Securities Fraud

November 5, 2015

The SEC filed securities fraud charges against Scottish trader James Alan Craig based on false “tweets” authored by Craig which caused sharp drops in the stock prices of two companies.  Craig created fake twitter accounts designed to look like the twitter accounts of well-known securities research firms.  His false tweets, claiming that the target companies were under investigation, caused the share price of Audience, Inc. to fall 28% and the share price of Sarepta Therapeutics, Inc. to fall 16%.  Craig bought and sold shares of the two companies in a largely unsuccessful attempt to profit from the sharp price swings.  SEC

November 3, 2015

Private equity firm Fenway Partners and four executives will pay over $10 million to settle SEC charges of failure to disclose conflicts of interest.  An SEC investigation found that Fenway and the charged executives did not fully disclose to a client fund and investors the details of several transactions involving more than $20 million in payments by the client fund or affiliated portfolio companies.  In short, investors were not told that portfolio company fees were rerouted to a Fenway affiliate, allowing Fenway to avoid providing the benefits of those fees to the client in the form of management fee offsets.  SEC

October 28, 2015

The SEC barred two brokers from now-defunct Connecticut brokerage Rochdale Securities.  According to the SEC’s allegations, the two brokers defrauded customers by using their order information to advise two longtime customers to trade ahead of these orders.  As a result, the favored customers profited from the trades, the defrauded customers generally received worse prices than if their orders had been routed directly to the market, and the brokers received double trading commissions.  SEC

October 27, 2015

The St. Joe Company, a Florida-based real estate developer and landowner, its former top executives, and two former accounting department directors, agreed to pay, collectively, $3.725 million in penalties and disgorgement to settle SEC claims of improperly accounting for the declining value of residential real estate developments during the financial crisis.  According to the SEC’s order instituting settled administrative proceedings, the respondents repeatedly failed to properly apply generally accepted accounting practices in testing St. Joe’s real estate developments for impairment, resulting in the failure to take required write-downs on properties hit hard by the financial crisis.  SEC

October 26, 2015

Credit rating agency DRBS Inc. agreed to pay almost $6 million to settle SEC charges of misrepresenting its surveillance methodology for ratings of certain complex financial instruments during a three-year period.  An SEC investigation found that the firm misrepresented that it would monitor on a monthly basis each of its outstanding ratings of U.S. residential mortgage-backed securities (RMBS) and re-securitized real estate mortgage investment conduits (Re-REMICs) by conducting a three-step quantitative analysis and subjecting each rating to review by a surveillance committee.  In fact, the review was not conducted on a monthly basis and when the committee convened it reviewed only a limited subset of ratings.  DRBS did not have adequate staffing and technological resources to conduct the surveillance promised by its surveillance methodology.  SEC

October 19, 2015

UBS advisory firms, UBS Willow Management LLC and UBS Fund Advisor LLC, agreed to pay $17.5 million to settle SEC charges arising from a failure to disclose a change in investment strategy used by UBS Willow Fund, a closed-end fund they advised.  UBS Willow Fund was marketed as one that primarily invested in distressed debt, a strategy predicated on the debt increasing in value.  In 2008, instead of focusing on investments in debt, UBS Willow Management had the fund purchase large quantities of credit default swaps, a strategy predicated on the debt decreasing in value.  Due to this change in strategy, the fund started incurring large losses and was liquidated in 2012.  UBS Willow Management did not provide adequate disclosure of the change in investment strategy to the fund’s investors or board of directors.  UBS Fund Advisor, which retained ultimate control over the fund, was aware of the change in investment strategy and failed to provide appropriate supervision by allowing the change without adequate disclosure.  SEC

October 14, 2015

As part of its enforcement initiative focused on violations of Rule 105 of Regulation M, the SEC settled enforcement actions against six firms: Auriga Global Investors, Sociedad de Valores, S.A., Harvest Capital Strategies LLC, J.P. Morgan Investment Management Inc., Omega Advisors, Inc., Sabby Management LLC, and War Chest Capital Partners LLC.  Rule 105 is intended to preserve the independent pricing mechanisms of the securities markets and prevent stock price manipulation by prohibiting firms from participating in public stock offerings after selling short those same stocks.  Through its Rule 105 Initiative, first announced in 2013, the SEC has taken action on every Rule 105 violation over a de minimis amount that has come to its attention – promoting a message of zero tolerance for these offenses.  As a result of this Initiative, the SEC has seen a dramatic decrease in Rule 105 violations.  The firms identified in this round of enforcement have agreed to pay over $2.5 million to settle the SEC’s charges.  SEC

October 13, 2015

UBS AG will pay $19.5 million to settle charges that it made false or misleading statements and omissions in offering materials provided to U.S. investors in structured notes linked to a proprietary exchange trading strategy.  This is the first case by the SEC involving misstatements and omissions by an issuer of structured notes, a complex financial product that typically consists of a debt security with a derivative tied to the performance of other securities, commodities, currencies, or proprietary indices.  The return on the structured note is linked to the performance of the derivative over the life of the note.  UBS, one of the largest issuers of structured notes in the world, settled the SEC’s charges that it misled U.S. investors in structured notes tied to the V10 Currency Index with Volatility Cap by falsely stating that the investment relied on a “transparent” and “systematic” currency trading strategy using “market prices” to calculate financial instruments underlying the index, when, in fact, undisclosed hedging trades by UBS reduced the index price by about 5%.  SEC

October 8, 2015

New York-based proprietary trading firm, Briargate Trading LLP, and its co-founder, Eric Oscher, will pay more than $1 million to settle charges by the SEC of “spoofing.”  An SEC investigation found that Briargate and Oscher orchestrated a scheme in which they placed sham orders (“spoofs”), to create the appearance of interest in stocks and manipulate their prices, and then placed bona fide orders on the opposite side of the market to take advantage of the artificially inflated or depressed prices.  Immediately after the bona fide orders were executed, the spoof orders were cancelled.  Through this conduct, perpetrated between October 2011 and September 2012, Oscher and Briargate reaped approximately $525,000 in profits.  SEC

October 7, 2015

Three private equity fund advisers within The Blackstone Group will pay nearly $39 million to settle charges they failed to fully inform investors about benefits that the advisers obtained from accelerated monitoring fees and discounts on legal fees.  An SEC investigation found  that advisers Blackstone Management Partners, Blackstone Management Partners III, and Blackstone Management Partners IV, failed to adequately disclose the acceleration of monitoring fees paid by fund-owned portfolio companies prior to the companies’ sale or initial public offering.  These payments essentially reduced the value of the portfolio companies prior to the sale, to the detriment of the funds and their investors.  Additionally, the fund investors were not informed about a separate fee arrangement that provided Blackstone with a much greater discount on services by an outside law firm than the discount the law firm provided to the funds.  SEC