It was a big-dollar week for financial misdeeds and their doers. New York regulators reached a settlement with Deutsche Bank for $2.4 billion on LIBOR manipulation, while the Financial Industry Regulatory Authority ordered RBC to fork over $1.4 million in fines and restitution on unsuitable sales of reverse convertibles.
In addition, the SEC charged 10 individuals for fraud in a penny stock scheme; a real estate investment firm for failure to make required public filings; and a mutual fund firm and its chief compliance officer for disclosure failures on CEO pay.
Deutsche Bank to Pay $2.4 Billion Over LIBOR Manipulation
Deutsche Bank has settled with a passle of regulators from New York to London over the manipulation of benchmark interest rates, including LIBOR, the London interbank offered rate.
The settlement will cost the bank $2.4 billion and calls for the firing of employees involved in the actions and the installation of an independent monitor who will look for violations of New York state banking laws, according to New York financial services superintendent Benjamin Lawsky.
From approximately 2005 through 2009, certain Deutsche Bank traders frequently requested that certain submitters submit rate contributions that would benefit the traders’ trading positions, rather than the rates that complied with the IBOR definitions, for LIBOR, EURIBOR (the Euro Interbank Offered Rate) and TIBOR (the Euroyen Tokyo Interbank Offered Rate). In addition, Deutsche Bank also communicated and coordinated with employees of other banks and financial institutions regarding their respective rate contributions in advance of an IBOR submission.
A bank’s IBOR rates are intended to correspond to the cost at which the bank concludes it can borrow funds, so the rates are an indicator of a bank’s financial health. If a bank’s submission is high, it suggests that the bank is either already paying a high amount to borrow funds, or would have to do so. This could indicate a liquidity problem and serve as a sign that the bank is experiencing financial difficulty.
Traders and submitters at Deutsche Bank knew the IBOR rates did not accurately reflect their definitions. Trails of internal messages indicated that the rate-setting had little to do with reality and everything to do with manipulation. For example, a 2009 email from a vice president to a trader said, "TIBOR is a corrupt fixing and DB is part of it!"
While the investigation resulted in the termination of many employees involved in the manipulation, including within management, others remained. As part of the settlement, the bank has been ordered to terminate seven employees who played a role in the misconduct but who remain employed by the bank: one London-based managing director, four London-based directors, one London-based vice president, and one Frankfurt-based vice president.
Ten of the individuals centrally involved in the misconduct were previously terminated as a result of the investigation, but four were reinstated pursuant to a German Labour Court determination, and two of them are still at the bank. Those employees reinstated due to the court decision who remain at the bank shall not be allowed to hold or assume any duties, responsibilities or activities involving compliance, IBOR submissions, or any matter relating to U.S. or U.S. dollar operations.
The penalty to be paid by the bank includes $600 million to the New York State Department of Financial Services (NYDFS), $800 million to the Commodity Futures Trading Commission (CFTC), $775 million to the U.S. Department of Justice (DOJ), and 227 million GBP (approximately $340 million) to the United Kingdom’s Financial Conduct Authority (FCA).
FINRA has ordered RBC Capital Markets to pay a $1 million fine and approximately $434,000 in restitution to customers after the agency found supervisory failures that resulted in the sales of unsuitable reverse convertibles.
According to the agency, RBC did not have supervisory systems in place that would flag transactions for review by a supervisor when reverse convertibles were sold to customers. That was not only a FINRA violation but also ignored the firm’s own guidelines.
RBC’s suitability guidelines for the sale of reverse convertibles set specific criteria for customer investment objectives, annual income, net worth, liquid net worth and investment experience, but these guidelines were not followed. As a result, the firm failed to detect the sale by 99 of its registered representatives of 364 reverse convertible transactions in 218 accounts that were unsuitable for those customers.
The customers incurred losses totaling at least $1.1 million. RBC made payments to numerous customers pursuant to the settlement of a class action lawsuit; FINRA ordered restitution to the remainder of affected customers.
The firm has neither admitted nor denied the findings, but consented to the sanctions.
SEC Charges 10 in Penny Stock Scheme
The SEC has charged 10 people with fraud in a scheme to offer and sell penny stock in undisclosed “blank check” companies bound for reverse mergers while misrepresenting to the public that they were promising startups with business plans.
According to the agency, Daniel McKelvey of Foster City, California; Alvin Mirman of Sarasota, Florida; and Steven Sanders of Lake Worth, Florida, managed to get around the requirements for blank check companies that are designed to keep them from being used in reverse mergers for pump-and-dump schemes.
They did this by creating undisclosed blank check companies and installing figurehead company officers, but claiming in registration statements and other SEC filings that the companies were pursuing real business ventures under these officers. They did not disclose that the companies were controlled at all times by McKelvey, Mirman or Sanders for the sole purpose of entering into reverse mergers with unidentified companies so they could profit from the sales.
The three collectively developed nearly two dozen undisclosed blank check companies and sold most of them for a total of approximately $6 million. They were only stopped because of an SEC stop order last year that led to the suspension of the registration statements of four issuers before they could be further packaged for sale.
The scheme involved hundreds of phony certifications filed with the companies’ SEC filings as well as communications from impersonating email accounts, management representation letters to accountants, notarizations on applications to the Financial Industry Regulatory Authority, and securities purchase agreements used in the sales of the undisclosed blank check companies.
The SEC also charged Steven Sanders’ brother Edward Sanders of Coral Springs, Florida; Scott Hughes of Duluth, Georgia; and Jeffrey Lamson of El Dorado Hills, California, with participating by acting as corporate nominees with knowledge of the false business plans, drafting or providing false business plans, or recruiting other nominee officers.
In addition to the six, four other figurehead officers and directors were charged. Edward Farmer of Sarasota, Florida; William Gaffney of Cumming, Georgia; Kevin Miller of Alpharetta, Georgia; and Ronald Warren of Peachtree Corners, Georgia, all agreed to settle their cases in separate administrative proceedings without admitting or denying the charges.
The SEC seeks disgorgement of ill-gotten gains plus prejudgment interest, financial penalties and permanent injunctions as well as officer-and-director bars and penny stock bars against McKelvey, Mirman, the Sanders brothers, Hughes and Lamson. Four relief defendants have also been named to recover the proceeds: Mirman’s wife, Ilene Mirman; a company managed by McKelvey called Forte Capital Partners LLC; and two companies managed by Steven Sanders, AU Consulting LLC and MBN Consulting LLC.
The investigation is continuing.
The SEC has charged real estate investment firm W2007 Grace Acquisition I Inc., which is indirectly owned by one or more private equity funds affiliated with The Goldman Sachs Group Inc., with failing to make required public filings.
According to the agency, W2007 Grace went “dark” in November 2007, after its reporting obligations for its class B and class C preferred shares were suspended upon its filing with the SEC a notice of suspension of its duty to file public reports pursuant to Section 15(d) of the Securities Exchange Act of 1934. At the time, W2007 Grace had fewer than 300 holders of record of the preferred shares.
Once the suspension took effect, the rules required W2007 Grace to resume reporting if the number of holders of record on the first day of any subsequent fiscal year was 300 or more. However, W2007 Grace failed to appropriately classify certain distinct corporations and custodial accounts as single holders of record, which led it to incorrectly include that it had fewer than 300 holders of record on Jan. 1, 2014. As a result it did not resume making public filings in 2014, which it was required to do.
The firm has agreed to settle the SEC’s charges relating to eight missed filings in administrative proceedings. It will pay $640,000 and must comply with additional conditions.
Firm and CFO Fined by SEC on CEO Pay Disclosures
The SEC has charged Kornitzer Capital Management and its CFO and former chief compliance officer Barry Koster on charges that they failed to accurately disclose how KCM allocated the expense of pay for KCM founder and CEO John Kornitzer with regard to the Buffalo Funds, Kornitzer’s mutual fund family.
According to the agency, while Koster was supposed to accurately disclose the percentage of Kornitzer’s pay allocated to the funds, which the funds’ board of trustees was told was “based on estimated labor hours,” instead Koster adjusted Kornitzer’s pay to maintain the semblance of a fairly consistent annual pretax net profit margin.
As a result, the board was provided with false information on how profitable the firm was with regard to how it managed the funds. This meant the board could not make educated decisions on the suitability of KCM’s advisory contracts.
KCM and Koster have agreed to settle without admitting or denying the charges. KCM is to pay a fine of $50,000, while Koster, in addition to no longer serving as CCO to either the firm or the funds, will pay $25,000.
--- Check out SEC Fines BlackRock Over Energy Fund Manager Who Owned Oil Company on ThinkAdvisor.