Financial Institution Fraud

May 8, 2018

The SEC announced the hedge fund advisory firm Visium Asset Management LP has agreed to settle charges related to asset mismarking and insider trading by its privately managed hedge funds and portfolio managers. Separately, the firm’s CFO agreed to settle charges that he failed to respond appropriately to red flags that should have alerted him to the asset mismarking. The SEC’s order finds that two portfolio managers of New York-based Visium falsely inflated the value of securities held by hedge funds it advised, causing the funds to falsely inflate returns, overstate their aggregate net asset value, and pay approximately $3.15 million in excess fees to Visium. The order also finds that certain Visium portfolio managers traded in the securities of pharmaceutical companies in advance of two generic drug approvals by the U.S. Food and Drug Administration (FDA). The trades were based on confidential information received from a former FDA official working as a paid consultant to Visium. Trades were also made in the securities of home healthcare providers in advance of a proposed cut to certain Medicare reimbursement rates by the Centers for Medicare and Medicaid Services (CMS), based on confidential information received from a former CMS employee working as a paid consultant to Visium. Visium agreed to settle the SEC’s charges by, among other things, disgorging illicit profits totaling more than $4.7 million plus interest of $720,711, and paying a penalty of more than $4.7 million. Ku agreed to pay a $100,000 penalty and to be suspended from the securities industry for twelve months. Visium and Ku each consented to the applicable SEC order without admitting or denying the findings. SEC

April 6, 2018

The SEC announced that three investment advisers have settled charges for breaching fiduciary duties to clients and generating millions of dollars of improper fees in the process. According to the SEC’s orders, PNC Investments LLC, Securities America Advisors Inc., and Geneos Wealth Management Inc. failed to disclose conflicts of interest and violated their duty to seek best execution by investing advisory clients in higher-cost mutual fund shares when lower-cost shares of the same funds were available. The SEC also charged Geneos for failing to identify its revised mutual fund selection disclosures as a “material change” in its 2017 disclosure brochure. Collectively, the firms will pay almost $15 million, with more than $12 million going to harmed clients. The SEC’s orders find that PNCI, SAA, and Geneos each violated provisions of the Investment Advisers Act of 1940, including an antifraud provision. Without admitting or denying the findings, the advisers each consented to a cease-and-desist order and a censure. The orders require PNCI to pay $6,407,770 in disgorgement and prejudgment interest along with a $900,000 penalty. SAA must pay $5,053,448 in disgorgement and prejudgment interest along with a $775,000 penalty. Geneos must pay $1,558,121 in disgorgement and prejudgment interest along with a $250,000 penalty. SEC

March 28, 2018

Aegis Capital Corporation, a New York-based brokerage firm, has admitted that it failed to file Suspicious Activity Reports (SARs) on numerous suspicious transactions.Broker-dealers are required to file SARs for certain transactions suspected to involve fraudulent activity or have no business or apparent lawful purpose. The SEC’s order found that Aegis failed to file SARs on suspicious transactions that raised red flags indicating the transactions were potentially related to the market manipulation of low-priced securities. The SEC’s order found that Aegis willfully violated an SEC financial recordkeeping and reporting rule. Aegis agreed to pay a $750,000 penalty and retain a compliance expert.  FINRA also announced a settlement with Aegis today that includes an additional $550,000 penalty. In a separate settled order, Aegis’ former anti-money laundering (AML) compliance officer Kevin McKenna was found to have aided and abetted the firm’s violations. Aegis CEO Robert Eide was found to have caused them. Without admitting or denying the SEC’s findings, Eide and McKenna agreed to pay penalties of $40,000 and $20,000, respectively.  McKenna also agreed to a prohibition from serving in a compliance or AML capacity in the securities industry with a right to reapply. SEC 

March 19, 2018

The SEC announced that Electronic Transaction Clearing (ETC), a registered broker-dealer headquartered in Los Angeles, has agreed to settle charges that it illegally placed more than $25 million of customers’ securities at risk in order to fund its own operations. Among other things, the SEC found that ETC violated the Customer Protection Rule, which is intended to safeguard customers’ cash and securities so that they can be promptly returned if a broker-dealer fails. It requires broker-dealers to maintain physical possession or control of customers’ fully paid and excess margin securities. According to the SEC’s order, ETC put customer securities at risk numerous times in 2015. ETC improperly transferred almost $8 million of fully paid securities belonging to cash customers to an account at another clearing firm to meet margin requirements on borrowed funds, and the firm used more than $17 million of securities of two customers to borrow funds without consent. The order also finds that ETC improperly commingled customers’ securities and allowed a customer’s excess margin securities to be loaned out by the other clearing firm. The SEC’s order charged ETC with violating the Securities Exchange Act and Customer Protection Rule as well as other related rules. Without admitting or denying the SEC’s findings, ETC agreed to entry of the order, to pay an $80,000 penalty, to cease and desist from committing or causing any similar violations in the future, and to be censured. ETC cooperated with the SEC’s investigation and has taken remedial steps to prevent future violations. SEC

March 8, 2018

The SEC announced settled charges against Merrill Lynch, Pierce, Fenner & Smith Inc. for its failure to perform required gatekeeping functions in the unregistered sales of securities on behalf of a China-based issuer and its affiliates. The SEC’s order found that Merrill Lynch sold almost three million shares of Longtop Financial Technological Limited’s securities into the market despite red flags indicating that the sales could be part of an unlawful unregistered distribution.  Ultimately, the distribution generated almost $38 million in proceeds for the overseas issuer and its affiliates. In settlement, without admitting or denying the SEC’s findings, the firm agreed to be censured and consented to the order requiring it to cease and desist from committing or causing any future violations of the registration provisions of the Securities Act.  The order also requires Merrill Lynch to pay a penalty of $1.25 million and more than $154,000 in disgorgement and prejudgment interest from commissions and fees earned on the improper sales. SEC

March 6, 2018

The SEC announced that it charged the New York Stock Exchange and two affiliated exchanges with regulatory failures in connection with multiple episodes, including several disruptive market events.  The charges arose from five separate investigations and include the first-ever charged violation of Regulation SCI.  The Commission adopted Reg SCI to strengthen the technology infrastructure and integrity of the U.S. securities markets, and today charged two NYSE exchanges with violating Reg SCI’s business continuity and disaster recovery requirement.  In settlement, the exchanges agreed to pay a $14 million penalty. According to the SEC’s order, the violations include erroneously implementing a market-wide regulatory halt, negligently misrepresenting stock prices as “automated” despite extensive system issues ahead of a total shutdown of two of the exchanges, and applying price collars during unusual market volatility on Aug. 24, 2015, without a rule in effect to permit them – a move that resulted in order imbalances being resolved more slowly. SEC

February 28, 2018

The SEC announced that Minnesota-based broker-dealer and investment adviser Ameriprise Financial Services  has agreed to settle charges for recommending and selling higher-fee mutual fund shares to retail retirement account customers and for failing to provide sales charge waivers. According to the SEC’s order, Ameriprise Financial Services Inc. disadvantaged certain retirement account customers by failing to ascertain their eligibility for less expensive mutual fund share classes.  Ameriprise recommended and sold these customers more expensive mutual fund share classes when less expensive share classes were available.  Ameriprise also failed to disclose that it would receive greater compensation from the purchases and that the purchases would negatively impact the overall return on the customers’ investments. The SEC’s order instituted a settled administrative and cease-and-desist proceeding. Ameriprise consented to a cease-and-desist order, a censure, and a penalty of $230,000. SEC

February 12, 2018

The SEC announced an enforcement action against Deutsche Bank Securities, Inc. that resulted in a repayment of more than $3.7 million to consumers, including $1.48 million in disgorgement payments. The enforcement action was based on an SEC investigation that found traders and salespeople making false and misleading statements when negotiating sales of commercial mortgage-backed securities. The false and misleading statements led customers to overpay  for the securities and Deutsche Bank failed to have an adequate compliance program to prevent and detect the misconduct by its employees. SEC