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SEC Pays $50K Whistleblower Reward

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A whistleblower who helped stop a multi-million dollar fraud will receive a $50,000 payment from the SEC. The award represents 30 percent of the amount collected in an SEC enforcement action against the perpetrators of the scheme, the maximum percentage payout allowed by the whistleblower law. The name of the recipient was not disclosed.

The 2010 Dodd-Frank Act authorized the whistleblower program to reward individuals who offer high-quality original information that leads to an SEC enforcement action in which more than $1 million in sanctions is ordered. Awards can range from 10 percent to 30 percent of the money collected. The Dodd-Frank Act included enhanced anti-retaliation employment protections for whistleblowers and provisions to protect their identity. The law specifies that the SEC cannot disclose any information, including information the whistleblower provided to the SEC, which could reasonably be expected to directly or indirectly reveal a whistleblower’s identity.

Sean McKessy, Chief of the SEC’s Whistleblower Office, said that since the program was established in August 2011, about eight tips a day are flowing into the SEC. “The fact that we made the first payment after just one year of operation shows that we are open for business and ready to pay people who bring us good, timely information.”

For more information about the SEC’s whistleblower program and how to report a tip, visit www.sec.gov/whistleblower.

Fort Lauderdale Securities Litigation Attorney and FINRA Arbitrator

Contact Fort Lauderdale securities litigation attorney Howard N. Kahn, Esq. if you or someone you know has a securities or broker dispute. In addition to being an experienced securities litigation attorney, Mr. Kahn also serves as a FINRA arbitrator for individual investors, brokers, and brokerage firms. You can reach him at 954-321-0176 or online.

College Football Hall of Fame Coach Charged in $80 Million Ponzi Scheme

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Jim Donnan, a College Football Hall of Fame inductee who guided teams at Marshall University and the University of Georgia and later became a television commentator, conducted a Ponzi scheme fraud with his business partner Gregory Crabtree through a West Virginia-based company called GLC Limited, according to SEC allegations. Other college coaches and former players were among its victims.

Donnan and Crabtree told investors that GLC was in the wholesale liquidation business and earning substantial profits by buying leftover merchandise from major retailers and reselling those discontinued, damaged, or returned products to discount retailers. They promised investors exorbitant rates of return ranging from 50 to 380 percent. However, only about $12 million of the $80 million raised from nearly 100 investors was actually used to purchase leftover merchandise, and the remaining funds were used to pay fake returns to earlier investors or stolen for other uses by Donnan and Crabtree.

“Donnan and Crabtree convinced investors to pour millions of dollars into a purportedly unique and profitable business with huge potential and little risk,” said William P. Hicks, Associate Director of the SEC’s Atlanta Regional Office. “But they were merely pulling an old page out of the Ponzi scheme playbook, and the clock eventually ran out.”

According to the SEC’s complaint filed in federal court in Atlanta, the scheme began in August 2007 and collapsed in October 2010. Donnan recruited the majority of investors by approaching contacts he made as a sports commentator and as a coach. For instance, he capitalized on his influence over one former player by telling him, “Your Daddy is going to take care of you” … “if you weren’t my son, I wouldn’t be doing this for you.” The player later invested $800,000.

The SEC’s complaint alleges that Donnan touted GLC’s success and profitability and told investors that the company could enter into even more merchandise deals with more capital. Donnan and Crabtree offered and sold investments that were short-term (2 to 12 months) and purportedly high-yield, with returns paid to investors in monthly or quarterly installments or in a one-time payment. Donnan told investors their money was being used to purchase specific items of merchandise that was often presold, so there was little to no risk to investing in any deal. However, much of the merchandise that GLC actually purchased was merely left unsold and abandoned in warehouses in West Virginia and Ohio.

The SEC alleges that Donnan typically assured investors that he was investing along with them in any merchandise deal that he offered. He touted that he and other prominent college football coaches had successfully and profitably invested in GLC. But by the time the scheme collapsed, Donnan had actually siphoned more than $7 million away from GLC, and Crabtree misappropriated approximately $1.08 million in investor funds.

The SEC’s complaint charges Donnan, who lives in Athens, Ga., and Crabtree, who resides in Proctorville, Ohio, with violations of the antifraud and registration provisions of the federal securities laws. The complaint also names two of Donnan’s children and his son-in-law as relief defendants for the purpose of recovering illicit funds that Donnan steered to them.

Fort Lauderdale Securities Litigation Attorney and FINRA Arbitrator

Contact Fort Lauderdale securities litigation attorney Howard N. Kahn, Esq. if you or someone you know has a securities or broker dispute. In addition to being an experienced securities litigation attorney, Mr. Kahn also serves as a FINRA arbitrator for individual investors, brokers, and brokerage firms. You can reach him at 954-321-0176 or online.

WJB Capital Group, Inc. Expelled by FINRA

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FINRA has expelled WJB Capital Group, a privately held broker-dealer, for misstating its financial records and for engaging in securities transactions while it was below its required net capital. Chief Executive Officer Craig A. Rothfeld was barred from the securities industry, and Chief Financial Officer Gregory S. Maleski was barred from acting in a principal capacity.

FINRA found that from 2009, when WJB Capital began to experience financial difficulties, through 2011, Rothfeld and Maleski misstated WJB’s financial position on the firm’s balance sheet.

In one example, Rothfeld and Maleski converted $9.8 million in compensation previously paid to 28 employees into forgivable loans. As a result, the firm also failed to provide for the appropriate payment of taxes. Had WJB appropriately recorded these loans and tax obligations, its balance sheet would have reflected substantial losses in addition to those that it was already experiencing.

In addition, Rothfeld and Maleski misclassified certain items as allowable for net capital purposes; as a result, at various times in 2011, WJB engaged in securities transactions when it was below its minimum required net capital.

For example, the firm improperly included receivables related to “non-deal road-shows” when they were not allowable assets under the net capital rule. As a result of the misclassification of these receivables, WJB misstated its FOCUS report and net capital calculations by at least $1 million on a monthly basis for approximately two years. The firm also misclassified a $1.5 million loan it received from its clearing firm as an allowable asset for net capital. Rothfeld, Maleski and WJB also failed to reasonably supervise the firm’s financial and accounting functions.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “Both WJB’s CEO and CFO hid the precarious financial condition of the firm, misstating the FOCUS reports and net capital calculations by as much as $4.4 million per month over a two-year period. The firm’s supervision and accounting were seriously flawed.”

In settling this matter, WJB, Rothfeld and Maleski neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Fort Lauderdale Securities Litigation Attorney and FINRA Arbitrator

Contact Fort Lauderdale securities litigation attorney Howard N. Kahn, Esq. if you or someone you know has a securities or broker dispute. In addition to being an experienced securities litigation attorney, Mr. Kahn also serves as a FINRA arbitrator for individual investors, brokers, and brokerage firms. You can reach him at 954-321-0176 or online.

NASCAR Stock Fund Adviser David Dube & Peak Wealth Face SEC Charges

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Peak Wealth Opportunities LLC, a Florida-based investment fund and fund manager David W. Dube face Securities and Exchange Commission charges for failing to provide SEC examiners with records of a mutual fund advisory business that invested in NASCAR-related stocks.

Despite repeated requests by SEC examiners, Dube and Peak Wealth failed to furnish certain records to the SEC about a mutual fund they advised called the Stock Car Stock Index Fund.

According to an SEC order initiating administrative proceedings, Peak Wealth was the adviser to the Stock Car Stock Index fund from 2008 to June 2010. SEC examination staff requested records from Peak Wealth and Dube in 2010 while examining Peak Wealth’s advisory business and the operations of the fund.

The SEC further alleges that Dube and Peak Wealth:

  • Failed to make and keep certain required financial records.
  • Failed to withdraw Peak Wealth’s registration with the SEC and make other required filings.
  • Failed to provide the fund’s board of directors with information reasonably necessary to assess Peak Wealth’s advisory fees.

Simultaneously with the SEC’s examination in 2010, the fund’s board requested information from Peak Wealth and Dube as part of the fund’s required annual evaluation of its advisory agreements. Section 15(c) of the Investment Company Act of 1940, which requires the annual evaluation, also requires advisers to provide their boards with information reasonably necessary to conduct those evaluations. Despite requesting additional time to respond to the board, Peak Wealth and Dube failed to provide any of the requested documents. The board subsequently terminated Peak Wealth’s advisory agreement and liquidated the fund by returning the money to investors.

Under the relevant rules, the SEC could seek to permanently bar Dube from association with an SEC registered investment adviser or broker dealer. The SEC alleges that Peak Wealth willfully violated Sections 203A and 204 of the Advisers Act of 1940 and Rules 203A-1(b)(2), 204-1(a)(1), 204-2(a)(1), (2), (4), (5), and (6) thereunder, and Section 15(c) of the Investment Company Act of 1940. The SEC charged Dube with willfully aiding and abetting and causing Peak Wealth’s violations.

Fort Lauderdale Securities Litigation Attorney and FINRA Arbitrator

Contact Fort Lauderdale securities litigation attorney Howard N. Kahn, Esq. if you or someone you know has a securities or broker dispute. In addition to being an experienced securities litigation attorney, Mr. Kahn also serves as a FINRA arbitrator for individual investors, brokers, and brokerage firms. You can reach him at 954-321-0176 or online.

Biremis Corp. & CEO Peter Beck Barred by FINRA

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Biremis, Corp., formerly known as Swift Trade Securities USA, Inc., was recently expelled by The Financial Industry Regulatory Authority (FINRA). Biremis President and Chief Executive Officer, Peter Beck, was barred by FINRA. The disciplinary actions resulted from supervisory violations related to detecting and preventing manipulative trading activities such as “layering,” short sale violations, failure to implement an adequate anti-money laundering program, and financial, operational and numerous other securities law violations.

Thomas Gira, FINRA Executive Vice President and Head of Market Regulation, said, “In creating a business that allowed a significant volume of overseas day trading to pass through its systems on a regular basis, Biremis and Mr. Beck needed to devote the appropriate level of resources and personnel to ensure that this business was properly supervised, yet failed on both accounts. Biremis’ inadequate supervisory system resulted in the firm violating multiple rules designed to protect the integrity of the markets and to ensure that member firms adhere to the high standards required of the brokerage industry.”

FINRA found that during various periods from June 2007 to June 2010, Biremis and Mr. Beck failed to establish a supervisory system reasonably designed to achieve compliance with the applicable laws and regulations prohibiting manipulative trading activity. Among other things, Biremis’ supervisory system failed to include policies and procedures designed to detect and prevent layering on U.S. markets. Layering involves the placement of non-bona-fide orders on one side of the market in order to cause market movement that will result in the execution of an order entered on the opposite side of the market, after which the non-bona-fide orders are then canceled. Biremis also failed to establish policies and procedures reasonably designed to detect and prevent manipulative activity designed to affect the closing price of a security. As a result, Biremis failed to detect and prevent potential layering activity and potential manipulation of the closing price of equity securities on U.S. markets.

FINRA found that despite the fact Biremis’ only business was to execute transactions on behalf of day traders around the world, Biremis and Mr. Beck failed to implement an adequate anti-money laundering (AML) program to comply with the Bank Secrecy Act. Among the violations related to its AML program, Biremis failed to properly detect suspicious activities and file suspicious activity reports (SARs) when appropriate. Also, Mr. Beck appointed an unqualified and untrained individual to supervise Biremis’ AML compliance program and Biremis failed to provide adequate AML training to employees.

Biremis and Mr. Beck also violated a number of additional securities laws and rules. Biremis failed to maintain a margin system and margin accounts, and did not have policies and procedures in place related to the use of margin. The firm also failed to prepare customer reserve computations and failed to maintain a special reserve bank account for the exclusive benefit of customers. In addition, Biremis placed thousands of short sale orders, which was in violation of an emergency order issued by the SEC that temporarily banned short selling in certain securities. Also, between at least April 2008 and May 2009, Biremis improperly calculated its net capital, operating in net capital deficiency by up to $25 million. Additionally, the firm failed to maintain all required emails and instant messages over a five-year period.

In concluding this settlement, Biremis and Mr. Beck neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Fort Lauderdale Securities Litigation Attorney and FINRA Arbitrator

Contact Fort Lauderdale securities litigation attorney Howard N. Kahn, Esq. if you or someone you know has a securities or broker dispute. In addition to being an experienced securities litigation attorney, Mr. Kahn also serves as a FINRA arbitrator for individual investors, brokers, and brokerage firms. You can reach him at 954-321-0176 or online.

Municipal Securities Report Issued by SEC

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Enhanced disclosure requirements for municipal securities investors are suggested in a new comprehensive report issued by the Securities and Exchange Commission.

State and local governments issue municipal securities to finance a wide variety of projects that are critical to building and maintaining the nation’s infrastructure.

At the start of 2012, there were more than one million different municipal bonds outstanding totaling $3.7 trillion, with 75 percent held by individual “retail” investors.

Despite its size and importance, the municipal securities market has not been subject to the same level of regulation as other sectors of the U.S. capital markets due to broad exemptions under federal securities laws for municipal securities.

Without a statutory regime for municipal securities regulation, the SEC’s investor protection efforts in the municipal securities market have been limited. The SEC’s report discusses potential legislative changes that could help improve disclosures to investors. For instance, the report recommends that Congress consider authorizing the SEC to set baseline disclosure standards and require municipal issuers to have audited financial statements.

Other potential legislative changes recommended in the report to help improve disclosures and practices in the municipal securities market include:

  • Eliminating the availability of Securities Act and Exchange Act exemptions for conduit borrowers who are not municipal entities.
  • Authorizing the Commission to establish the form and content of financial statements for municipal issuers who issue municipal securities, and to recognize a designated private-sector body as the standard setter for generally accepted for federal securities law purposes.
  • Providing a safe harbor from private liability for forward-looking statements of repeat municipal issuers that satisfy certain conditions.
  • Permitting the Internal Revenue Service to share information with the SEC that it obtains from returns, audits, and examinations related to municipal securities offerings, particularly in instances of suspected securities fraud.
  • Providing a mechanism, through trustees or other entities, to enforce compliance with continuing disclosure agreements and other obligations of municipal issuers to protect municipal securities bondholders.

In addition to potential legislation, the SEC’s report identifies potential rulemaking by the Commission or the Municipal Securities Rulemaking Board and enhancement of best practices by the municipal securities industry.

Click on the link for the SEC Report on the Municipal Securities Market.

Fort Lauderdale Securities Litigation Attorney and FINRA Arbitrator

Contact Fort Lauderdale securities litigation attorney Howard N. Kahn, Esq. if you or someone you know has a securities or broker dispute. In addition to being an experienced securities litigation attorney, Mr. Kahn also serves as a FINRA arbitrator for individual investors, brokers, and brokerage firms. You can reach him at 954-321-0176 or online.

Investors Warned about Exchange-Traded Notes

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An Investor Alert titled Exchange-Traded Notes—Avoid Unpleasant Surprises was issued today by The Financial Industry Regulatory Authority (FINRA).

Exchange-traded notes (ETNs) are a type of debt security that trade on exchanges and promise a return linked to a market index or other benchmark. However, unlike exchange-traded funds (ETFs), ETNs do not buy or hold assets to replicate or approximate the performance of the underlying index.

Some of the indexes and investment strategies used by ETNs can be quite sophisticated and may not have much performance history. The return on an ETN generally depends on price changes if the ETN is sold prior to maturity (as with stocks or ETFs)—or on the payment, if any, of a distribution if the ETN is held to maturity (as with some other structured products).

As FINRA’s Investor Alert explains, an ETN’s closing indicative value is computed by the issuer and is distinct from an ETN’s market price, which is the price at which an ETN trades in the secondary market. Investors should understand that an ETN’s market price can deviate, sometimes significantly, from its indicative value.  If the ETN is trading at a significant premium to its closing or intraday indicative value, investors might want to consider similar products that are not trading at a premium.

“ETNs are complex products and can carry a raft of risks. Investors considering ETNs should only invest if they are confident the ETN can help them meet their investment objectives and they fully understand and are comfortable with the risks,” said Gerri Walsh, FINRA’s Vice President for Investor Education.

Exchange-Traded Notes describes the specific risks associates with ETNs, including:

  • Credit Risk. ETNs are unsecured debt obligations of the issuer.
  • Market Risk. As an index’s value changes with market forces, so will the value of the ETN in general, which can result in a loss of principal to investors.
  • Liquidity Risk. Although ETNs are exchange-traded, a trading market may not develop.
  • Price-Tracking Risk. Investors should be wary of buying at a price that varies significantly from closing and intraday indicative values.
  • Holding-Period Risk. Some leveraged, inverse and inverse leveraged ETNs, are designed to be short-term trading tools, and the performance of these products over long periods can differ significantly from the stated multiple of the performance (or inverse of the performance) of the underlying index or benchmark during the same period.
  • Call, Early Redemption and Acceleration Risk. Some ETNs are callable at the issuer’s discretion.
  • Conflicts of Interest. The issuer of the notes may engage in trading activities that are at odds with investors who hold the notes (shorting strategies, for instance).

FINRA’s new Investor Alert also contains a step-by-step checklist to help investors determine if an ETN is right for them. Click on the link to read the full ETN investor alert.

Fort Lauderdale Securities Litigation Attorney and FINRA Arbitrator

Contact Fort Lauderdale securities litigation attorney Howard N. Kahn, Esq. if you or someone you know has a securities dispute. In addition to being an experienced securities litigation attorney, Mr. Kahn also serves as a FINRA arbitrator for individual investors, brokers, and brokerage firms. You can reach him at 954-321-0176 or online.

FINRA Launches Large Arbitration Case Pilot Program

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Large arbitration cases involving claims of $10 million or more are the focus of a new pilot program recently launched by the Financial Industry Regulatory Authority (FINRA).

The program enables parties to customize the administrative process to better suit special needs of a larger case and allows them to bypass certain FINRA arbitration rules. Participation in the pilot program, which begins today, is voluntary and open to all cases. In order to be eligible, however, all parties will be required to pay for any additional costs of the program and must be represented by counsel.

Linda Fienberg, President of FINRA Dispute Resolution, said, “In response to the increasing number of very large cases, we wanted to introduce a more formal approach to give parties greater flexibility and more control over the administration of their case.”

Examples of how parties may customize the process include having the option to:

  • Have additional control over the method of arbitrator appointment and the qualifications of arbitrators;
  • Hire non-FINRA arbitrators for their case;
  • Develop their own procedures for exchanging information prior to the hearing;
  • Have expanded discovery options such as depositions and interrogatories; and
  • Choose from a wider selection of facilities.

All parties must agree and will be required to pay for any additional costs of the program such as costs for enhanced facilities or additional arbitrator honorariums. FINRA will send a letter to parties in cases involving claims of $10 million or more to solicit participation in the pilot.

Fort Lauderdale Securities Litigation Attorney and FINRA Arbitrator

Contact Fort Lauderdale securities litigation attorney Howard N. Kahn, Esq. if you or someone you know has a securities dispute. In addition to being an experienced securities litigation attorney, Mr. Kahn also serves as a FINRA arbitrator for individual investors, brokers, and brokerage firms. You can reach him at 954-321-0176 or online.

FINRA Fines Merrill Lynch $2.8 Million for Overcharging Customers

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Merrill Lynch, Pierce, Fenner & Smith, Inc. was fined $2.8 million by FINRA for supervisory failures that resulted in overcharging customers $32 million in unwarranted fees, and for failing to provide certain required trade notices. Merrill Lynch has provided $32 million in remediation, plus interest, to the affected customers.

Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement, said, “Investors must be able to trust that the fees charged by their securities firm are, in fact, correct. When this is not the case, investor confidence is threatened.”

FINRA found that from April 2003 to December 2011, Merrill Lynch failed to have an adequate supervisory system to ensure that customers in certain investment advisory programs were billed in accordance with contract and disclosure documents. As a result, the firm overcharged nearly 95,000 customer accounts fees of more than $32 million. Merrill Lynch has since returned the unwarranted fees, with interest, to the affected customers.

Merrill Lynch also failed to provide timely trade confirmations to customers in certain advisory programs due to computer programming errors. As a result, from July 2006 to November 2010, Merrill Lynch failed to send customers trade confirmations for more than 10.6 million trades in over 230,000 customer accounts. In addition, Merrill Lynch failed to properly identify whether it acted as an agent or principal on trade confirmations and account statements relating to at least 7.5 million mutual fund purchase transactions. At various times, Merrill Lynch also failed to deliver certain proxy and voting materials, margin risk disclosure statements and business continuity plans.

In concluding this settlement, Merrill Lynch neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Fort Lauderdale Securities Litigation and FINRA Arbitration

Contact Fort Lauderdale securities litigation attorney Howard N. Kahn, Esq. if you or someone you know has a securities dispute. In addition to being an experienced securities litigation attorney, Mr. Kahn also serves as a FINRA arbitrator for individual investors, brokers, and brokerage firms. You can reach him at 954-321-0176 or online.

Nasdaq Glitches with Facebook IPO Result in Bad Trades

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Nasdaq OMX Group Inc. (NDAQ) is under fire from brokers and traders who lost money on Friday’s initial public offering of Facebook Inc.

Technical issues at the exchange caused orders placed between 11:11 a.m. and 11:30 a.m. on May 18th to go into a “black hole,” according to the Wall Street Journal. Other investors experienced difficulties when they tried to cancel IPO orders. Nasdaq indicates that it may earmark at least $13 million to resolve bad trades.

The Financial Industry Regulatory Authority, or Finra, is expected to oversee the process of arbitrating and distributing the money to investors. The U.S. Securities and Exchange Commission (SEC) is also expected to review the Facebook IPO trading activity.

Florida Securities Litigation and FINRA Arbitration

Contact Fort Lauderdale securities litigation attorney Howard N. Kahn, Esq. if you or someone you know has a securities dispute. In addition to being an experienced securities litigation attorney, Mr. Kahn also serves as a FINRA arbitrator for individual investors, brokers, and brokerage firms. You can reach him at 954-321-0176 or online.