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SEC, FINRA Enforcement: Franklin Resources, Chairman Sued for $150M Over Long-Ago Stock Bequest

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Among recent enforcement actions, the Securities and Exchange Commission charged a man from Ontario with masterminding a fraudulent trading scheme and ordered another firm to hire a dedicated chief compliance officer. The Financial Industry Regulatory Authority expelled an investment firm and barred its CEO for fraud; in two separate actions censured and fined Citigroup Global Markets; and suspended and fined a chief compliance officer over AML failures.

And in a lawsuit filed in San Francisco, Anthony Miele III is seeking to recover $150 million in stocks and dividends from Franklin Resources that were allegedly a never-received bequest.

Franklin Resources, Johnson Sued for $150M Over Stock Bequest

Franklin Resources and its retired chairman Charles Johnson are the target of a lawsuit that seeks to recover some $150 million in stocks and dividends. Before his retirement, Johnson built the publicly traded mutual fund firm into a force majeure in the industry.

A lawsuit filed in federal court in San Francisco by Anthony Miele III of Manhattan says that, although he was left Franklin shares that were worth $16,000 at the time of his father’s death in 1974, he was unaware of the bequest and that Johnson, among others, hid the shares from him. Now, Miele says, the shares are worth $130 million, plus another $20 million in uncashed dividends.

Miele alleges that he was never told about the stock or the dividends, according to the suit, which accuses Johnson of “breach of fiduciary duty, negligence, fraudulent concealment and negligent prevention of assistance.”

SEC Slams Shelton Financial for Hiding Mutual Fund Payments to BD

The SEC has censured and fined Shelton Financial Group and its founder and owner Jeffrey Shelton, and ordered them to bring in a dedicated chief compliance officer.

According to the SEC, the firm had an arrangement with its broker-dealer that it would be compensated for all client assets that were invested in certain mutual funds. At first the firm failed to disclose the arrangement and the conflict of interest that it represented to clients, and when later it did disclose the arrangement, at first it failed to do so accurately.

Shelton served as the firm’s CCO from 2004 until June of 2010. In 2007 he hired a chief operating officer who in 2010 would become the firm’s new CCO. In 2012, the SEC discovered through an onsite exam that the firm’s policies and procedures were inadequate regarding conflicts of interest and its compliance policies were not tailored to its business.

Although the firm attempted to correct the disclosure failures to clients and on its Form ADV, it was not done correctly; the CCO used existing language that had been written by Shelton. As a result, clients were unaware that a conflict of interest existed. The firm failed to disclose the conflict of interest until a brochure produced in October of 2013.

The SEC ordered that, in addition to hiring a dedicated CCO and bringing in an independent compliance consultant, the firm and Shelton have been ordered to pay total disgorgement of $99,114.19 and prejudgment interest of $20,952.91, as well as a civil penalty of $70,000. The firm and Shelton neither admitted nor denied the charges.

SEC Charges Ontario Man With Fraudulent Trading

The SEC has charged Aleksandr Milrud, who lives in Ontario, Canada, with putting together a market manipulation scheme that used “layering”—the placing of orders by a trader that are used solely to trick others into buying or selling U.S. publicly traded stocks at artificially inflated or depressed prices.

According to the agency, since at least January 2013, Milrud recruited online traders chiefly based in China and Korea, provided them with access to trading accounts and technology and taught them on how to steer clear of regulators while engaged in layering. Among the strategies he used to avoid detection were having his traders use multiple computers, Internet protocol (IP) addresses, and user names. He provided traders with at least two accounts; one was for what Milrud called “the dirty work” of layering, and the other was used to execute what he termed “clean” trades at prices affected by the dirty work of the first account.

Milrud had his traders layer a wide variety of stocks while limiting the number of trades and the price changes; he hoped that by doing this, the “money” trades would not be noticed. He also distanced himself from some of the transactions by wiring funds to an offshore bank account and having the money delivered to him as cash in a suitcase.

The SEC is seeking a final judgment ordering Milrud to return his allegedly ill-gotten gains with interest plus penalties and permanently barring him from future violations. In a parallel action, the U.S. Attorney’s Office for the District of New Jersey has announced criminal charges against Milrud.

The investigation is continuing.

FINRA Expels John Carris Investments for Stock Manipulation; CEO Looted Firm to Pay for Tattoos

A FINRA hearing panel has expelled John Carris Investments LLC (JCI) and barred CEO George Carris from the securities industry for fraud and suitability violations.

In September of 2013, FINRA filed a temporary cease-and-desist order against JCI and Carris, to stop the firm’s solicitations of customers to buy shares of Fibrocell Science Inc. stock in the absence of proper disclosures. It also said that Carris used firm funds to pay personal expenses that ranged from tattoos to pet care, while failing to pay hundreds of thousands of dollars in employee payroll taxes to the U.S. Treasury.

The hearing panel has found that JCI and George Carris recklessly sold shares of stock and promissory notes issued by JCI’s parent company using misleading statements and by omitting material facts. Andrey Tkatchenko, a registered representative, was suspended for two years and fined $10,000 for recommending the stock and promissory notes without a reasonable basis.

JCI and Carris were also expelled and barred for manipulating the price of Fibrocell stock. The panel found that JCI and Carris manipulated the stock price through unfunded purchases of large blocks of the stock and prearranged trading accomplished through reported matched limit orders.

Head trader Jason Barter was suspended for 18 months and fined $5,000 for his role in the manipulation of the Fibrocell stock. He must requalify to enter the securities industry.

The ruling resolves the charges brought in September by FINRA’s Department of Enforcement.

FINRA Hits Citigroup Global Markets for Unregistered Managers, Short-Selling Violations

Citigroup Global Markets was the target of two separate FINRA enforcement actions. In the first, the firm was censured and fined $175,000 for permitting a group of portfolio managers who were not registered with FINRA in any capacity to direct the Citigroup Principal Strategies Desk’s trading activity from approximately November 2007 until January 2012.

According to the agency, the firm also during this period allowed a managing director who was not registered with FINRA in any capacity to supervise one of the portfolio managers.

In the second action, FINRA censured and fined the firm $125,000, as well as requiring it to revise its written supervisory procedures (WSPs), after it found that, on 9,396 occasions, the firm accepted a short sale order in an equity security from another person, or effected a short sale in an equity security for its own account, without either borrowing the security or thinking that it would be able to borrow the security.

In addition, FINRA found that the firm submitted inaccurate short interest position reports, and that the firm’s supervisory system was not reasonably designed to achieve for compliance with applicable laws, regulations and rules concerning accurate short interest reporting.

In each case, the firm neither admitted nor denied the findings, but consented to the sanctions.

FINRA Censures, Fines CCO for AML, Supervisory Failures

Dennis Young was suspended and fined $11,500 by FINRA for failures in monitoring, detecting, investigating and reporting potentially suspicious activity related to the deposit and liquidation of low-priced securities through various accounts at his firm.

Young, who was the anti-money laundering compliance officer (AMLCO) of the firm, did not address shortcomings in the firm’s AML procedures related to those securities.

In addition, the firm’s clearing firm was concerned about the legitimacy of the issuers whose securities were being deposited and liquidated through a foreign institutional customer’s accounts. The clearing firm raised inquiries that included specific allegations of prior market manipulative activities by executives for certain issuers. However, Young never investigated and thus failed to find red flags.

FINRA also said that Young, acting in his capacity as the firm’s CCO, failed to establish, maintain and enforce an adequate supervisory system, including WSPs, reasonably designed to achieve compliance in relation to the deposit and liquidation of low-priced securities. Instead, he “unreasonably” relied on branch personnel and the firm’s clearing firm to keep tabs on compliance.

 

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