RCNs are complex securities.  In addition to the risk of default by the issuer, RCNs contain embedded put options giving the issuer the right to not return the investor’s principal at maturity, but instead assign the underlying security (usually a stock) at maturity if the stock price drops to a certain level.  In that case, the investor is left holding a stock that may be worth much less than the price paid for the RCN.

RCNs are alternative investments that typically offer above-market yields.  They are often sold to income-oriented investors who are unable to realize a sufficient return in the persistent low interest rate environment in which we live.  However, most individual investors who purchase RCNs have no idea they can lose money on this investment.

According to the SEC, UBS sold approximately $548 million in RCNs to more than 8,700 relatively inexperienced retail customers.

Investors who have lost money in RCNs should consult with an attorney with experience in representing investors in securities arbitration.  The Doss Firm, LLC has such experience and offers a free initial consultation to investors who may have questions about any of their investments.

According to the SEC, Jacob and IBS had about $18 million belonging to 30 client households, including Georgia residents, under their control from 2009 through July 2014.  The clients signed a “Durable Power of Attorney / Security Account Limited Discretionary Authorization,” which gave Jacob and IBS the ability to buy, sell and trade in the client accounts.  Jacob and IBS received $517,000 in advisory fees for managing the accounts, which included retirement accounts.  The accounts were held at large brokerage firms, which the SEC did not identify in its Order Instituting Administrative Proceedings against Jacob and IBS.

Jacob and IBS allegedly misrepresented and failed to disclose material information about the risks of his investment strategy and certain exchange traded funds (“ETFs”) that were used.  Clients were told that the strategy and the ETFs was low-risk or no-risk when Jacob had reason to know they were not. The SEC also charged that Jacob made false and misleading statements to clients about the profitability of his investment strategies. The ETFs included high-risk products like Proshares Short S&P500 and Proshares Short Russell 2000, which amounted to speculative bets that the S&P 500 and Russell 2000 would decline in value over the short term.  Clients lost nearly 50% of their investment in these products.

An investment adviser’s registration status can be checked for free on the SEC’s website at http://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_Search.aspx, as well as FINRA’s Brokercheck at http://brokercheck.finra.org/.

While Jacob and IBS may or may not have the ability to make whole the victims of their fraudulent scheme, the large brokerage firms certainly do.  Those brokerage firms had a duty to supervise Jacob and are legally responsible for any client losses caused by Jacob’s wrongdoing during his association with those firms.

According to the SEC, the Enforcement Division has engaged in a “data-driven initiative to identify potentially fraudulent trade allocations known as ‘cherry-picking.’” Through this process the SEC Enforcement Division was able to find that Welhouse purchased options in a master account for Welhouse & Associates Inc. and put off allocating the funds into his clients’ accounts until later in the day to determine if the securities would appreciated in value. The SEC claims Welhouse gained about $442,319 in ill-gotten gains allocated to S&P 500 exchange-traded fund. On average, a personal trade made by Welhouse had “a first-day return of 6.28 percent while his clients’ trades in these options had an average first-day loss of 5.05 percent.”

The SEC conducted a statistical analysis to determine if Welhouse’s profits could have been sheer luck or coincidence, but “after running a simulation one million times, the staff concluded it could not.” This process came about because according to Julie M. Riewe, Co-Chief of the SEC Enforcement Division, “Cherry-picking schemes can be extremely difficult to detect without an investor astutely noticing that something may be amiss and coming to us with a complaint about the adviser.”

The SEC alleges that Gray Financial Group and Gray “made material misrepresentations to at least one client when asked specifically about the investments’ compliance with the law,” as well as, “misrepresented the number and identity of prior investors in the fund.”

Alternative investments are often complex, high-risk, high-fee investments. Georgia law requires that public pension funds invest no more than 20% of their capital in alternative investments; however, the investments sold to two of the Atlanta pension funds in this case caused them to exceed that limit. Georgia law also prohibits public pension funds from investing in an alternative fund unless there are at least four other investors at the time of investment, but there were fewer than four investors in the funds sold to its Atlanta pension fund clients. Georgia law further provides that alternative investment funds must have at least $100 million in assets in order to be purchased by public pensions, yet the funds in this case never reached that amount of assets.

Gray Financial Group collected over $1.7 million in fees from its Atlanta pension fund clients that in connection with the improper investments, according to the SEC.

According to the SEC, the national operators of for profit colleges and its two chief executives fraudulently concealed from ITT’s investors the negative financial impact on ITTof the two student loan programs called “PEAKS” and “CUSO.” ITT had provided guarantees against the risk of loss from non-performing loans that resulted in millions of dollars in liability for ITT. However, instead of disclosing these liabilities to its investors, ITT took steps to mislead them.

Those steps included, according to the SEC, making payments on delinquent student loans in order to “keep the loans from defaulting and triggering tens of millions of dollars of guarantee payments, without disclosing this practice.”

In order to further conceal its liabilities, the SEC alleged that IIT netted its anticipated guarantee payments against recoveries it projected for many years later without disclosing this approach or its near-term cash impact. In addition, the SEC charged, ITT failed to consolidate the PEAKS program in its financial statements despite ITT’s control over the economic performance of the program.” Finally, ITT and the executives reportedly misled and withheld crucial information from its auditor.

After two years of misleading investors, ITT finally disclosed the true extent of its guarantee obligations, which resulted in ITT’s stock value declining by approximately two-thirds, according to the SEC.

Issuers of private placement investments often employ unregistered brokers and financial advisers to sell them to individual (or retail) investors. The sellers of private placements typically receive outsized commissions, and thus do very well indeed. On the other hand, many investors who could ill afford it have lost a substantial portion of their life savings by investing in private placements.

The SEC recently published an Investor Alert identifying 10 red flags that an unregistered offering (private placement) may be fraudulent. The red flags include such things as promises of high returns with little or no risk; involvement of unregistered sales people; high-pressure sales tactics; amateurish, sloppy or no documentation; absence of the “usual suspects” involved in “legitimate” private placements (lawyers, accountants, etc.); the old “mail drop as corporate address” trick; cold call solicitations; and phony backgrounds of managers or promoters.

While it is true, as the SEC indicates, that some private placements may be used by legitimate businesses to raise capital, it is also true that private placements may be fraudulent investment schemes. Even if a private placement is legitimate, it is always improper for an investment adviser or broker to recommend that an individual investor invest a substantial percentage of his or her liquid net worth in such investments due to the risk of losing everything you invest.

The laws requiring registration of securities offerings are designed to protect investors, though that protection may be illusory. Generally, unregistered securities can only be sold to so-called “accredited investors.” For an individual to be considered an accredited investor, he or she must either have annual income of over $200,000 for the prior two years (or $300,000 jointly with a spouse), or have a total net worth of over $1 million above the value of the primary residence and any loans secured by it.

Now, it is still true that $1 million is a lot of money, but it is not nearly as much as it used to be back when these “accredited investor” rules were written. The “accredited investor” requirement is supposed to protect investors but, arguably, the income/net worth cut-off is too low. It is based on a false premise that anyone with $200,000 or $300,000 annual income or a net worth of $1 million is wealthy and, therefore, able to bear the loss of his or her entire investment, even if that investment is all or a substantial portion of that person’s net worth.

The bottom line is that private placements (even if they are not outright frauds) are almost always unsuitably risky and illiquid for individual investors. They should not be recommended to most individual investors by brokers or investment advisers, and would not be recommended were it not for the high sales commissions. If such an investment is presented to you, the best response is to “just say no.” If the opportunity was so great, venture capitalist investors would invest and the issuer would not need to be raising money from people like you and me. More appropriate, liquid, and less risky investment alternatives that do not pay the seller high fees or commissions are usually available.

If you are stuck in one of these investments, you may be able to get your money back by undoing the sale (a legal remedy called rescission). We would be glad to discuss your options with you, so feel free to give us a call.

Under the SEC’s program, persons who voluntarily provide original information about a possible securities law violation that leads to the collection of monetary sanctions by the SEC of more than $1 million are entitled to an award of between 10% and 30% of the amount collected.

The most common violations reported by whistleblowers have involved corporate disclosures and financials, offering fraud and manipulation, according to the SEC’s Annual Report on the Whistleblower Program for 2012. Other categories of violations have included insider trading, trading and pricing, unregistered offerings, municipal securities and public pensions.

The most recent award recipient wished to keep his identity confidential. By law, the SEC takes steps to protect the confidentiality of whistleblowers. In order to submit a tip anonymously, the whistleblower must be represented by an attorney.

Employers are prohibited by law from retaliating against whistleblowers. It is unlawful to discharge, demote, suspend, harass, or discriminate against an employee who provides information under the SEC’s whistleblower program. Victims of wrongful retaliation may be entitled to reinstatement, double back pay, expenses and attorney’s fees.

Whistleblowers provide a valuable service to financial markets and society in general. If you believe you have information relating to a possible securities law violation by your employer, and would like to submit a tip to the SEC anonymously, The Doss Firm, LLC may be able to help.

Canellos worked as an assistant attorney to Ms. White while she was the U.S. Attorney for the Southern District of New York in the 1990s to early 2000s. Then he worked for six years as a litigation partner at Milbank, Tweed, Hadley & McCloy LLP. In 2009 he headed the SEC’s New York Regional Office from 2009 to 2012. Canellos has been serving as the SEC’s acting director of enforcement since January 2013.

Ceresney is joining the SEC after his tenure at Debevoise & Plimpton LLP. Ceresney was a partner when White headed the litigation department at Debevoise & Plimpton LLP.

The appointment of the enforcement co-directors is among the White’s first moves as head of the SEC.

Bao worked in the finance department at Abaxis Inc. and allegedly regularly provided material non-public information to Nguyen. Nguyen would then trade in advance of Abaxis’s company quarterly earning announcements. $144,910.00 was generated in illicit profits from this trading.

Furthermore, the SEC charged Nguyen last year with insider trading.

To settle the SEC’s charges, Bao agreed to pay $144,910 and consented to a five year ban on serving as an officer or director of a public company.

The SEC’s charges stem from its ongoing investigations into expert networks that have uncovered widespread insider trading at several hedge funds and other investment advisory firms. The investigations have so far resulted in enforcement actions against 40 entities or individuals that have reaped more than $430 million in alleged insider trading gains.

Regulation FD requires companies to distribute material information in a manner reasonably designed to get that information out to the general public broadly and non-exclusively. It is intended to ensure that all investors have the ability to gain access to material information at the same time.

The SEC has reported in the past that the fair disclosure rule “applies to social media and other emerging means of communication used by public companies the same way it applies to company websites.” In 2008, the SEC approved the use of websites to disseminate corporate information, if investors have been told to monitor the sites for announcements.

The SEC report concluded that companies are permitted to utilize social media outlets to announce key information in compliance with Regulation FD, so long as investors have been alerted about which social media will be used to disseminate such information.

However, the SEC noted that every case must be evaluated on its own facts, but “disclosure of material, nonpublic information on the personal social media site of an individual corporate officer…without advance notice to investors that the site may be used for this purpose…is unlikely to qualify as an acceptable method of disclosure under the securities laws.”

The SEC alleged that Teeple was tipped in advance of a July 2008 announcement that Foundry Networks Inc. had agreed to be acquired by Brocade Communication Systems Inc. for approximately $3 billion. Teeple then caused the San Francisco-based hedge fund advisory firm where he worked to buy Foundry shares in large quantities in the days leading up to the public announcement. The hedge funds managed by the firm reaped millions of dollars in profits when Foundry’s stock value increased upon the news of the acquisition.

In addition, Teeple tipped Denver-based investment professional John Johnson, who then made illegal trades based on the nonpublic information.

Furthermore, Riley tipped Teeple in advance of at least two other major announcements by Foundry, and Teeple’s firm traded on the nonpublic information to make profits or avoid losses.

In a separate action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Teeple, Riley, and Johnson.
The SEC’s complaint charges Teeple, Riley, and Johnson with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

The SEC alleged that Berkman touted to investors that he had special access to scarce sources of pre-IPO stock in Facebook, LinkedIn, Groupon, and Zynga. Then, instead of purchasing shares on investors’ behalf as promised, Berkman misused their investments to make Ponzi-like payments to earlier investors, fund personal expenses, and pay off claims against him in a bankruptcy case. He raised at least $13.2 million from 120 investors.

John B. Kern of Charleston, S.C., was also charged by the SEC with allegedly participating in the fraud as legal counsel to some of Mr. Berkman’s companies. When investors in Berkman’s phony Facebook fund began questioning what happened to their money after Facebook’s IPO occurred, Kern falsely assured them that their money was used to purchase pre-IPO Facebook stock being held for them by unnamed counterparties.

Mr. Berkman is expected to appear in U.S. District Court for the Middle District of Florida in Tampa on March 19, 2013.

According to the SEC’s complaint, Canadian stock promoters John Kirk, Benjamin Kirk, Dylan Boyle, James Hinton, and their associates, used false and misleading promotions to pump up trading in the stock of the two companies and made millions when they secretly dumped their own shares.

The SEC alleged that the promoters sent investors false and misleading emails about the companies through two websites they controlled, Skymark Research and Emerging Stock Report, and used “boiler room” sales calls to tout the stocks, falsely claiming that the recommendations were based on independent research by the websites.

The San Diego-based attorneys, Luis Carrillo and Wade Huettel, were central participants in the scheme because they allegedly helped the promoters conceal their ownership interests in the companies, drafted misleading public filings, and provided misleading legal opinions. As part of the scheme, their law firm, Carrillo Huettel LLP, secretly received proceeds of stock sales in the form of a sham “loan.”

The SEC is seeking to have the defendants return their allegedly ill-gotten gains, with interest, and to bar Carrillo, Huettel, de Beer, John Kirk, Benjamin Kirk, Boyle, and Hinton from participating in penny stock offerings and from serving as public company officers or directors. Furthermore, the SEC is seeking civil monetary penalties from the attorneys, their law firm, and from de Beer.

William M. Stephens was the unregistered broker. Donald W. Phillips was the former senior executive that headed up capital raising efforts for Ranieri Partners and was responsible for overseeing Stephen’s activities.

Federal securities laws require that an individual who solicits investments in return for transaction-based compensation be registered as a broker. The SEC’s investigation found that Stephens solicited investors for Ranieri Partners but was not a registered broker.

Ranieri Partners, Phillips, and Stephens agreed to settle the SEC’s charges. Ranieri Partners agreed to pay a penalty of $375,000, Phillips agreed to pay a penalty of $75,000, and Stephens agreed to be barred from the securities industry.

Merri Jo Gillette, Director of the SEC’s Chicago Regional Office said “registered brokers are subject to SEC oversight and examinations in order to monitor their conduct and protect the interests of investors…investors in Ranieri Partners’ funds were denied these protections because Stephens acted outside the boundaries of the law, and Phillips and the firm ignored the essence of his activities.”

According to the SEC, Illinois failed to inform investors about the impact of problems with its pension funding schedule. Illinois failed to disclose that its statutory plan significantly underfunded the state’s pension obligations and increased the risk to its overall financial condition. Illinois’ pension system was underfunded by $83 billion in 2011, with assets in the system covering only 43% of its liabilities. The state also misled investors about the effect of changes to its statutory plan.

Illinois, which implemented a number of remedial actions and issued corrective disclosures beginning in 2009, agreed to settle the SEC’s charges without admitting or denying the findings.

“Having a resolution and not an open-ended inquiry is a positive for the state to move forward for future bond issuance,” said Bridget Byron, executive director of finance at the Illinois state treasurer’s office.

The SEC’s proposal, called Regulation SCI, would replace the current voluntary compliance program with enforceable rules designed to better insulate the markets from vulnerabilities posed by systems technology issues.

SROs, certain alternative trading systems, plan processors, and certain exempt clearing agencies would be required to carefully design, develop, test, maintain, and survey systems that are integral to their operations. The proposed rules would require them to ensure their core technology meets certain standards, conduct business continuity testing, and provide certain notifications in the event of systems disruptions and other events.

“While it’s not possible to prevent every technological error that market participants may commit, we must ensure that our regulations are designed to minimize their impact on our markets and ultimately investors,” said SEC Chairman Walter.

The SEC’s complaint alleged that the RAHFCO Hedge Funds raised approximately $23.5 million from over 100 investors nationwide between 2007 and the funds’ collapse in May 2011. Additionally, the complaint alleged that the primary function of the Defendants’ scheme was to convince investors to invest in fraudulent pooled investments that purportedly traded in options and futures on the S&P 500 Index and in equities, then the Defendants siphoned off the invested funds for the Defendants’ own purposes.

The SEC’s complaint seeks permanent injunctions, third-tier civil penalties, disgorgement plus prejudgment interest, and other relief against all of the defendants.

In the alert, the SEC said “that in recent examinations, custody-related problems were identified in one-third of the firms reviewed, or about 140 firms. Advisors have failed to recognize that they maintain control of their clients’ assets, mixed together client, proprietary and employee assets in a single account and fallen short of surprise-exam requirements.”

The firms with problems were ordered to change their custody compliance policies and procedures, modify their business practices or devote more resources to custody issues. In the severe cases, the SEC examiner referred the incident to the SEC’s Division of Enforcement.

Chairman Elisse Walter stated “safeguarding of assets is central to investor protection, it is critical that investment advisors follow our rules when they maintain custody of their clients’ funds.”

Most investment advisors house their clients’ assets with a third-party custodian, such as Charles Schwab & Co. or TD Ameritrade Inc. Furthermore, most investment fraud occurs when the fraudster maintains clients’ money themselves.

The Doss Firm, LLC represents investors nationwide who have lost money as a result of investment fraud or due to faulty investment advice. If you believe that you may be a victim of investment fraud and would like to speak with us, please call our firm for a free consultation.

Specifically, the SEC is requesting data and other information from the public and interested parties about the benefits and costs of the current standards of conduct for broker-dealers and investment advisors when providing advice to retail customers, as well as alternative approaches to the standards of conduct.

SEC Chairman Elisse B. Walter said “Studies have shown that few investors realize that the standard of care they receive depends on the type of investment professional they use. And often investors do not know which type of financial professional they are relying on…This request for information will help us in our (SEC) ongoing consideration of alternative standards of conduct for certain broker-dealers and investment advisors, as well as potential harmonization of other aspects of regulation in this area.”

The examination priorities address issues that span the entire market as well as issues that relate specifically to particular business models and organizations.

• The market-wide priorities include:
• Fraud detection and prevention,
• Corporate governance and enterprise risk management,
• Conflicts of interest, and
• Technology controls.

• Priorities in each program area include:
• For investment advisers and investment companies — presence exams for newly registered private fund advisers, and payments by advisers and funds to entities that distribute mutual funds.
• For broker-dealers — sales practices and fraud, and compliance with the new market access rule.
• For market oversight — risk-based examinations of securities exchanges and FINRA, and order-type assessment.
• For clearing and settlement — For transfer agent exams, timely turnaround of items and transfers, accurate recordkeeping, and safeguarding of assets. For clearing agencies designated as systemically important, conduct annual examinations as required by the Dodd-Frank Act.

The priority list is not exhaustive and may be adjusted throughout the year.