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Schwab Reviews Risky Exchange-Traded Products

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Discount brokerage Charles Schwab is reviewing whether to add a warning when a customer is about to trade certain exchange-traded products, according to a Reuters story titled “Schwab considers warnings on controversial exchange-traded products.” Schwab’s position indicates the need for retail investors to be cautious when considering an investment in “esoteric” securities.

According to the Reuters report:

“The move follows the sudden plunge in an exchange-traded note called VelocityShares Daily 2X VIX Short-Term ETN, or TVIX, which lost 60 percent of its value last week.

‘It is under review, primarily because of the risk we saw in things like the TVIX. No one knew that those kind of things were going to happen,’ said Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research in Austin, Texas.

The warning would be similar to one that pops up when investors trade options related to volatility, which are more complex than stocks.”

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.

Fort Lauderdale Investment Advisor Arrested in Las Vegas

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George Elia was arrested by the FBI on a criminal complaint alleging that the defendant committed wire fraud. If convicted, Elia faces a maximum of twenty years in prison, to be followed by three years of supervised release, and a potential fine. Wifredo A. Ferrer, United States Attorney for the Southern District of Florida, and John V. Gillies, Special Agent in Charge, Federal Bureau of Investigation (FBI), Miami Field Office, announced the arrest of defendant Elia.

According to the criminal complaint, starting in 2000, Elia owned and operated various companies, including International Consultants, based out of Fort Lauderdale, Florida. From at least 2005 through 2011, Elia claimed to invest in publicly-traded stocks on behalf of investors. As a result of these claims, investors gave Elia money to invest in common stocks that investors believed were trading on the New York Stock Exchange, NASDAQ, and others.

The complaint describes how, in August 2010, Elia met with an investor at the Ritz Carlton in Fort Lauderdale, Florida. At this meeting, Elia showed the investor a three-ring binder, which purported to contain Fidelity account statements and a summary sheet for Elia’s various investment accounts. Elia assured the investor that the investor would recover money in about a year through Elia’s investments. The investor agreed to wire money to Elia. During the meeting, the investor used a telephone to photograph the Fidelity statements that Elia showed the investor.

FBI agents reviewed the Fidelity records for Elia’s companies, which revealed that the actual balances in the Fidelity brokerage accounts that Elia controlled did not match the balances on the statements that Elia showed to the investor in August 2010. According to Fidelity records, the total value of the trading accounts for the respective period was approximately $111,432.27, not the $8,241,923.38 that was set out in the documents that Elia showed the investor.

By the summer of 2011, Elia stopped sending investors quarterly statements, returning calls and emails to investors, and paying regular payments to investors. Elia was arrested in Las Vegas on March 27, 2012, after arriving on a flight from London.

A criminal complaint is only an accusation and a defendant is presumed innocent until and unless proven guilty beyond a reasonable doubt.

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.

CFTC Studies High Frequency Trading

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The Commodity Futures Trading Commission (CFTC) will hold a meeting of its Technology Advisory Committee on Thursday, March 29, 2012, in Washington, DC.

The meeting will focus on three significant issues facing the futures and swaps industries as the Commission continues to finalize rules under the Dodd-Frank Act:

(1) automated and high frequency trading (HFT): exchange oversight and definitions;
(2) final recommendations from the Subcommittee on Data Standardization; and
(3) credit limit checks: market structure and technology issues.

This meeting serves as the inaugural meeting of the new Subcommittee on Automated and High Frequency Trading, which will focus on developing recommendations regarding the definition of high frequency trading (“HFT”) in the context of the larger universe of automated trading.

Read the full press release here, including details on how to participate. Audio of the meeting will be available via listen-only conference call. Additionally, a video recording of the meeting will be published through a link on the CFTC’s website.

FINRA Fines Citigroup Unit for Excessive Markups

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The Financial Industry Regulatory Authority (FINRA) announced this week that it fined Citi International Financial Services LLC, a subsidiary of Citigroup, Inc., $600,000 and ordered more than $648,000 in restitution and interest to more than 3,600 customers for charging excessive markups and markdowns on corporate and agency bond transactions, and for related supervisory violations.

According to a FINRA release:

Thomas Gira, Executive Vice President, FINRA Market Regulation, said, “FINRA is committed to ensuring that customers who purchase and sell securities, including corporate and agency bonds, receive fair prices. The markups and markdowns charged by Citi International were outside of appropriate standards for fair pricing in debt transactions, and FINRA will continue to identify and address transactions that violate fair pricing standards, regardless of whether a markup or markdown is above or below 5 percent.”

FINRA found that from July 2007 through September 2010, Citi International charged excessive corporate and agency bond markups and markdowns. The markups and markdowns ranged from 2.73 percent to over 10 percent, and were excessive given market conditions, the cost of executing the transactions and the value of the services rendered to the customers, among other factors. In addition, from April 2009 through June 2009, Citi International failed to use reasonable diligence to buy or sell corporate bonds so that the resulting price to its customers was as favorable as possible under prevailing market conditions.

During the relevant period, Citi International’s supervisory system regarding fixed income transactions contained significant deficiencies regarding, among other things, the review of markups and markdowns below 5 percent and utilization of a pricing grid for markups and markdowns that was based on the par value of the bonds, instead of the actual value of the bonds. Citi International was also ordered to revise its written supervisory procedures regarding supervisory review of markups and markdowns, and best execution in fixed income transactions with its customers.

In concluding this settlement, Citi International neither admitted nor denied the charges.

Contact Fort Lauderdale securities litigation attorney Howard N. Kahn, Esq. if you or someone you know invested in corporate or agency bond transactions sold by the Citi International Financial Services unit of Citigroup, Inc. 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.

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.

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.

Yitzchak Zigdon Settles SEC Charges in CO2 Tech Pump-and-Dump Scheme

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Yitzchak Zigdon is one of several defendants named in a 2011 SEC complaint relating to a $7 million alleged fraud scheme to sell CO2 Tech stock at artificially inflated prices.

In the original complaint, the Commission alleged that CO2 Tech Ltd. was a sham company without significant assets or operations whose stock prices were quoted in the Pink Sheets. According to the complaint, among other things, Zigdon provided the paper work necessary to establish the account that was used to dump the shares of CO2 Tech on to the market.

The complaint also stated that Zigdon caused materially false and misleading information about CO2 Tech to be disseminated in press releases and on its website. In particular, the complaint alleged that CO2 Tech falsely touted business relationships that the company had not formed, including a relationship with the Boeing Company when, in fact, there had been no communications, correspondence or understandings between CO2 Tech and Boeing.

On January 23, 2013, the U.S. District Court for the Southern District of Florida entered a final judgment by consent against Yitzchak Zigdon in the SEC’s enforcement action against seven defendants concerning the common stock of CO2 Tech Ltd.

The final judgment enjoins Zigdon from future violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Court also ordered Zigdon to pay disgorgement of $260,000, prejudgment interest of $74,516 and a civil penalty in the amount of $130,000 for a total of $464,516 in monetary sanctions.

In addition, the Court barred Zigdon from participating in an offering of penny stock. Zigdon consented to the entry of the final judgment without admitting or denying any of the allegations of the Commission’s Complaint.

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.

Citigroup Fined $725,000 by FINRA for Failure to Disclose Conflicts

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Citigroup Global Markets, Inc. failed to disclose certain conflicts of interest in its research reports and research analysts’ public appearances, according to The Financial Industry Regulatory Authority (FINRA). The company was fined $725,000.

Citigroup and/or its affiliates managed or co-managed public securities offerings, received investment banking or other revenue from, made a market in the securities of and/or had a 1 percent or greater beneficial ownership in covered companies, and did not make these required disclosures in certain research reports. In addition, Citigroup research analysts failed to disclose these same potential conflicts of interest in connection with public appearances in which covered companies were mentioned.

Research reports published from January 2007 through March 2010 were identified as lacking the required disclosures, according to a January 18, 2012 FINRA press release.

Contact Fort Lauderdale securities litigation attorney Howard Kahn, Esq., if you relied on Citigroup research report from this time period to make investments. A former Certified Public Accountant, Mr. Kahn also serves as an arbitrator for the Financial Industry Regulatory Authority (FINRA).

SEC Charges Kevin Dowd of Boca Raton in Pharmasset Stock Tip

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Financial advisor Kevin Dowd allegedly gave a penny stock promoter an illegal tip about on a pending acquisition of Princeton, N.J.-based Pharmasset Inc. by California-based Gilead Sciences, according to SEC charges. Dowd allegedly received $35,000 and a jet ski dock from the tipee in exchange for the information.

The SEC alleges that Kevin L. Dowd got details about the Pharmasset Inc. acquisition from one of his supervisors at the brokerage firm where he worked. The supervisor learned about the deal from a customer who sat on Pharmasset’s board of directors.

Dowd, who knew the customer, breached his duty to keep the information confidential by tipping a friend in the penny stock promotion business who bought Pharmasset stock on the last trading day before the public announcement of the deal. The trader also tipped another individual who bought Pharmasset call options, and collectively they made $708,327 in illicit insider trading profits in just two trading days. The SEC’s investigation is continuing.

“As an industry professional, Dowd surely knew what he was doing was wrong, but he incorrectly thought that his scheme was clever enough to avoid detection by investigators,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit. “Professionals in the securities industry or any sector should know that you’ll be held accountable for violating insider trading laws, even if you don’t trade the securities yourself.”

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced criminal charges against Dowd.

According to the SEC’s complaint filed in federal court in New Jersey, the Pharmasset director told Dowd’s supervisor in confidence as his financial adviser that Pharmasset was going to be sold and the price would be in the high $130s per share. Dowd’s supervisor provided Dowd with the information along with an instruction that he was restricted from trading or recommending Pharmasset securities. Despite the warning, Dowd tipped his penny stock promoter friend, who wired $196,000 into a brokerage account with a zero balance and bought 2,700 shares of Pharmasset stock on Friday, Nov. 18, 2011. Dowd’s friend tipped another individual who bought 100 out-of-the-money call options, which are securities that derive their value from the underlying common stock of the issuer and give the purchaser the right to buy the underlying stock at a specific price within a specified time period. Investors typically purchase call options when they believe the value of the underlying securities is going up.

According to the SEC’s complaint, Gilead and Pharmasset announced the acquisition on Monday, November 21. Dowd’s tippees immediately sold all of their Pharmasset securities to obtain their illegal profits.

The SEC alleges that Dowd violated Sections 10(b) and (14)(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest, a financial penalty, and a permanent injunction against Dowd.

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.