SEC Fines UBS for Improper Sales of Reverse Convertible Notes

The Securities and Exchange Commission has announced that UBS Financial Services will pay more than $15 million to settle charges related to unsuitable sales of reverse convertible notes (“RCNs”) to individual (“retail”) investors.  The SEC found that UBS failed to adequately educate and train its sales force in connection with the sale of RCNs as a result of which they had no reasonable basis for recommending them, and could not make proper disclosures to investors.

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.




Florida Invest Adviser Charged with Defrauding Georgia Clients

Fraud is always a danger in the world of investment advisers. In a recent example of this, the Securities and Exchange Commission announced fraud charges against Arthur F. Jacob, age 56, and his firm, Innovative Business Solutions LLC (“IBS”) of Florida.  Jacob is a disbarred attorney and a Certified Public Accountant whose history includes misappropriation of client funds, among other misconduct.  Neither Jacob nor IBS were registered with the SEC or any state as investment advisers, which is often a tell-tale sign of fraud.

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, as well as FINRA’s Brokercheck at

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.


SEC Announces Fraud Charges against Investment Manager

On June 29, 2015 the Securities and Exchange Commission announced fraud charges against Wisconsin-based investment advisory firm and owner Mark P. Welhouse of Welhouse and Associates Inc. The firm and owner are being charged with improperly allocating certain options trades that appreciated in value to personal and business accounts, while allocating other trades that depreciated in value to clients.

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.”

SEC Announces Charges against Atlanta Investment Firm and Two Executives Accused of Defrauding Police and Firefighter Pension Funds

On May 21, 2015 the Securities and Exchange Commission announced fraud charges against Gray Financial Group, Founder and President Laurence O. Gray, and co-CEO Robert C. Hubbard IV. According to the SEC, the advisory firm and the two executives breached their fiduciary responsibility by swaying Atlanta public pension find clients to invest in alternate investments funds offered by Gray Financial Group, despite knowing the investments would violate Georgia pension laws. The pension fund clients include Atlanta’s police, firefighters, and transit workers pension funds.

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.

ITT Educational Services and Two Executives Charged with Fraud by SEC

The Securities and Exchange Commission announced on May 12, 2015 that fraud charges were being filed against ITT Educational Services Inc., as well as Kevin Modany (chief executive officer), and Daniel Fitzpatrick (chief financial officer).

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.

Unregistered Investments Are Almost Always Unsuitable, and Are Often Fraudulent

Private placements are investments that have not been registered with the United States Securities and Exchange Commission. The lack of registration is either unlawful, or lawful due to an exemption from registration under the securities laws. Private placement investments are always high-risk investments that are complex, not transparent, and illiquid (cannot be readily sold) – despite the fact that they are often presented as having little or no risk, and are sometimes fraudulent.

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.

Anonymous SEC Whistleblower Awarded $150,000

On October 30, 2013, the Securities and Exchange Commission announced that is has awarded $150,000 to an anonymous whistleblower. It is the sixth award since the SEC Whistleblower program began two years ago. So far, the largest award is $14 million.

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.

Co-Directors of SEC’s Enforcement Division Named

On April 22, 2013, George Canellos and Andrew Ceresney were named as SEC’s Division of Enforcement co-directors. Both have ties to SEC’s new chairman Mary Jo White.

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.

SEC Charges Former Medical Device Company Employee for Illegally Tipping

On April 8, 2013, the SEC charged ThanhHa Bao, a former employee at Abaxis Inc. a California-based medical device manufacturer, with illegally tipping. Bao allegedly tipped confidential financial data to her brother, Tai Nguyen, who illegally traded in Abaxis Inc.’s stock and enabled his hedge fund clients, at Insight Research, to do the same.

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.

SEC Issues Report on Social Media Dissemination of Information

On July 3, 2012, Netflix CEO, Reed Hastings, possibly violated Reg FD when Hastings posted corporate information on his personal Facebook. However, on April 2, 2013, the SEC decided not to initiate an enforcement action or allege wrongdoing by Hastings or Netflix. The SEC recognized that there has been market uncertainty about the application of Regulation FD to social media.

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.”