More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
Among recent enforcement actions by the SEC were a bar against radio personality Raymond Lucia associating with any investment advisor, broker or dealer, as well as other penalties, for his “Buckets of Money” violations; a freeze on the proceeds of illegal distributions of Biozoom stock; and a freeze on insider trader assets in the case of Onyx Pharmaceuticals. Also, a $9.5 million fine was levied by FINRA and exchanges on Newedge for failing to supervise trading by clients.
'Buckets of Money' Violations Bring Bar, Fines
Radio personality Raymond Lucia Sr., who in September of last year was the target of an SEC administrative proceeding over promoting his “Buckets of Money” strategy while never having backtested it despite claims to the contrary, is the focus of another ruling.
Cameron Elliot, SEC administrative law judge, barred Lucia from associating with any investment advisor, broker or dealer. The judge also revoked investment advisor registrations for him and his firm, Raymond J. Lucia Cos. (RJLC), and also imposed a $50,000 penalty against him and a $250,000 penalty against RJLC. The judge’s decision found that that RJLC had violated investment advisor antifraud statutes and that Lucia had aided and abetted RJLC’s violations.
Until the SEC got onto his case, Lucia had given investment seminars at which he touted his “Buckets of Money” strategy. At those seminars he claimed that extensive backtesting over extensive bear-market periods proved the strategy’s validity. In fact, however, he and his firm had done little, if any, backtesting to verify those claims.
FINRA, Exchanges Hit Newedge With $9.5M Supervisory Fine
FINRA along with BATS Exchange, New York Stock Exchange, NYSE Arca and NASDAQ censured and fined Newedge USA of Chicago $9.5 million for failing to supervise trading by clients that directly accessed U.S. equities markets through Newedge's order routing platform and/or internet service providers (known as "direct market access," or "DMA") or routed orders directly to market centers (known as "sponsored access," or "SA").
Newedge also violated Regulation SHO and SEC Emergency Orders concerning short sales, and failed to obtain and retain books and records.
FINRA and the exchanges found that Newedge did not have sufficient procedures, adequate surveillance tools, or necessary information to monitor DMA and SA client trading. Newedge's supervisory violations occurred over a four-year period, during which numerous internal documents noted the firm's deficiencies. Even after these "red flags" were raised, Newedge did not take adequate steps to satisfy its supervisory obligations, FINRA found.
Purse Maker-Turned-Biomed Developer Is Focus of Insider Trading Case
Eight Argentine citizens have been charged, and their U.S. brokerage accounts frozen, on allegations of insider trading in the unregistered sale of millions of shares of Biozoom. Two other Argentine citizens who owned Biozoom shares but had not yet sold them have also seen the assets in their U.S. brokerage accounts frozen. Trading in the company’s shares was suspended the last week of June on concerns that insider trading was taking place.
In April, Biozoom, formerly Entertainment Art, announced that it was changing its name and making a drastic change in its business model; instead of producing leather bags, it was going to develop biomedical technology. The ten defendants, from March to June 2013, received more than 20 million shares of Entertainment Art; that amounted to one-third of the company’s total outstanding shares. The defendants claimed to have acquired the bulk of the shares in March from Entertainment Art shareholders who had bought them in private placements that began in 2007.
But that didn’t stop the defendants, who deposited their Biozoom shares into their accounts as shares that could be freely traded. They then proceeded to do just that, despite the fact that no registration statement was filed with the SEC for any of the sales transactions. Starting in the middle of May, over the course of a one-month period, eight of them sold more than 14 million shares, which yielded almost $34 million. Nearly $17 million of that amount was wired to overseas bank accounts. There is approximately $16 million in cash in the frozen U.S. brokerage accounts.
Magdalena Tavella, Andres Horacio Ficicchia, Gonzalo Garcia Blaya, Lucia Mariana Hernando, Cecilia De Lorenzo, Adriana Rosa Bagattin, Daniela Patricia Goldman and Mariano Pablo Ferrari are the eight defendants who have already sold shares. Mariano Graciarena and Fernando Loureyro have not yet sold the shares they hold.
The SEC is seeking return of the selling defendants’ allegedly ill-gotten sale proceeds, and civil penalties, as well as preliminary and permanent injunctions against nonselling defendants Graciarena and Loureyro, because of the likelihood that both defendants will offer or sell their Biozoom shares to the public.
The investigation is continuing.
Foreign Accounts’ Assets Frozen in Insider Trading Case
The SEC swooped in before courts closed for the July 4 holiday to obtain emergency freeze orders for foreign accounts used by traders hoping to cash in on insider information.
Onyx Pharmaceuticals had received an acquisition offer from Amgen and was slated to announce that fact, along with its rejection of the offer, on Sunday, June 30. In advance of the announcement, traders gambled that the news would send the stock higher, and on the three trading days before the announcement was made, June 26, 27 and 28, they loaded up on call options for the stock.
Onyx was the recipient of an unsolicited proposal from Amgen to acquire all of Onyx's outstanding shares and share equivalents for $120 per share in cash. The former planned an announcement on June 30 of the offer from Amgen, as well as the news that it had rejected the offer and instead had authorized its financial advisors to contact potential acquirers who may have an interest in a transaction with Onyx.
The $120 price per share offered by Amgen represented a 38% premium to Onyx's closing share price on Friday June 28. The announcement, however, caused Onyx's share price, which closed at $86.82 on Friday, to rise more than 51% on Monday, July 1, and its stock’s trading volume increased by more than 900% that same day. The traders, using their inside information, made about $4.6 million in profit on the call options they’d bought in those three days before the announcement was made.
Many of those options bought by the unknown traders were out of the money; also, the SEC said that the trades were suspicious in both timing and size, since they represented large increases over the historical volume for those call options purchased.
The unknown traders have been charged, and the SEC also seeks a final judgment ordering the traders to disgorge their ill-gotten gains with interest pay financial penalties, and to permanently bar them from future violations. The investigation continues.