Misrepresentations

August 17, 2016

The CFTC filed a civil enforcement action against Mirko Schacke of Antioch, California, and his company, TradeMasters USA, LLC, of Las Vegas, Nevada, charging them with fraudulently soliciting over $150,000 from at least 36 investors in connection with the purchase of futures trading software.  CFTC

August 8, 2016

Georgia and 42 other states announced a $100 million multistate settlement with Barclays Bank PLC and Barclays Capital Inc. for fraudulent and anti-competitive conduct involving the manipulation of the London interbank offered rate, or, Libor. This is a benchmark interest rate that affects financial instruments worth trillions of dollars and has a widespread impact on global markets and consumers. Barclays has agreed to pay $100 million, of which about $93 million will be used to reimburse government and nonprofit organizations that had Libor-linked swaps and other investment contracts with Barclays and that were harmed by the activity. A multistate investigation revealed that Barclays had manipulated Libor during the financial crisis period of 2007-2008 by understating the interest rates it would need to pay to borrow money in order to avoid the appearance that Barclays was in financial difficulty and would need to pay a higher rate than some of its peers. Government entities and not-for-profit organizations were defrauded when they entered into swaps and other investment instruments with Barclays without knowing that Barclays and other banks on the U.S. dollar-Libor-setting panel were manipulating Libor and colluding with other banks to do so. GA, VA, IL

July 26, 2016

Massachusetts-based State Street Bank and Trust Company agreed to pay a total of at least $382.4 million -- including $155 million to the DOJ, $167.4 million in disgorgement and penalties to the SEC, and at least $60 million to ERISA plan clients in an agreement with the Department of Labor -- to settle allegations that it deceived its custody clients when providing them with indirect foreign currency exchange (FX) services.  According to the government, State Street admitted that contrary to its representations to certain custody clients, it did not price FX transactions at prevailing interbank market rates and instead executed FX transactions by applying a predetermined, uniform mark-up (if the custody client was a FX purchaser) or mark-down (if the custody client was an FX seller) to the prevailing interbank rate for FX.  State Street is also alleged to have falsely informed custody clients that it provided “best execution” on FX transactions, that it guaranteed the most competitive rates available on FX transactions and that it priced FX transactions based on a variety of factors when, in fact, prices were largely driven by hidden mark-ups designed to maximize State Street’s profits.  The allegations originated from famed Bernie Madoff whistleblower Harry Markopolos under the whistleblower provisions of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).  State Street will pay an additional $147.6 to resolve private class action lawsuits filed by the bank’s customers alleging similar misconduct.  DOJ

July 28, 2016

The SEC filed an emergency action in federal court and obtained an asset freeze against Matthew E. White, Rodney A. Zehner, and Daniel J. Merandi who allegedly fraudulently issued $1 billion in unsecured corporate bonds out of a shell company they own and claimed invested money would be used to fund a resort project.  In fact, they never came close to raising the funds necessary to start the project.  In the meantime, they pocketed the $5.6 million in investor funds they had raised and used it for personal purchases at Saks Fifth Avenue, Gucci, Louis Vuitton, Prada, and Versace.  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

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 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 13, 2016

Two California-based municipal advisory firms, School Business Consulting (SBC) and Keygent LLC, along with several of their top executives, will collectively pay $200,000 to settle charges that they used deceptive practices when soliciting the business of five California school districts.  SBC was advising the five school districts on their hiring of financial professionals.  At the same time, SBC was retained by Keygent which was seeking the business of these five school districts.  SBC shared the confidential information of the school districts with Keygent, including questions to be asked in Keygent’s interviews with the school districts and the details of competitors’ proposals.  The school districts were unaware that Keygent had the benefit of these confidential details through the hiring process.  SEC

June 10, 2016

The SEC announced fraud charges and an asset freeze obtained against Thomas J. Connerton, a Connecticut man accused of misleading people into investing in his company and then taking their money for personal use.  The SEC alleges that Connerton told investors that his company, Safety Technologies LLC, was developing a material to make surgical gloves better resistant to cuts or punctures.  He claimed that several major glove manufacturers wanted the technology and his company was on the brink of imminent deals that would result in large payouts for investors in his company.  No such deals were ever close to materializing and Connerton emptied the company’s bank account by writing a series of checks to himself and using investor funds for his own expenses.  Of more than 50 investors in Safety Technologies, six were women Connerton met through online dating services, and fourteen were friends or family of those women.  SEC