Archive

July 22, 2016

Accountant Nicholas Bottini will pay a $25,000 penalty and has been permanently suspended from appearing and practicing before the SEC, after conducting a faulty audit of the financial statements of ContinuityX Solutions, Inc., a publicly-traded company that claimed to sell internet services to businesses and whose executives have since been charged by the SEC for allegedly engineering a scheme to grossly overstate the company’s revenue through fraudulent sales.  New York-based accounting firm EFP Rotenberg LLP, where Bottini was a partner at the time, will also pay a $100,000 penalty to settle the SEC’s charges and is prohibited from accepting new public company clients for one year.  SEC

July 14, 2016

Investment advisory firm RiverFront Investment Group will pay $300,000 to settle charges that it failed to properly prepare clients for additional transaction costs beyond the “wrap fees” they expected to pay to cover the costs of bundled services.  In wrap fee programs, subadvisers typically use a sponsoring brokerage firm to execute their trades on behalf of clients and the costs of those trades are included in the annual wrap fee that each client pays.  An SEC investigation found that RiverFront disclosed to investors in ADV forms that client trades were typically executed through the sponsoring broker so the wrap fee would cover the transaction costs.  But RiverFront actually used brokers besides the wrap program sponsor to execute the majority of its wrap program trading, resulting in additional costs to clients for those transactions.  While RiverFront did disclose that some “trading away” from the sponsoring broker could occur, the firm inaccurately described the frequency, rendering its disclosures materially misleading.  SEC

July 12, 2016

Citigroup Global Markets will pay a $7 million penalty and admit wrongdoing to settle charges that a computer coding error caused the firm to provide the agency with incomplete “blue sheet” information about trades it executed.  According to the SEC’s order, the coding error occurred in the software that Citigroup used from May 1999 to April 2014 to process SEC requests for blue sheet data, including the time of trades, types of trades, volume traded, prices, and other customer identifying information.  Consequently, during that period, Citigroup omitted 26,810 securities transactions from its responses to more than 2,300 blue sheet requests.  After discovering the coding error, Citigroup failed to report the incident to the SEC or take any steps to produce the omitted data until nine months later.  SEC

June 24, 2016

The SEC charged four companies and eight individuals in connection with an $80 million oil and gas fraud orchestrated by Chris Faulkner, a Dallas man who calls himself the “Frack Master” for his purported expertise in hydraulic fracturing.  The SEC charged Faulkner, CEO of Breitling Energy Corporation (BECC), with disseminating false and misleading offering materials, misappropriating millions of dollars of investor funds, and attempting to manipulate BECC’s stock.  According to the SEC’s complaint, Faulkner started the scheme through privately-held Breitling Oil and Gas Corporation (BOG), which offered and sold turnkey oil and gas working interests.  Faulker ran most of BOG’s operations while co-owners Parker Hallam and Michael Miller oversaw the sales process.  The SEC alleges that BOG’s offering materials contained false statements and omissions about Faulkner’s experience, estimates for drilling costs, how investor funds would be used, and baseless production projections prepared by a geologist whose affiliation with BOG was undisclosed.  The scheme evolved to include BOG’s successor, BECG, a reporting company with shares traded on OTC Link, and two affiliated companies Crude Energy LLC and later Patriot Energy Inc.  Faulkner allegedly established Crude and Patriot to deceive investors through offerings similar to those conducted by BOG.  The SEC alleges that BOG, Crude, and Patriot raised more than $80 million from investors as part of these deceptive offerings.  The SEC further alleges that Faulkner misappropriated at least $30 million of investor funds for personal expenses including lavish meals and entertainment, international travel, cars, jewelry, gentlemen’s clubs, and personal escorts.  In the midst of this fraud, Faulkner engaged in a scheme to manipulate the price of BECC’s stock by placing trades at the end of the day to “mark the close” of the stock.  SEC

June 23, 2016

Merrill Lynch will pay $10 million to settle charges that it was responsible for misleading statements in offering materials provided to retail investors for structured notes linked to a proprietary volatility index.  According to the SEC’s order, the offering materials emphasized that the notes were subject to a 2% sales commission and .75% annual fee.  Due to the impact of these costs over the five-year term of the notes, the volatility index would need to increase by 5.93% from its starting value in order for investors to earn back their original investment on the maturity date.  But the offering materials failed to adequately disclose a third cost included in the index known as the “execution factor” that imposed a cost of 1.5% of the index value each quarter.  The notes were issued by Merrill Lynch’s parent company Bank of America Corporation and Merrill Lynch had principal responsibility for drafting and reviewing the retail pricing supplements.  The SEC’s order finds that Merrill Lynch did not have in place effective policies or procedures to ensure its personnel drafted and approved disclosures that adequately disclosed the impact of the execution factor.  SEC

June 23, 2016

Merrill Lynch will pay $415 million and admit wrongdoing to settle charges that it misused customer cash to generate profits for the firm and failed to safeguard customer securities from the claims of its creditors.  An SEC investigation found that Merrill Lynch violated the SEC’s Customer Protection Rule by misusing customer cash that rightfully should have been deposited in a reserve account.  Merrill Lynch engaged in complex options trades that lacked economic substance and artificially reduced the required deposit of customer cash in the reserve account.  The maneuver freed up billions of dollars per week from 2009 to 2012 that Merrill Lynch used to finance its own trading activities.  Had Merrill Lynch failed in the midst of these trades, the firms’ customers would have been exposed to a massive shortfall in the reserve account.  In addition, according to the SEC’s order, Merrill Lynch further violated the Customer Protection Rule by failing to adhere to requirements that fully-paid-for customer securities be held in lien-free accounts and shielded from claims by third parties should the firm collapse.  In addition to the Customer Protection Rule violations, Merrill Lynch violated Exchange Act 21F-17 by using language in severance agreements that operated to impede employees from voluntarily providing information to the SEC.  SEC

June 22, 2016

The SEC obtained an emergency court order to freeze the assets of Idris Dayo Mustapha, a UK resident charged with intruding into the online brokerage accounts of U.S. investors to make unauthorized stock trades that allowed him to profit on trades in his own account.  The SEC’s complaint alleges that in April and May of 2016, Mustapha hacked into numerous accounts of U.S. customers of broker-dealers in and outside the U.S, placed stock trades without the customers’ knowledge, and then traded in the same stocks through his brokerage account.  SEC

June 21, 2016

Former President of UNO Charter School Network Inc. and CEO of United Neighborhood Organization of Chicago, Juan Rangel, will pay $10,000 to settle charges related to his role in a misleading $37.5 million bond offering to build three charter schools.  The SEC alleged that Rangel negligently approved and signed a bond offering statement that omitted the charter schools’ multi-million-dollar contracts with two brothers of UNO’s COO – conflicted transactions that could have threatened UNO’s ability to repay bond investors.  According to the SEC’s complaint, in 2010 and 2011, UNO entered into grant agreement with the Illinois Department of Commerce and Economic Opportunity (IDCEO) to build three charter schools.  Rangel signed the agreements, which required UNO to certify that no conflict of interest existed and to immediately notify IDCEO in writing if any conflicts subsequently arose.  The complaint alleges that UNO breached the agreement when, at Rangel’s direction, it contracted with its COO’s brothers, agreeing to pay $11 million to one brother’s window company and $1.9 million to another brother for construction services.  UNO did not notify IDCEO in writing about either transaction and its offering statement disclosed only the smaller contract.  The offering statement also did not disclose that by breaching its agreement with IDCEO, the agency could seek to recover the grants, requiring UNO to liquidate its charter schools to repay them, losing the assets it depended on to repay bond investors.  SEC

June 21, 2016

The SEC has filed charges and obtained an asset freeze against investment adviser Ash Narayan for allegedly siphoning millions of dollars from accounts he managed for professional athletes and investing them in The Ticket Reserve, a struggling online sports and entertainment ticket business on whose board he served.  The SEC’s complaint alleges that Narayan transferred $33 million from clients’ accounts to The Ticket Reserve, typically without their knowledge or consent and often using forged or unauthorized signatures.  Narayan received nearly $2 million in hidden compensation from the company, most of it directly traceable to funds stolen from his clients.  According to the SEC’s complaint, The Ticket Reserve also made Ponzi-like payments to existing investors using money from the new investors.  The SEC also charged The Ticket Reserve CEO Richard Harmon and COO John Kaptrosky with participating in the scheme by making undisclosed finder’s fee to payments to Narayan out of his clients’ funds and approving and executing Ponzi-like payments.  SEC

June 16, 2016

The SEC announced charges against Christopher Salis, former global vice president at SAP America, for receiving thousands of dollars in kickbacks for tipping Douglas Miller in advance of SAP’s impending acquisition of Concur Technologies.  Miller then tipped his brother, Edward Miller, and mutual friend, Barrett Biehl, as they rushed to open online brokerage accounts and make risky, short-term trades in Concur call options so they could profit substantially when the deal was publicly announced.  The SEC has also linked Salis and Douglas Miller to suspicious trades in 2007 that were made in advance of a tender for a company called Business Objects where Salis worked at the time.  SEC