Among recent actions by the SEC was the charging of a self-styled money manager for free-riding and fraud, while FINRA took on failures in WSPs and OATS compliance.
SEC Files Charges in Free-Ride Case
According to the SEC, Ronald Feldstein went for a free ride — literally — in a Bentley, thanks to a scheme in which he defrauded investors of almost half a million dollars and cost three brokerage firms more than $2 million.
Feldstein was charged by the SEC for a free-riding scheme in which he bought securities he never intended to pay for, should they prove unprofitable, and that he planned to pay for out of sales profits if the stocks went up. Instead, he planned to refuse to issue instructions to settle the trades and just walk away, leaving the broker-dealers holding the unprofitable positions.
He carried out this charade by means of three separate brokerage accounts in the names of two investment funds that he made up: Mara Capital Management and Vita Health of America. This lasted from September 2008 until February 2009.
Later in 2009, he tried a different strategy. He started pursuing longtime business acquaintances, among them a dry cleaner and a car leasing and servicing company. As a decades-long customer, he managed to persuade them to “invest” with him, offering such opportunities as a successful hedge fund, a promising penny stock, and a fashion company’s initial public offering.
But Feldstein took their money — some $450,000 — and ran, to the Hamptons and on gambling junkets, and to buy the aforementioned Bentley. The money never even made it into an investment account; he either deposited his investors’ funds into his own personal account or into another account belonging to an entity he owned that allowed him to spend the funds as he pleased.
The SEC charged Feldstein, Mara Capital and Vita Health of America. Trademore Capital Management was also charged as a relief defendant.
FINRA Fines G Research $1 Million on WSP Failures
G Research, formerly Gabelli & Co., was censured and fined $1 million by FINRA for written supervisory procedures that the agency said were not reasonably designed to bring about compliance with securities laws and regulations and NASD and FINRA rules when it came to private partnerships formed by firm registered representatives. FINRA also said the firm did not adequately supervise the private partnerships.
The WSPs did not provide adequate supervision on due diligence related to the hedge funds and funds of funds that were frequently offered to clients by the private partnerships. Among other shortcomings, the WSPs failed to provide specific guidance regarding the relative fees to be charged by the private partnerships. Contracts for private partnership investors obligated them to pay additional fees to invest with an affiliated advisor through a private partnership, but the WSPs contained no guidance on those fees, or when waivers to an investment minimum might be obtained.
There was also a failure to provide guidance on obligations imposed when members sell hedge funds and funds of hedge funds. The firm did not adequately evaluate a provision in the fund of funds’ subscription agreements that disavowed its obligation to perform due diligence on the fund manager.