Westport and McClure obtained standing authority, from entrusting clients, to make investments decisions that were consistent with their clients’ investment objectives and best interest, but they misused that authority when they repeatedly purchased risky securities in clients’ accounts that not only generated undisclosed mark-ups and other fees but these accounts already paid a significant advisory fee to Westport to manage their investments.  They were also required to disclose all conflicts of interest, however they failed to inform clients that Westport and McClure benefited financially from the investment decisions that were made in these discretionary accounts.

During the relevant period, Westport received a total of $650,000 in mark-ups from advisory client accounts and the firm received $1.7 million in advisory fees.  The complaint stated that for some clients, the amount of undisclosed mark-ups equaled 70 percent or more of the amount of advisory fees paid by that account.  At least two clients’ accounts generated more in mark-ups that in advisory fees.  Cumulatively, their advisory clients’ accounts have lost approximately $1.2 million to date as a result of these unsuitable investments, with approximately $890,000 in realized losses.  

SEC Charged Russian National for Defrauding Older Investors in Fake Certificates of Deposit Scam

The SEC announced today that Denis Georgiyevich Sotnikov, a Russian national, who resides in Hallandale Beach, Florida, is involved in an ongoing fraudulent scheme in which US investors, many of whom are older and using their retirement savings, are lured into buying fictitious Certificates of Deposit (CDs) at above market rates.  The Complaint stated that Sotnikov targeted investors who were searching for CDs with high rates.  These ads included links to phony and spoofed websites which falsely claimed that the firms offering the CDs were members of FINRA and the FDIC.  The spoofed websites use domain names similar to the actual sites of legitimate financial institutions. 

As a result of the intricate scheme, unsuspecting investors see advertising for the spoofed websites at the top of their search results when searching for CDs with attractive rates.  After the potential investors visit the spoofed websites, they are directed to call a number to speak with an account executive impersonating a real registered representative, who instructs investors to wire funds to so-called clearing partners.  In reality, these clearing partners are entities used by Sotnikov to launder and misappropriate investor funds. 

According to the SEC, from November 2014 through March 2020, there were at least 24 websites spoofing actual financial firms and 8 fictitious financial firms that resulted in over $26 million in known investor losses.  The investigation found that Sotnikov’s participation was essential to the fraudulent scheme.  He organized and controlled all the entities involved as supposed clearing or offering firms which were created by Sotnikov to serve as conduits to receive wire transfers from duped investors in advancement of the fraudulent scheme.  

The SEC’s complaint filed in federal court charged Sotnikov and the entities he controlled with violating the antifraud provisions of the federal securities laws and Sotnikov with aiding and abetting those violations.  The SEC is looking for permanent injunctive relief and the return of allegedly ill-gotten gains with prejudgment interest and penalties.   In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced related criminal charges and are pursuing asset seizures. 

SEC Charges New York-Based Firm and Supervisors for Failing to Supervise Brokers Who Defrauded Customers

On June 29, 2018, the Securities and Exchange Commission announced that it had charged New York-based broker-dealer Alexander Capital L.P. and two of its managers for failing to supervise three brokers who made unsuitable recommendations to investors, “churned” accounts, and made unauthorized trades that resulted in substantial losses to the firm’s customers while generating large commissions for the brokers.

Their report found that Alexander Capital failed to reasonably supervise William C. Gennity, Rocco Roveccio, and Laurence M. Torres, brokers who were previously charged with fraud in September 2017.  According to the order, Alexander Capital lacked reasonable supervisory policies and procedures and systems to implement them, and if these systems were in place, Alexander Capital likely would have prevented and detected the brokers’ wrongdoing.

In separate orders, the SEC found that supervisors Philip A. Noto II and Barry T. Eisenberg ignored red flags indicating excessive trading and failed to supervise brokers with a view to preventing and detecting their securities-law violations.  The SEC’s order against Noto found that he failed to supervise two brokers and its order against Eisenberg finds that he failed to supervise one broker.

Alexander Capital agreed to be censured and pay $193,775 of allegedly ill-gotten gains, $23,437 in interest, and a $193,775 penalty, which will be placed in a Fair Fund to be returned to harmed retail customers.  Alexander Capital also agreed to hire an independent consultant to review its policies and procedures and the systems to implement them.  Noto agreed to a permanent supervisory bar and to pay a $20,000 penalty and Eisenberg agreed to a five-year supervisory bar and to pay a $15,000 penalty.  These penalties will be paid to harmed retail customers.  Alexander Capital, Noto and Eisenberg agreed to settle today’s charges without admitting or denying the findings in the SEC’s orders. If you believe that you have suffered losses as a result of Alexander Capital L.P.’s misconduct, you may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324.  By phone:  954.693.7577 or 800.718.1422.

SEC Charges Morgan Stanley in Connection With Failure to Detect or Prevent Misappropriation of Client Funds

On June 29, 2018, the Securities and Exchange Commission announced that Morgan Stanley Smith Barney (MSSB) had agreed to pay a $3.6 million penalty and to accept certain undertakings for its failure to protect against its personnel misusing or misappropriating funds from client accounts.

The SEC’s order found that MSSB failed to have reasonably designed policies and procedures in place to prevent its advisory representatives from misusing or misappropriating funds from client accounts.  The order further found that although MSSB’s policies provided for certain reviews of disbursement requests, the reviews were not reasonably designed to detect or prevent such potential misconduct.

According to the SEC’s order, MSSB’s insufficient policies and procedures contributed to its failure to detect or prevent one of its advisory representatives, Barry F. Connell, from misusing or misappropriating approximately $7 million out of four advisory clients’ accounts in approximately 110 unauthorized transactions occurring over a period of nearly a year.

Without admitting or denying the findings, MSSB consented to the SEC’s order, which includes a $3.6 million penalty, a censure, a cease-and-desist order, and undertakings related to the firm’s policies and procedures.  Morgan Stanley previously repaid the four advisory clients in full plus interest. If you believe that you have suffered losses as a result of Barry Connell’s misconduct, you may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324.  By phone:  954.693.7577 or 800.718.1422.

SEC Charges Long Island Investment Professional in $8 Million Scam Targeting Long-Standing Brokerage Customers

On May 30, 2018, the Securities and Exchange Commission charged a former registered representative with defrauding long-standing brokerage customers in an $8 million investment scam.

According to the SEC’s complaint, Steven Pagartanis, who was affiliated with a registered broker-dealer, told some investors – including retirees who had been Pagartanis’s customers for many years – that he would invest their funds in either a publicly-traded or private land development company.  He promised that the funds would be safe and also promised guaranteed monthly interest payments on the investments.  At Pagartanis’s direction, his investors wrote checks payable to a similarly-named entity that was secretly controlled by Pagartanis.  In all, the customers invested approximately $8 million, which Pagartanis used to pay personal expenses and make the guaranteed “interest” payments to his customers.  To conceal the scam, which unraveled earlier this year when Pagartanis stopped making the so-called interest payments to customers, Pagartanis created fictitious account statements reflecting ownership interests in the land development companies.

The Suffolk County District Attorney’s Office filed criminal charges on May 30, 2018 against Pagartanis.

The SEC’s complaint, filed in federal district court in Brooklyn, charged Pagartanis with violating the antifraud provisions of the federal securities laws.  The SEC is seeking a judgment ordering Pagartanis to disgorge his allegedly ill-gotten gains plus prejudgment interest, and to pay financial penalties. If you believe that you have suffered losses as a result of Steven Pagartanis’ misconduct, you may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324.  By phone:  954.693.7577 or 800.718.1422.

93.7577 or 800.718.1422.

SEC Shuts Down $85 Million Ponzi Scheme and Obtains Asset Freeze

On May 1, 2018, the Securities and Exchange Commission announced the unsealing of fraud charges against a Mississippi company and its principal who allegedly bilked at least 150 investors in an $85 million Ponzi scheme.  The defendants agreed to permanent injunctions, an asset freeze, and expedited discovery.

The SEC’s complaint alleges that Arthur Lamar Adams lied to investors by telling them that their money would be used by his company, Madison Timber Properties, LLC, to secure and harvest timber from various land owners located in Alabama, Florida, and Mississippi, and promised annual returns of 12-15%.  But Madison Timber never obtained any harvesting rights.  Instead, Adams allegedly forged deeds and cutting agreements as well as documents purportedly reflecting the value of the timber on the land.  Adams also allegedly paid early investors with later investors’ funds and convinced investors to roll over their investments.  According to the complaint, Adams used investors’ money for personal expenses and to develop an unrelated real estate project.

The SEC’s complaint, filed under seal in federal court in Jackson, Mississippi on April 20, 2018, charges Adams and Madison Timber Properties with violating the antifraud provisions of the federal securities laws.  The court granted the SEC’s request for an asset freeze and permanently enjoined Madison Timber and Adams from violating the antifraud provisions of the federal securities laws and ordered Adams to surrender his passport.  Adams and Madison Timber consented to the entry of the court order.


SEC Announces its Largest-Ever Whistleblower Awards

On March 19, 2018, the SEC announced its highest-ever Dodd-Frank whistleblower awards, with two whistleblowers sharing a nearly $50 million award and a third whistleblower receiving more than $33 million.  The previous high was a $30 million award in 2014.

The SEC has awarded more than $262 million to 53 whistleblowers since issuing its first award in 2012.  All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators.  No money has been taken or withheld from harmed investors to pay whistleblower awards.

Whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action.

Whistleblower awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million. As with this case, whistleblowers can report jointly under the program and share an award.

By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.

If you believe you have information evidencing violations of the federal securities laws, please contact David A. Weintraub, P.A., 800.718.1422.