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Regulation and Compliance > Federal Regulation > FINRA

SEC, FINRA Enforcement: 3 Busted in Fake Movie Scam

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Royal Bank of Scotland (RBS) has agreed to a $275 million settlement with plaintiffs in a class-action case that pitted investors against RBS and others over the sale of mortgage-backed securities.

In addition, a former Merrill Lynch broker got 10 years in prison after a guilty plea and FINRA took action against one firm for unfair pricing and another for inappropriate fees.

SEC Charges Three in Movie Investment Scam

Three California residents, Los Angeles-based attorney Samuel Braslau, Rand Chortkoff of Encino and Stuart Rawitt, were charged by the SEC with defrauding investors in a purported multimillion-dollar movie project that would supposedly star well-known actors and generate blockbuster investment returns.

Braslau masterminded the scheme, and set up companies named Mutual Entertainment LLC and Film Shoot LLC to raise funds. In January 2011, Mutual Entertainment spent $25,000 to purchase the rights to Marcel, an unpublished story set in Paris during World War II. After that, Mutual Entertainment began raising investor money through a boiler-room operation that Chortkoff operated out of Van Nuys.

High-pressure salespeople, including Rawitt, sucked in more than 60 investors across the country and bilked them out of a total of $1.8 million for the movie, which was first titled Marcel and later changed to The Smuggler. Investors were promised that high-profile actors like Donald Sutherland and Jean-Claude Van Damme would appear in the movie, but none of the actors were even approached about the project.

Instead of using investor funds for movie production expenses as promised — investors were told that 63.5% was destined for such expenses — Braslau, Chortkoff and Rawitt took the money and spent it, leaving barely a pittance remaining — certainly not enough for a full-length feature film, as investors were promised.

That was far from the only lie investors were told. Rawitt said the movie would bring in a 300% return on investment, claimed that they had nearly reached their fundraising goal of $7.5 million and that the movie would begin shooting in the summer of 2013. He also managed to give investors the impression that Mutual Entertainment was a successful film company whose track record encompassed the Harold and Kumar movies produced by Carsten Lorenz. To top it off, he promised investors returns on action figures and other movie tie-ins, when nobody had bothered to try to sell any such rights.

Rawitt was the subject of a prior SEC enforcement action in 2009, when he was charged for his involvement in an oil-and-gas scheme.

The SEC’s investigation is continuing. In a parallel action, the U.S. Attorney’s Office for the Central District of California has announced criminal charges against Braslau, Chortkoff and Rawitt.

Former Merrill Lynch Broker Gets 10 Years for Ponzi Scheme

Gary Lane, a former Bank of America Merrill Lynch broker who pleaded guilty to running a Ponzi scheme that bilked investors of $2.7 million, was sentenced to 10 years in prison. During the scheme, which ran from 2005 to 2011, Lane told his investors, who were either elderly or inexperienced, that if they put money into a non-BofA account he would put it into U.S. Treasury bonds that would pay more than 6% interest and mature in only two years. But, according to Daniel Bogden, the U.S. attorney for the District of Nevada, those bonds never existed, and the money instead went into Lane’s wife’s ETrade account, where Lane used it to pay for everything from interest to earlier investors to his own personal expenses.

In September, Lane pleaded guilty to mail fraud and tax evasion. The firm, which was not named in any of the lawsuits that resulted from Lane’s activities, reported him to law enforcement officials and have also made restitution to Lane’s customers.

Lane, who was fired from Merrill in March 2011 when the firm learned what he was up to, was also barred by FINRA from association with any member firms in September of the same year.

RBS Settles MBS Litigation for $275 Million

RBS has agreed to settle with the plaintiffs, to the tune of $275 million, in a class-action case brought by investors against the bank and other defendants over investments in mortgage-backed securities (MBS).

The plaintiffs, led by New Jersey Carpenters Health Fund and the Boilermaker Blacksmith Pension Trust, and including class representatives Iowa Public Employees’ Retirement System and Midwest Operating Engineers Pension Trust Fund, have agreed to the settlement, the third largest among the class actions that took on banks for selling the bundles of troubled loans that fueled the financial crisis in 2008.

RBS and the other defendants were accused of hiding the fact that the mortgage loans behind the securities failed to meet underwriting requirements. The securities, linked to the Harborview Mortgage Loan Trusts, dropped to junk status. That in turn spurred the plaintiffs to sue, charging that the public offering documents used to sell the MBS did not disclose the failure to satisfy underwriting requirements. The settlement must still be approved by a federal judge in New York.

FINRA Censures, Fines UBS on Unfair Pricing, TRACE Failures

UBS Financial Services Inc. was censured by FINRA and fined $260,000 after the agency found that the firm failed to give its customers best pricing on shares that it sold them from its own accounts or purchased from them for its own accounts.Instead, according to FINRA, it bought or sold such shares at an aggregate price (including any markdown or markup) that was not fair and reasonable, considering all relevant factors, including best judgment on the fair market value of the securities at the time of the transactions and of any securities exchanged or traded in connection with the transactions; the expense involved in carrying out the transactions; allowing the broker or dealer a profit; and the total dollar amount of the transactions. FINRA said that the firm failed to use reasonable diligence to offer its customers the best prices under market conditions and other relevant factors.

In addition, FINRA also found that the firm failed to report block S1 transactions in TRACE-eligible agency debt securities and TRACE-eligible corporate debt securities to the Trade Reporting and Compliance Engine within 15 minutes of the execution time.

The firm neither admitted nor denied the findings, but consented to their entry. It has also paid a total of $131,534.81 in restitution to address violations of MSRB, NASD and FINRA rules.

FINRA Censures, Fines E.J. De La Rosa on Unfair Reimbursements

E.J. De La Rosa & Co., Inc. was censured by FINRA and fined $200,000, as well as being ordered to pay restitution of $43,564 to issuers over reimbursements that it sought unfairly over the issuance of municipal securities. The firm was also ordered to certify to FINRA that it has completed a review of its written supervisory procedures (WSPs) and systems and put in place revisions to both to ensure compliance over the matter.

The firm was a member of Cal PSA, a municipal securities association, and was actively involved in Cal PSA’s board of directors. Most of Cal PSA’s members were underwriters of bond issuances, although there is no statutory or regulatory requirement that a firm join the association in order to underwrite a bond offering. The firm received an invoice from Cal PSA for underwriting assessments when it participated in the underwriting of transactions, and paid a total of $68,371.30.

The firm knew that Cal PSA billed its members on a per-bond basis, regardless of whether there was any direct relationship between that bond issuance and the association’s activities, and regardless of whether the association provided any services required for the underwriting.

The firm, however, sought and received reimbursement of those voluntary payments from the proceeds of municipal and state bond offerings, despite not having disclosed that those payments were not actually expenses connected with the issuance of the bonds. Therefore, requests for reimbursement were unfair because they did not disclose to issuers the nature of the fees.

FINRA also found that the firm’s WSPs were not reasonably designed to prevent such actions.

While it neither admitted nor denied FINRA’s findings, the firm did agree to their entry. It has also, in response to a request from the Treasurer of the State of California, returned $24,806.84 to multiple issuers, as a refund for the municipal securities association underwriting assessments that were reimbursed from offering proceeds.


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