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Facebook Pre-IPO Share Sales Draw SEC Scrutiny

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Managers of private investment funds established solely to acquire the shares of Facebook and other Silicon Valley firms were charged by the Securities and Exchange Commission with misleading investors and pocketing undisclosed fees and commissions. The SEC alleges that the fund managers collectively raised more than $70 million from investors.

Separately, the SEC charged SharesPost, an online service that matches buyers and sellers of pre-IPO stock, with engaging in securities transactions without registering as a broker-dealer.

The charges stem from the SEC’s yearlong investigation of the fast-growing business of trading pre-IPO shares on the secondary market.

“While we applaud innovation in the capital markets, new platforms and products must obey the rules and ensure the basic fairness and disclosure that are the hallmarks of sound financial regulation,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

“Fund managers must fully disclose their compensation and material conflicts of interest.  Investors deserve better than the kind of undisclosed self-dealing present in these cases,” said Robert Kaplan, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.

Contact Fort Lauderdale securities litigation attorney Howard N. Kahn, Esq. if you or someone you know has been the victim of securities fraud. Mr. Kahn is an experienced securities fraud and litigation attorney. He is also a FINRA arbitrator in securities disputes among individual investors, brokers, and brokerage firms. You can reach him at 954-321-0176 or online.

SEC Charges Thornburg Mortgage with Fraud

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The Securities and Exchange Commission today charged the senior-most executives at formerly one of the nation’s largest mortgage companies with hiding the company’s deteriorating financial condition at the onset of the financial crisis. The plan backfired and the company lost 90 percent of its value in two weeks.

The SEC alleges that Thornburg Mortgage Inc. chief executive officer Larry Goldstone, chief financial officer Clarence Simmons, and chief accounting officer Jane Starrett schemed to fraudulently overstate the company’s income by more than $400 million and falsely record a profit rather than an actual loss for the fourth quarter in its 2007 annual report. Behind the scenes, Thornburg was facing a severe liquidity crisis and was unable to make on-time payments for substantial margin calls it received from its lenders in the weeks leading up to the filing of its annual report on Feb. 28, 2008.

According to the SEC’s complaint filed in federal court in New Mexico, even though Thornburg was violating lending agreements by failing to make on-time payments, the executives were unwilling to disclose the severity of their liquidity crisis to investors and Thornburg’s auditor.

For example, in a February 25 e-mail from Starrett to Goldstone and Simmons, she said, “We have purposefully not told [our auditor] about the margins calls.” Goldstone, Simmons, and Starrett scrambled to satisfy all outstanding margin calls and then timed the filing of the annual report to occur just hours later in order to precede additional margin calls and avoid full disclosure. As Goldstone had earlier stated to Simmons and Starrett in an e-mail, “We don’t want to disclose our current circumstance until it is resolved.” The intention was “to keep the current situation quiet while we deal with it.”

The SEC alleges that the executives’ plan to never disclose the delayed margin call payments fell through when they were unable to raise cash quickly enough to meet more margin calls received soon after filing the annual report. When Thornburg began to default on this new round of margin calls, it was forced to disclose its problems in 8-K filings with the SEC. By the time the company filed an amended annual report on March 11, its stock price had collapsed by more than 90 percent. Thornburg never fully recovered and filed for bankruptcy on May 1, 2009.

Contact Fort Lauderdale securities fraud attorney Howard N. Kahn, Esq. if you or someone you know has been the victim of securities fraud or commercial mortgage fraud. Mr. Kahn is an experienced mortgage fraud and securities litigation attorney. He works with commercial lenders, borrowers, and investors in cases involving mortgage fraud or securities litigation. You can contact him at 954-321-0176 or online.

Brokerage Account Statements: Investor Alert

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The Financial Industry Regulatory Authority (FINRA) has issued an Investor Alert called “It Pays to Understand Your Brokerage Account Statements and Trade Confirmations.”

Investors are advised to carefully review their brokerage account statements every month, not just to confirm the balance but to also look for errors or signs of unauthorized trading or overcharges. 

Signs of Brokerage Account Fraud

FINRA warns investors to be aware of statements that appear unprofessional or altered in any way, since this may be a red flag for fraud. In some cases, according to FINRA, fraudsters simply cut and paste the logo of a legitimate firm onto their own bogus statement.

Other signs of fraud mentioned by FINRA include:

  • No specified end date or statement period on your statement.
  • End dates or statement periods that don’t follow a consistent pattern (such as the last day, last business day or last Friday of each month).
  • Account number that doesn’t match previous statements.
  • Wrong or outdated address, which could hamper delivery of account information.
  • Incorrect or outdated account ownership information.
  • The financial professional’s name is unfamiliar to you.
  • A phone number that is out of service or always busy or not answered.

Read more from FINRA’s guide, “It Pays to Understand Your Brokerage Account Statements and Trade Confirmations.”

Contact Fort Lauderdale securities attorney Howard N. Kahn, Esq., if you or someone you know has been the victim of fraud or unauthorized trading in regard to an investment or brokerage account. Mr. Kahn is an experienced securities attorney and FINRA arbitrator. You can him at 954-321-0176 or online.

George Elia Ponzi Scheme Trial Scheduled for This Week

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The $11 million Ponzi scheme perpetrated on members of the Wilton Manors, Florida gay community from March 2005 to January 2012 is headed for trial this week in a Miami federal court.

Defendants George Elia and his company, International Consultants & Investment Group Ltd. Corp., orchestrated a Ponzi scheme in which Elia raised approximately $11 million from approximately 25 investors, according to an SEC complaint. Elia allegedly lied to investors by claiming to generate returns as high as 26% through day trading stocks and exchange-traded funds.

Elia allegedly transferred the funds to entities he controlled, including Relief Defendants 212 Entertainment Club, Inc., and Elia Realty, Inc. He also used some of the funds to pay personal expenses such as mortgage and car payments, and to pay an associate to introduce him to potential investors to sustain his Ponzi scheme.

George Elia, 69, faces 10 fraud-related charges, according to the Sun-Sentinel. Co-defendant James F. “Jim” Ellis, who recruited investors using his connections in the gay community, pleaded guilty last month to a single count of conspiracy to commit mail and wire fraud.

Fort Lauderdale Securities Litigation and Arbitration Attorney

Contact Fort Lauderdale securities litigation and arbitration attorney Howard N. Kahn, Esq. if you or someone you know has a securities or broker dispute. He is an experienced securities litigation and arbitration attorney, and is available to assist individual investors, brokers, and brokerage firms involved in securities matters. You can reach him at 954-321-0176 or online.

Unauthorized Trading Target of SEC Risk Alert

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Helping broker-dealers and investment advisers prevent and detect unauthorized trading in brokerage and advisory accounts is the subject of a new Securities and Exchange Commission risk alert.

According to the SEC, “unauthorized trading can include rogue trades in customer, client, or proprietary accounts or trades that exceed firm limits on position exposures, risk tolerances, and losses. Unauthorized trading can be done by traders, assistants on trading desks, portfolio managers, brokers, risk managers, or other personnel, including those in administrative positions in a firm’s back office.”

Red flags for unauthorized trading include changes in trading patterns, a high volume of trade cancellations or corrections, manual trade adjustments, or unexplained profits for a particular trader or client may warrant additional scrutiny.

Contact Fort Lauderdale securities attorney Howard N. Kahn, Esq., if you or someone you know has been the victim of unauthorized trading in regard to an investment or brokerage account. Mr. Kahn is an experienced securities attorney and FINRA arbitrator. You can him at 954-321-0176 or online.

Click on the link to read the SEC’s release on unauthorized trading.

SEC Proposes Identity Theft Rules

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The Securities and Exchange Commission yesterday proposed a rule designed to protect investors from identity theft. Broker-dealers, mutual funds, and other SEC-regulated entities are being asked to implement identity theft safety programs that will establish and detect appropriate “red flags.”

Risk factors that a financial institution or creditor would be required to consider as a red flag for covered accounts include:

(1) the types of covered accounts it offers or maintains;
(2) the methods it provides to open its covered accounts;
(3) the methods it provides to access its covered accounts; and
(4) its previous experiences with identity theft.

Risk factors are likely to vary across account types. For example, margin accounts will differ from advisory accounts, and red flags for business accounts will be different than consumer accounts.

The SEC proposal was issued jointly with the Commodity Futures Trading Commission (CFTC) under Section 1088 of the Dodd-Frank Act. The proposed rules are substantially similar to rules adopted in 2007 by the FTC.

Click on the link for a full copy of the SEC/CFTC identity theft proposal.

Contact Fort Lauderdale securities attorney Howard N. Kahn, Esq., if you or someone you know has been the victim of identity theft in regard to an investment or brokerage account. Mr. Kahn is an experienced securities attorney and FINRA arbitrator. Contact him at 954-321-0176 or online.

Mutual Benefits Corp. Ponzi Scheme Back in the News

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Steven Steiner, a former vice president of Mutual Benefits Corp., and his partner Henry Fecker III are waiting for a Miami jury to decide their fate. The two are charged with laundering millions of dollars through residential real estate, hiding assets from authorities, and lying to a court-appointed receiver, according to a Miami Herald article titled “Jurors deliberating in money-laundering trial linked to South Florida ‘Ponzi scheme’.”

Mutual Benefits Corp. (“MBC”) was the viatical and life settlement company that raised more $1.25 billion from over 30,000 investors worldwide from October 1994 through May 2004. A viatical or life settlement is an investment in which the investor purchases a right to receive the proceeds on a terminally ill or elderly person’s insurance policy when the insured dies.

A 2005 SEC indictment alleged that Steiner and others participated in a wide-scale fraud involving the sale of investments, falsely promising investors “safe” and “secure” investments when they knew that MBC had, among other things, improperly acquired policies, pressured doctors to rubber-stamp false life expectancy figures, and mismanaged escrowed premium funds in a “Ponzi” scheme fashion.

During a month-long February trial that just ended, Steiner denied allegations of fraud and insisted that he complied with the SEC settlement. He has been in jail since August 2011, and faces a 54-count indictment that could result in significant additional prison time.

Fort Lauderdale Securities Litigation and Arbitration Attorney

Contact Fort Lauderdale securities litigation and arbitration attorney Howard N. Kahn, Esq. if you or someone you know has a securities or broker dispute. He is an experienced securities litigation and arbitration attorney, and is available to assist individual investors, brokers, and brokerage firms involved in securities matters. You can reach him at 954-321-0176 or online.

SEC Freezes Swiss Assets in H.J. Heinz Questionable Trades

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The SEC obtained an emergency court order to freeze assets in a Zurich, Switzerland trading account that was used to reap more than $1.7 million from trading in advance of last week’s public announcement about the acquisition of H.J. Heinz Company.

The SEC’s immediate action ensures that potentially illegal profits cannot be siphoned out of this account while the agency’s investigation of the suspicious trading continues.

In a complaint filed in federal court in Manhattan, the SEC alleges that prior to any public awareness that Berkshire Hathaway and 3G Capital had agreed to acquire H.J. Heinz Company in a deal valued at $28 billion, unknown traders took risky bets that Heinz’s stock price would increase.

The traders purchased call options the very day before the public announcement. After the announcement, Heinz’s stock rose nearly 20 percent and trading volume increased more than 1,700 percent from the prior day, placing these traders in a position to profit substantially.

“Irregular and highly suspicious options trading immediately in front of a merger or acquisition announcement is a serious red flag that traders may be improperly acting on confidential nonpublic information,” said Daniel M. Hawke, Chief of the Division of Enforcement’s Market Abuse Unit.

Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, “Despite the obvious logistical challenges of investigating trades involving offshore accounts, we moved swiftly to locate and freeze the assets of these suspicious traders, who now have to make an appearance in court to explain their trading if they want their assets unfrozen.”

The SEC alleges that the unknown traders were in possession of material nonpublic information about the impending acquisition when they purchased out-of-the-money Heinz call options the day before the announcement. The timing and size of the trades were highly suspicious because the account through which the traders purchased the options had no history of trading Heinz securities in the last six months. Overall trading activity in Heinz call options several days before the announcement had been minimal.

The emergency court order obtained by the SEC freezes the traders’ assets and prohibits them from destroying any evidence. The SEC’s complaint charges the unknown traders with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. In addition to the emergency relief, the SEC is seeking a final judgment ordering the traders to disgorge their ill-gotten gains with interest, pay financial penalties, and be permanently barred from future violations.

Fort Lauderdale Securities Litigation and Arbitration Attorney

Contact Fort Lauderdale securities litigation and arbitration attorney Howard N. Kahn, Esq. if you or someone you know has a securities or broker dispute. He is an experienced securities litigation and arbitration attorney, and is available to assist individual investors, brokers, and brokerage firms involved in securities matters. You can reach him at 954-321-0176 or online.

FINRA Warns Bond Investors on Price Fluctuation Risk

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Bonds with a low interest rate and high duration may experience significant price drops if interest rates rise, according to a new FINRA Investor Alert called Duration—What an Interest Rate Hike Could Do to Your Bond Portfolio.

FINRA issued the Alert to help investors understand the importance of duration risk. Although stated in years, duration is not simply a measure of time. The duration of a bond or a bond fund also signals how much the price of a bond investment is likely to fluctuate when interest rates move up or down.

As explained in FINRA’s Alert, a bond fund with a 10-year duration will decrease in value by 10 percent if interest rates rise 1 percent. In contrast, if a fund’s duration is two years, then a similar 1-percent rise in interest rates will result in only a 2-percent decline in the bond fund’s value.

To find your bond fund’s duration, investors should look on the fund’s fact sheet. Investors holding individual bonds should start by asking their investment professional or the bond’s issuer.

Investors should also keep in mind that just because a bond or bond fund’s duration is low, it does not mean the investment is risk-free. In addition to duration risks, bonds and bond funds are subject to inflation, call, default and other risk factors.

Fort Lauderdale Securities Litigation and Arbitration Attorney

Contact Fort Lauderdale securities litigation and arbitration attorney Howard N. Kahn, Esq. if you or someone you know has a securities or broker dispute. He is an experienced securities litigation and arbitration attorney, and is available to assist individual investors, brokers, and brokerage firms involved in securities matters. You can reach him at 954-321-0176 or online.

Merrill Lynch Fined by FINRA Over Retention Bonuses

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Merrill Lynch failed to arbitrate retention bonus disputes with employees, according to recent charges by the Financial Industry Regulatory Authority (FINRA) that resulted in a $1 million fine.

According to a January 25, 2012 release:

“Registered representatives who participated in the bonus program had to sign a promissory note that prevented them from arbitrating disagreements relating to the note, forcing the registered representatives to resolve disputes in New York state courts.

FINRA found that Merrill Lynch, after merging with Bank of America in January 2009, implemented a bonus program to retain certain high-producing registered representatives and purposely structured it to circumvent the requirement to institute arbitration proceedings with employees when it sought to collect unpaid amounts from any of the registered representatives who later left the firm. 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.”

Over 5,000 Merrill Lynch registered reprentatives received retention bonuses as part of the Bank of America acquisition, according to the release.

Contact Fort Lauderdale securities attorney Howard N. Kahn, Esq., if you or someone you know was a Merrill Lynch registered rep who received a retention bonus. Mr. Kahn serves as a  FINRA arbitrator.

Read the full FINRA-Merrill Lynch press release.