Category Archives: SEC News

The SEC charged Massachusetts Mutual Life Insurance Company with securities law violations for failing to sufficiently disclose the potential negative effect of a “cap” included on certain annuity products.  According to the SEC Order Instituting Administrative and Cease-and-Desist Proceedings, MassMutual included a “cap” feature in around $2.5 billion of its variable annuities.  From September 2007 to March 2009, MassMutual offered a “Guaranteed Minimum Income Benefit (GMIB)” rider as an optional feature on some of its variable annuity products.  The products’ prospectuses failed to sufficiently explain that once the GMIB value reached a cap, it would no longer earn interest and withdrawals would cause pro-rata reductions to the GMIB value.  The firm’s failure to sufficiently explain the effect of the cap on withdrawals confused sales agents and others.

According to the SEC’s Order, a variable annuity with a GMIB rider reflects two values, the contract value and the GMIB value.  The contract value fluctuates with market performance.  The GMIB value automatically increases on the contract issue date and each contract anniversary thereafter by 5 or 6% (depending on the product.)   MassMutual refered to the annual increases as interest credits.  GMIB riders were advertised to provide “Income Now” and “Income Later” features to investors.  In the Income Now feature, MassMutual GMIB riders have a “dollar-for-dollar” withdrawal characteristic, meaning that the GMIB value will decline only by the dollar amount of any withdrawal, so long as the withdrawal does not exceed the annual interest credit (of5 or 6%, depending on the product.)  In the Income Later feature, MassMutual’s sales literature stated that “[e]ven if your contract value drops to zero, you can apply your GMIB value to a fixed or variable annuity.”  MassMutual failed to specifically disclose the effect of taking withdrawals after the GMIB value reached the cap, including that: 1) after reaching the cap, MassMutual would no longer apply an interest credit for purposes of taking withdrawals; and that 2) at that point, MassMutual would deem all withdrawals to be excess withdrawals that would reduce the GMIB value in direct proportion to the contract value reduction.  As a result of the improper disclosures, a number of MassMutual sales agents, wholesalers, and at least one annuity specialist at another insurance sales agency did not understand the negative impact the cap feature had on the contracts.

During the GMIB riders offering periods, MassMutual had indications that sales agents and others did not understand the effect of post-cap withdrawals on the GMIB value, which should have alerted it to the fact that its disclosures were inadequate.  MassMutual removed the cap after the SEC’s investigation to ensure that no investors would be harmed.  Without admitting or denying the allegations, MassMutual has agreed to settle the charges and pay a $1.625 million penalty.

The SEC charged Fabrizio Neves and Jose Luna, former brokers in Miami, with fraud for overcharging customers approximately $36 million by using undisclosed, excessive fees on structured notes transactions.  The SEC alleged that Neves conducted the scheme while working at LatAm Investments, LLC, a broker-dealer that is no longer in business.  The affected customers were two Brazilian public pension funds, and a Colombian institutional investor.

According to the complaint, from November 2006 to September 2009, Neves negotiated with several U.S. and European commercial banks to structure 12 notes on his customers’ behalf.  Neves, as the funds’ portfolio manager, was authorized to make all trading decisions on the funds’ behalf.  Instead of purchasing structured notes worth approximately $70 million, Neves engaged in a scheme that included trading the notes with one or more accounts in the names of offshore nominee entities that he and Luna controlled, to later buy the same notes at an excessive, baseless mark up price for their customers.  Respondents also altered the structured notes’ term sheets by whiting out or electronically cutting and pasting the markup amounts, over the actual price and trade information, and providing the forged documents to clients.  As a result, the Brazilian funds and the Colombian investor were charged markups as high as 67%, totaling approximately $36 million in overpaid, undisclosed, excessive fees.  Both Neves and Luna enjoyed inflated salaries and commissions stemming from their scheme.

The SEC also instituted an administrative proceeding against LatAm’s former president, Angelica Aguilera, alleging that she failed to reasonably supervise Neves and Luna.  The SEC said, “Neves lined his pockets with millions of dollars by charging customers exorbitant, fraudulent markups…Neves and Luna thought they could hide their scheme and evade regulators by using offshore nominee companies and forged documents, but they thought wrong.”

Without admitting or denying the charges, Luna has agreed to pay disgorgement of $923,704.85, prejudgment interest of $241,643.51, plus a penalty amount to be determined.

The SEC charged Manouchehr Moshayedi, chief executive officer and chairman of the board of directors of STEC, Inc., with insider trading in a secondary offering of STEC shares.  STEC is a California based company that designs, manufactures and markets computer storage devices.   According to the complaint, Moshayedi engaged in an insider trading scheme by making false and misleading representations and omissions in connection with the sale of 9 million shares of STEC stock.

The SEC alleges that during the first half of 2009, STEC’s stock rose more than 800%, as the company reported its increased revenues, sales and margins for its products.  On July 16, 2009, the company also made public its unique supply agreement with its largest customer, EMC Corporation.  The agreement committed EMC to purchase $120 million worth of STEC products in the third and fourth quarters of 2009.  In order to take advantage of the run-up in the stock price, Moshayedi and his brother decided to sell a significant portion of their STEC holdings in a secondary offering.  A few days before the scheduled secondary offering, Moshayedi learned of critical non-public information that was likely to have a negative impact on the stock price.  Instead of calling off the offering and abstaining from selling his shares, Moshayedi engaged in a fraudulent scheme to hide the truth through a secret side deal.

According to the complaint, On August 3, 2009, Moshayedi and his brother each sold 4.5 million shares of their STEC stock, and each received gross proceeds, before expenses, of $133,920,000.  Three months later, after Moshayedi disclosed part of the material, non-public information he possessed when he sold his shares, STEC’s price plummeted 38.9%.  The SEC stated, “Moshayedi put his own self-interest ahead of his responsibility to lead a public company, and shareholders who placed their trust in him suffered as a result.”

The SEC charged five physicians with insider trading in the securities of a Michigan based holding company.  According to the complaint, Apparao Mukkamala served as chairman of the board of directors of American Physicians Capital, Inc. (“ACAP.”).  As chairman of the board, he owed a fiduciary duty of trust and confidence to ACAP and its shareholders.

According to the SEC, between March 12, 2010 and July 8, 2010 Mukkamala illegally disclosed material non-public information concerning the anticipated sale of ACAP, to four fellow physicians.  Between April 30 and July 7, 2010, Mukkamala and the other four purchased nearly $2.2 million of ACAP stock based on the non-public confidential information learned by Mukkamala.   On July 8, 2010, after The Doctors Company publicly announced its acquisition of ACAP, Defendants collectively realized more than $623,000 in profits from their illegal trading in ACAP.

Without admitting or denying the SEC allegation, the five physicians consented to the entry of final judgments ordering them to pay more than $1.9 million to settle the SEC’s charges.  The SEC stated, “These physicians made numerous purchases of ACAP shares that were detected as highly unusual when compared to their past trading patterns… [b]oard chairmen and other insiders should never choose greed over duty when possessing confidential information about the companies they serve.”

The Honorable Timothy C. Batten Sr. granted the SEC’s request for a temporary restraining order and entered an asset freeze for the benefit of investors against Aubrey Lee Price, PFG, LLC, PFGBI, LLC – the funds he managed – and his affiliated entities.  The SEC alleged that after sending a letter dated June 2012 titled “Confidential Confession for Regulators – PFG, LLC and PFGBI, LLC Summary,” Price went into hiding.  In the 22-page letter, Price admitted that he “falsified statements with false returns” in order to conceal between $20-23 million dollars in investor losses.

According to the complaint, Price raised approximately $40 million from approximately 115 investors, living primarily in Georgia and Florida.  The SEC alleged that Price began his scheme in 2008, selling membership interests in two unregistered investment funds, PFG, LLC and PFGBI, LLC (“the Funds.”)  The funds were managed by Price.  According to PFG’s private placement memorandum, the investment objective was to achieve “positive total returns with low volatility” by investing in a variety of opportunities, including equity securities traded on the U.S. markets.  Instead, Price used investors funds to invest in South America real estate and a troubled South Georgia bank.  Furthermore, PFG’s offering documents stated that investors’ funds would be kept in a custodial account at Goldman Sachs Execution & Clearing, L.P.   Between 2009 and 2011, more than 90% of PFG investor funds, around $36.9 million, were placed in a securities trading account at Goldman Sachs  The account suffered massive trading losses in addition to the frequent wire-transfers to PFG’s operating bank account.  By mid-May 2012, the remaining $480,000 in PFG’s Goldman Sachs account was transferred to PFG’s operating account, at which time the Goldman Sachs trading account was closed.  To conceal the depletion of the fund’s assets, Price created and provided false Goldman Sachs account statements and representation letters to investors and bank regulators, indicating fictitious investment returns.

The SEC filed a complaint in U.S. District Court for the Northern District of Georgia charging him with securities fraud.  The SEC stated, “Price raised nearly $40 million from investors and made woeful financial transactions that he hid from them … [n]ow both the money and Price are missing.”

The SEC charged Peter Madoff with fraud, making false statements to regulators, and falsifying books and records, in order to create the illusion that Bernard L. Madoff Investment Securities LLC’s (“BMIS”) had a functioning compliance program in place.  The SEC alleged that Peter Madoff was responsible for creating compliance manuals, written supervisory procedures, reports of annual compliance reviews, and compliance certifications which were never implemented or performed.  The documents were merely created to paper the file.

According to the complaint, from 1969 through December 11, 2008, Peter created compliance materials for the sole purpose of papering the firm’s files.  Peter’s misconduct was instrumental up until the BMIS’s final collapse, when Bernie Madoff allegedly told Peter that there were insufficient funds to pay investors and recruited Peter to help him decide which family, friends and employees to receive what was left of the clients’ funds.  At the same time, Peter rushed to withdraw approximately $200,000 for himself from BMIS’s bank account.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced that criminal charges were filed against Peter Madoff.  The SEC stated, “Peter Madoff helped Bernie Madoff create the image of a functioning compliance program purportedly overseen by sophisticated financial professionals … [t]ragically, the image was merely an illusion supported by Peter’s sham paperwork and false filings for which he was rewarded with tens of millions of dollars in stolen investor funds.”  According to the SEC, Peter used these fraudulent proceeds to support a luxurious lifestyle at the expense of BMIS’s clients.

The SEC charged New York-based hedge fund adviser Philip A. Falcone and his advisory firm, Harbinger Capital Partners, LLC, for conduct that included misappropriation of client assets, market manipulation, and betraying clients.  The SEC filed three separate civil actions and opened an administrative proceeding against Falcone and his firm, for a variety of fraud charges.  It is unclear at this time whether investors in Falcone managed hedge funds will be able to initiate FINRA arbitrations against broker-dealers who sold the hedge funds.

According to the SEC, Falcone and Harbinger engaged in a fraudulent scheme to misappropriate $113.2 million from a Harbinger fund in order to pay Falcone’s personal tax obligation.  In 2009 Falcone declined to pursue other financing options to pay his obligation, such as pledging his personal property as collateral for a bank loan, instead Falcone took out a loan from Harbinger Capital Partners Special Situations Fund, L.P.    The transfer of the fund’s assets to Falcone was structured as a loan and concealed from fund investors for approximately five months.  In 2011, after the SEC initiated its investigation, Falcone repaid the loan.

The SEC alleged that in another breach of Defendants’ fiduciary duties to their investors, Falcone and Harbinger implemented a ‘vote buying’ scheme.  In early 2009, following the credit crisis of the previous year, one of Harbinger’s funds experienced a sharp decline in assets under management.  As a result of the investment losses, many investors were seeking to redeem their interests.  Falcone and Harbinger, in an attempt to stabilize the situation, proposed an amendment to impose more stringent redemption restrictions on investors.  The proposed change required investor approval.  To secure consent, Falcone and Harbinger made side deals with certain strategically-important investors, providing those investors with favorable redemption and liquidity terms in return for their favorable vote for the amendment.  Falcone and Harbinger allegedly permitted the preferential investors to withdraw a total of approximately $169 million.  These quid pro quo agreements to buy votes were concealed form fund investors and the fund’s board of directors.

In a separate cease and desist administrative proceeding, the SEC found that between April and June 2009, Harbinger violated anti-manipulation securities laws while engaged in illegal trades in connection with the purchase of common stock in three public offerings after having sold the same securities short during a restricted period.  The SEC reached a settlement with Harbinger for unlawful trading.  Without admitting or denying any of the Commission’s findings, Harbinger will pay disgorgement in the amount of $857,950, prejudgment interest in the amount of $91,838, and a civil monetary penalty of $428,975.

The SEC sued AMMB Consultant Sendirian Berhad (AMC), a Malaysian investment adviser, for allegedly charging a U.S. registered fund for advisory services that it did not provide.  AMC served as a sub-adviser to the Malaysia Fund, Inc. (the Fund), a closed-end fund that invests in Malaysian companies.  The Fund’s principal investment adviser was Morgan Stanley Investment Management, Inc.  The Fund was AMC’s only client.

According to the complaint, between 1996 and 2007, AMC misrepresented to the Fund’s board of directors the services it provided.   AMC’s reports falsely claimed that AMC was providing specific advice, research, and assistance to Morgan Stanley for the benefit of the fund.  Based on this misrepresentation, the board renewed AMC’s contract and approved payment for their fees.  AMC charged the Fund more than $1.8 million in investment advisory fees for advisory services AMC did not provide.  In reality, AMC’s services were limited to providing two monthly reports based on publicly available information that Morgan Stanley did not request or use.

The SEC alleged that AMC breached its fiduciary duty with respect to compensation under the Investment Company Act of 1940.  Moreover, AMC failed to adopt and implement adequate policies, procedures, and controls over its advisory business, contrary to what AMC stated in certification provided to the fund’s board of directors.   In February 2008, AMC’s advisory agreement with the fund was terminated.  Without admitting or denying the allegations, AMC agreed to pay $1.6 million to settle the SEC’s charges.

The SEC obtained a temporary restraining order and asset freeze against Wayne L. Palmer (“Palmer”) and his company National Note of Utah, L.C. (“National Note”), to halt operations of its Ponzi scheme.  At the same time, the SEC filed a complaint against National Note and its managing member and sole owner Wayne L. Palmer, for operating a nationwide real estate-based Ponzi scheme that raised around $100 million.

According to the complaint, Palmer had been in the real-estate and real-estate financing business since 1976.  Since at least 2004, Palmer had raised more than $100 million from over 600 investors in National Note.   Palmer misrepresented that funds were used to buy and sell mortgage notes, underwrite and make loans, or buy and sell real estate.  Palmer promised returns of 12% annually with a minimum investment of $25,000.  Palmer recruited new investors primarily by word of mouth and referrals, as well as through his real-estate speaking engagements.

The SEC alleged that Respondents misrepresented and mislead investors into believing their principal was guaranteed and risk free.  Palmer told investors that National Note had a perfect record, having never missed  principal or interest payments.  Marketing materials provided to investors showed that National Note returns did not fluctuate and stated that investors were guaranteed payment even if property owners missed payment on mortgage loans that the company held.

The SEC stated, “Palmer promised double-digit returns at his real estate seminars, where investors learned the hard way about his lies and deceit.”  The SEC complaint charged National Note and Palmer with violating the anti-fraud and securities registration provisions of U.S. securities laws.  Palmer also faces charges that he operated as an unregistered broker-dealer.

The SEC charged OppenheimerFunds Inc. with making misleading statements about two of its mutual funds’ losses and recovery prospects.  According to the SEC, in the midst of the financial crisis, two fixed income retail mutual funds managed by Oppenheimer suffered losses greater than those experienced by similar funds.  The underperformance was mainly caused by the funds’ exposure to AAA-rated commercial mortgage-backed securities (“CMBS’) and total return swaps (“TRS”) contracts, which created substantial leverage in both funds.  When the CMBS market crashed, in late 2008, the funds’ net asset values plunged to unexpected levels, creating staggering cash liabilities for the funds.

The SEC alleged that Oppenheimer was forced to liquidate large portions of their portfolio to meet TRS contract payments and was diligently trying to reduce their CMBS exposure.  As the CMBS market continued to decline, Oppenheimer had to make a $150 million cash infusion into the funds to keep them from collapsing.  When Oppenheimer was questioned by financial advisors and shareholders about the funds’ condition, Oppenheimer represented that the funds had only incurred paper losses that could be reversed once the credit markets returned to normal.  These communications were materially misleading because the funds were committed to substantially reducing their CMBS exposure, which in turned diminished the possibility of recovering CMBS-induced losses.  Additionally, the funds were forced to sell significant portions of their holdings to raise cash to meet their TRS liabilities, resulting in realized investment losses and loss of future income from the bonds.  The SEC investigation also found that through 2008, Oppenheimer distributed a prospectus highlighting the funds’ cash investments without disclosing the funds’ practice  of assuming substantial leverage through its use of derivatives.

Without admitting or denying the SEC’s findings, OppenheimerFunds agreed to pay a penalty of $24 million, disgorgement of $9,879,706, and pre-judgment interest of $1,487,190.  This money will be deposited into a fund for the benefit of investors.

It is unclear at this time whether the FINRA Arbitration process will be appropriate for Oppenheimer investors.  Any investor interested in speaking with a securities attorney may contact David A. Weintraub, P.A., 7805 SW 6^th Court, Plantation, FL  33324.  By phone: 954.693.7577 or 800.718.1422.