Among the recent enforcement actions taken by the Department of Labor (DOL), the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) were a settlement of $1.27 million to be paid by an advisory firm to 13 pension plans; charges in an insider trading ring; and a number of fines and censures over failures to report, to control trading limits, to retain electronic messages and to set reasonable markups.
Advisory Firm to Pay $1.27 Million to Pension Plans after DOL Investigation
The Department of Labor announced that USI Advisors, a wholly owned subsidiary of USI Consulting Group, a Goldman Sachs Capital Partners company, has agreed to pay $1,265,608.70 to 13 pension plans to resolve alleged violations of the Employee Retirement Income Security Act between 2004 and 2010.
The Glastonbury, Conn.-based fiduciary investment advisor was found in an investigation to have made investments in mutual funds on behalf of ERISA-covered defined benefit plan clients and received 12b-1 fees from those funds. However, it failed to fully disclose the receipt of the 12b-1 fees or to use those fees for the benefit of the plans, either by directly crediting the amounts to the plans or by offsetting other fees the plans would be obligated to pay the company.
Under the terms of the settlement, USI Advisors has agreed not to provide bundled investment advisory and actuarial services to any ERISA-covered defined benefit plan client without first entering into a written agreement, contract or letter of understanding that specifies the services provided and whether the company or its affiliates will act as a fiduciary to those plans. USI Advisors also will provide to clients a description of all compensation and fees received, in any form, from any source, involving any investment or transaction related to them.
SEC Charges 8 With Insider Tranding on Pharma Merger
The SEC announced that it has charged eight individuals living in the Griffin, Ga., area for their involvement in an insider trading ring that generated more than $500,000 in illegal profits based on nonpublic information about an upcoming company merger.
According to the SEC’s complaint filed in federal court in Atlanta, local accountant Thomas Melvin Jr. exploited confidential information from a client who was on the board of directors at Chattem, a Tennessee-based pharmaceutical company known for such over-the-counter products as Allegra, Gold Bond and Icy Hot. In late 2009, after Chattem’s board was informed that the French pharmaceutical manufacturer Sanofi, then Sanofi-Aventis, made a tender offer to purchase the company, Melvin’s client sought his professional advice on the financial impact of his Chattem stock options being involuntarily exercised due to a change in control of the company.
The Chattem board member made clear to Melvin during their private conversations and meetings that the topic of discussion was confidential. The board member shared the likely increase in stock price, $20 to $25 per share, from the pending transaction as well as its potential timing. Melvin breached his duty of confidentiality to the client and proceeded to tip three friends and a partner at his accounting firm, Melvin, Rooks & Howell PC, about the likely increase in the company’s stock price as a result of the impending transaction. Those individuals then knowingly traded on the confidential information ahead of the public announcement of the merger, and some even tipped others who traded illegally as well.
The four told by Melvin were C. Roan Berry, a friend who lives in Jackson, Ga.; Michael Cain, a friend who lives in Griffin, Ga.; Joel Jinks, a friend who lives inGriffin and was a one-time candidate for local sheriff; and R. Jeffrey Rooks, Melvin’s longtime accounting partner who lives in Griffin.
The SEC alleges that Berry tipped his friend and neighbor in Jackson, Ashley J. Coots, who in turn tipped his friend and former co-worker Casey D. Jackson, who lives in Atlanta; in addition, it alleges that Cain, who works at a brokerage firm, tipped his friend Peter C. Doffing, who lives in Milner, Ga., and purchased out-of-the-money call options based on the nonpublic information.
Four of the eight men—Berry, Coots, Jackson and Rooks—agreed to settle the SEC’s charges and pay back all of their ill-gotten gains plus interest and penalties for a combined total of more than $175,000. The SEC will proceed with litigation against Melvin, Cain, Doffing and Jinks.
Exception Monitoring Failed
Merrill Lynch, Pierce, Fenner & Smith Inc. was censured and fined $450,000 on FINRA findings that, prior to March 1, 2009, it did not have an exception-based reporting system that specifically monitored for potentially unsuitable concentration levels in structured products in customer accounts. That affected sales of about 650,000 structured product purchases between Jan. 1, 2006, and March 1, 2009, of which more than half involved structured product offerings issued by the firm’s parent company.
Without admitting or denying the findings, the firm consented to the sanctions and entry of findings that stated that while the firm, in supervising sales of securities to retail customers, relies upon automated exception-based reporting systems to flag transactions and/or accounts that met certain predefined criteria, prior to March 1, 2009, did not have a system in place that specifically monitored for structured product levels of unsuitable levels in client accounts.
MSSB Fined After Overnight Trading Losses
Morgan Stanley Smith Barney was censured and fined $450,000 by FINRA over findings that the firm failed to adequately safeguard or control a system that allowed a junior trader to accumulate a position more than double that of its agency desk limit and many times his own position limit that resulted in substantial losses for the firm.
Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings on the junior trader’s actions. He was responsible for trading Fannie Mae and Freddie Mac products in a cash book and Eurodollar and Treasuries futures contracts in a futures book, and was permitted to trade remotely so he could trade after hours and react to global events. However, at the end of one trading day, he had accumulated a futures position of approximately $744 million, more than double the agency desk’s limit of $350 million and several multiples over his position limit of $116 million. He also traded at home and overnight so that, by the following morning, he had further exceeded his position limit with holdings in Eurodollar and Treasury futures of $1.33 billion.