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SEC, FINRA Enforcement: Advisors Get $3.6M Arb Award After Boss Faked Client Complaints

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Among recent enforcement actions were charges by the SEC against four California residents in an insider trading scheme; charges of real estate investment fraud against a Boston firm and its two principals by the Massachusetts Securities Division, and FINRA actions against one firm for email surveillance failures and another for inventing false customer complaints against two of its former advisors.

FINRA Arb Panel Awards Advisors $3.6M After Boss Faked Client Compaints

A FINRA arbitration panel has ordered San Ramon, Calif.-based Valentine Capital Asset Management Inc., and its owner, John Valentine, to pay $3.6 million to two former advisors of the firm after he came up with false customer complaints against them.

Valentine was ordered to pay $800,000 in compensatory damages and $2.5 million in punitive damages for his actions in instigating false claims against the advisors. In addition, William Leitch and Corey Casilio are also to be paid $338,000 in attorney fees and $30,000 in sanctions and other fees.

According to the panel’s findings, Valentine instigated false customer claims against Leitch and Casilio after they left his firm, and also orchestrated the dissemination of false accusations via the Web to damage their reputations and prevent potential customers from doing business with them.

In addition to the financial penalties, the panel also ordered the expungement of five customer complaints from Casilio’s record and two from Leitch’s, as well as a correction of each advisor’s U-5 so that they no longer reflect the bogus complaints.

SEC Charges Four With Insider Trading

The SEC has charged four northern California residents, Saleem Khan, his friend Roshanlal Chaganlal and Khan’s work colleagues Ranjan Mendonsa and Ammar Akbari, with insider trading of Ross Stores stock options based on nonpublic information about monthly sales results leaked by one of the retailer’s employees.

According to the agency, Khan was routinely tipped by his friend Roshanlal Chaganlal, who was a director in the finance department at Ross headquarters in Dublin, Calif. Chaganlal had access to confidential sales figures on an internal webpage limited to a relatively small group of Ross employees, and regularly shared that information with Khan so he could trade ahead of impending monthly sales announcements by Ross.

Besides trading in his own brokerage account, Khan traded in his brother-in-law Shahid Khan’s account as well as an account belonging to another acquaintance. Saleem Khan also gave the information to Mendonsa and Akbari.

Collectively the group made $12 million from the scheme. Saleem Khan brought in $5.4 million in profits in his own account and $6 million in profits in his brother-in-law’s account. Khan’s supervisor Mendonsa made approximately $800,000, and Akbari made approximately $2,000.

When the scheme started, Chaganlal gave $17,000 to Saleem Khan for insider trading in Ross securities using Shahid Khan’s account. Saleem Khan and Chaganlal tried to hide what they were doing by using two cashier’s checks for $8,500 purchased in the name of Chaganlal’s wife, who had a different surname. Saleem Khan later funneled $130,000 of the generated trading profits back to Chaganlal by using third-party intermediaries. In one instance, Khan wrote Akbari a check for $35,000, and Akbari in turn wrote two checks totaling $35,000 to Chaganlal’s wife. Another $75,000 was routed in a roundabout way to a title company so it could be credited at closing toward Chaganlal’s purchase of a newly built home.

Saleem Khan also separately made approximately $450,000 in illicit profits by insider trading in stock options of software company Taleo Corporation before it was acquired by Oracle Corporation in 2012. Khan began purchasing large numbers of options in Taleo six days before the merger announcement, based on nonpublic information he got from someone he knew at Oracle. Khan had never previously traded in Taleo securities.

In addition to the four traders, Shahid Khan and an acquaintance of Saleem Khan, Michael Koza, have also been charged as relief defendants. The two have agreed to settle the charges against them by paying the court the entire amount of insider trading profits remaining in their accounts, which total $240,741 for Shadid Khan and $31,713 for Koza.

The SEC seeks permanent injunctive relief, disgorgement of illicit profits plus interest, and financial penalties against Saleem Khan, Chaganlal, Mendonsa, and Akbari. The complaint also seeks an officer-and-director bar against Chaganlal. The investigation is continuing.

Cabot Investment Properties Charged With Defrauding Seniors

Massachusetts Secretary of the Commonwealth William Galvin has charged Boston-based Cabot Investment Properties LLC (CIP) and its principals, Carlton Cabot and Timothy Kroll, with embroiling seniors in a real estate fraud scheme.

According to the complaint, the firm sold retirees illiquid real estate investments, ran off with the profits, securitized the properties involved and sold notes to other investors. It then started foreclosure proceedings on the properties, putting the first batch of investors at risk.

The scheme started in August 2003, the complaint said, when CIP began offering income-producing tenants-in-common investments (TICs). The complaint said that CIP bought “18 separate malls, business centers, and other real estate properties across the nation and structured these properties as securities.” Then they sold interests in the TIC, an illiquid investment, to Massachusetts residents, most of them elderly, who were looking for retirement income. Massachusetts investors put more than $5 million into the TIC.

CIP, Cabot and Kroll misappropriated more than $9 million from investment proceeds, according to the complaint, via “wire transfers, material misrepresentations and omissions to investors, and misleading disclosures regarding investors’ financial exposure.”

Cabot and Kroll commingled rents, reserves and operating cash from the eight investments that made up the TIC and put the money into several CIP holding accounts, from which they wired millions into their own personal bank accounts and into the account of Cabot’s wife. They subsequently used the money to fund a “lavish lifestyle in Manhattan.”

Not only did they abscond with the money, but they also securitized the mortgages underlying the TIC into commercial mortgage-backed securities (CMBS), each of which was sold to a separate batch of investors as income-producing notes. The process put TIC investors’ liability further at risk because aggressive special servicers were authorized to start foreclosure proceedings to expedite collection of funds.

Investors not only were told that their investments were safe and they would not be liable, but the truth about the investments was hidden from them — Cabot and Kroll had all communications concerning defaults and other actions forwarded to them instead of to the investors who were liable for the pair’s actions.

The Enforcement Section of the Massachusetts Securities Division is seeking a cease-and-desist order, a permanent bar against the respondents, rescission offers to all Massachusetts residents who bought the securities and an administrative fine.

FINRA Censures, Fines Commonwealth for Botched Email Software Upgrade

Commonwealth Equity Services Inc., doing business as Commonwealth Financial Network, was censured by FINRA and fined $250,000 on findings that an incompatible software upgrade and subsequent failure to test the email supervisory system resulted in email surveillance failures.

According to the agency, Commonwealth updated the software that directs the flow of its registered representatives’ emails to the firm’s email retention server. However, the upgrade was not compatible with the surveillance tool the company uses for daily reviews of associated persons’ emails.

Since the company failed to test the email supervisory system during the software upgrade, it didn’t realize that the surveillance tool was neither surveilling the outgoing doing business as (DBA) emails of registered representatives in the firm’s branch offices nor forwarding a sampling of those emails to the firm’s compliance department for review.

During the first month the upgrade was in use, outgoing emails from half the DBA email domains maintained by the firm’s registered reps were not reviewed. Three months later, the firm’s supervisory system failed to perform a daily surveillance review of the outgoing emails from any of those DBA email domains.

Until the computerized supervisory system was fixed, registered representatives sent approximately 17 million emails; about 14 million of those outgoing emails were sent through the DBA domains. As a result, approximately 12.6 million of those outgoing emails, or about 90% of them, were not surveyed by the daily protocol.

FINRA also found that although the IT department had ongoing contact with the email vendor concerning the surveillance tool’s remediation, it failed to ensure all the outgoing DBA emails were surveilled. It also failed to notify the legal and compliance departments about the email surveillance system’s deficiencies until more than eight months after it learned of the problem with the surveillance tool. The firm’s WSPs at that time did not require the IT department to notify the legal and compliance departments when it discovered problems with the firm’s computerized supervisory system.

In addition, the firm discovered that its supervisory system also failed to monitor some representatives’ emails, both incoming and outgoing. The supervisory system maintained a computerized “directory” of personnel, but was unable to identify some registered representatives who had multiple listings in the directory. Because of this additional supervisory system breakdown, the firm failed to review approximately 474,380 of its registered representatives’ emails.

Check out Retirees Suffer as 401(k) Rollover Boom Enriches Brokers on ThinkAdvisor.


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