Among recent enforcement actions were a $1 million fine and $353,000 in restitution ordered by FINRA against StateTrust Investments over excessive markups and markdowns in fraudulent corporate bond transactions; charges against a China-based company and its CEO by the SEC for misleading investors about its financial condition; SEC charges against a medical device company for misleading shareholders about the FDA’s opinion of its product; and an amicus brief filed by the SEC in a case concerning market manipulation and misrepresentation.
FINRA Fines StateTrust Investments $1 Million, Orders Restitution
StateTrust Investments, Inc. was fined $1.045 million by FINRA and ordered to pay restitution of $353,000, plus interest, to customers who were affected by excessive markups and markdowns in fraudulent corporate bond transactions. In addition, the agency also sanctioned the firm’s head trader, Jose Luis Turnes, suspending him for six months and fining him $75,000.
The agency had already taken action against Jeffrey Cimbal, StateTrust’s chief compliance officer, who in April was fined $20,000 and suspended for five months in a principal capacity for failing to supervise Turnes.
FINRA found that the firm charged excessive markups or markdowns to customers in a total of 563 transactions. In 227 of those transactions, the markups and markdowns were greater than 5%, and in 85 of those instances, StateTrust acted through Turnes to charge excessive markups and markdowns that deviated 8% to more than 23% from the prevailing market price.
In each of those 85 instances, when StateTrust bought bonds from customers, it did so at prices that were 8% or more below the prevailing market price and then sold them to its bank or insurance affiliate at a markup. When it bought bonds from its bank or insurance affiliate, it sold them to customers at a markup 8% or more above the prevailing market rate.
During that period, Turnes was also the chairman and largest indirect shareholder of the bank and insurance affiliates.
StateTrust, Turnes and Cimbal neither admitted nor denied the charges but have consented to the entry of FINRA’s findings.
SEC Charges China MediaExpress With Fraud
Investigation by the SEC’s cross-border working group has resulted in the agency filing charges against China MediaExpress, a company that is publicly traded in the U.S. but which purports to operate a television advertising network on intercity and airport express buses in China. The company is charged with misleading investors about its financial condition by inflating its cash balances by millions of dollars.
China MediaExpress became a publicly traded company in October 2009. According to the SEC, it then began to materially overstate its cash balances in both press releases and SEC filings, with the company’s chairman and CEO, Zheng Cheng, signing off on the public filings and attesting to their accuracy.
In its 2009 annual report, for example, which was filed on March 31, 2010, it claimed to have $57 million in cash when its cash balance was actually $141,000. In November that year, it issued a press release claiming a cash balance of $170 million at the end of Q3 of its fiscal year when the actual figure was $10 million. The company also falsely claimed two multinational corporations as clients.
The misrepresentations sent the company’s stock price soaring; it tripled to more than $20 per share. At the same time, the company received $53 million from a hedge fund for a sale of the company’s stock to that fund.
Zheng had agreements in place to receive stock if the company met net income targets, so he had plenty of incentive to falsify the figures. In fact, he netted around $6 million in company stock (2009 value) when the company met its net income targets for FY 2009.