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Enforcement Roundup: Wells Fargo, JPMorgan Slammed Over Mortgage Kickbacks

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Among recent enforcement actions, the Consumer Financial Protection Bureau ordered JPMorgan Chase & Co., Wells Fargo and a loan officer to pay fines, saying they illegally traded referrals to a title company for marketing services.

Meanwhile, the Securities and Exchange Commission filed charges against attorneys and auditors in a phony mining scheme, an investment advisory firm and its manager in a fraud scheme, and a former executive at an engineering firm for Foreign Corrupt Practices Act violations.

In addition, FINRA censured and fined a firm for inadequate supervision that led to compliance failures.

CFPB Orders Wells Fargo, JPMorgan Chase to Pay More Than $35M Over Mortgage Kickbacks

The Consumer Financial Protection Bureau and the Maryland attorney general took action against Wells Fargo and JPMorgan Chase for an illegal marketing services kickback scheme they allegedly participated in with Genuine Title, a title company that is no longer in business.

Also targets of the action were former Wells Fargo employee Todd Cohen and his wife, Elaine Oliphant Cohen.

According to the CFPB, Genuine Title, which was based in Maryland, offered real estate closing services from 2005 until it went out of business in April 2014. Genuine Title gave the banks’ loan officers cash, marketing materials, and consumer information in exchange for business referrals.

Among the services the company offered as part of the payoffs were purchasing, analyzing and providing data on consumers, and mailing consumers letters with the banks’ logos. In exchange, the banks’ loan officers would refer homebuyers to the company for closing services. This scheme was especially profitable for the loan officers, who generally work on commission.

More than 100 Wells Fargo loan officers in at least 18 branches, largely in Maryland and Virginia, participated in this scheme, along with at least six Chase loan officers in three different branches in Maryland, Virginia and New York.

Cohen was employed by Wells Fargo as a loan officer from April 2009 through August 2010, and not only got marketing materials but cash payments — which were made to his then-girlfriend in an effort to disguise them.

Subject to court approval, Wells Fargo will pay $10.8 million in redress and $24 million in fines. Chase will pay approximately $300,000 in redress and a $600,000 fine. Cohen and Oliphant Cohen will pay a $30,000 fine, and Cohen will be banned from the mortgage industry for two years.

SEC: Attorneys, Auditors Faked Mining Firms to Bilk Stock Investors

The SEC has charged attorneys, auditors, and others for involvement in a microcap scheme that was shut down last year when the agency suspended the registration statements of 20 purported mining companies being used to scam investors in phony stock offerings.

According to the agency, the scheme was masterminded by Canadian attorney and stock promoter John Briner. Briner, after being suspended by the SEC from practicing on SEC-regulated entities, hid behind clients and associates to run shell companies that were supposedly engaged in mining exploration. Briner made all the decisions while others were nominally in charge, according to the companies’ registration statements. Those charged who are going to court are:

Colorado-based attorney Diane Dalmy, who allegedly provided opinion letters for 18 of the mining companies in which she claimed to have conducted an investigation of the companies’ stock issuance.

Nevada-based audit firm De Joya Griffith LLC and partners Arthur De Joya, Jason Griffith, Philip Zhang and Chris Whetman, whom Briner brought in to audit the financial statements of some of the mining companies. They not only ignored red flags of fraud, the auditing work they did was so cursory that it could not properly be termed auditing.

Texas-based audit firm M&K CPAS PLLC and partners Matt Manis, Jon Ridenour, and Ben Ortego, who were also hired by Briner to audit some of the companies’ statements. They too ignored red flags of fraud and didn’t really conduct audits at all.

Others who were charged but have settled with the SEC without admitting or denying the allegations were:

Stuart Carnie of Ocala, Florida, and Charles Irizarry of Peoria, Arizona, each of whom supposedly was the sole CEO of three of the companies. Both participated in the stock offerings and signed bogus registration statements for their own three companies. Each must pay disgorgement of $6,000 plus prejudgment interest of $337.85 and a penalty of $12,000 for a total of $18,337.85.

Wayne Middleton of Salt Lake City, Utah, was supposedly the sole CEO of two of the companies. He participated in their stock offerings and also signed false and misleading registration statements. He must pay disgorgement of $4,000 plus prejudgment interest of $225.24 and a penalty of $8,000 for a total of $12,225.24.

Each has agreed to be barred from serving as an officer or director of a public company or from participating in penny stock offerings, in addition to the financial penalties.

Fund Manager Ran Ponzi Scheme to Buy Home, Cars and Jewelry: SEC

A Fort Lauderdale, Florida-based investment advisory firm, its manager and three related funds face fraud charges and an asset freeze by the SEC.

Elm Tree Investment Advisors LLC; its founder and manager, Frederic Elm; and the three funds, Elm Tree Investment Fund LP; Elm Tree “e”Conomy Fund LP; and Elm Tree Motion Opportunity LP were the target of the SEC actions after most of the funds of misled investors went to make Ponzi-style payments to other investors. Along the way, some of the money also went to pay for Elm’s personal expenses.

Elm, formerly known as Frederic Elmaleh, along with his unregistered advisory firm and the three funds, duped investors to the tune of more than $17 million since November of 2013. In addition to keeping some investors quiet with payments, Elm used some of the money to buy a $1.75 million home, luxury automobiles and jewelry, and to cover daily living expenses.

Elm’s wife, Amanda Elm, formerly Elmaleh, is named as a relief defendant based on her receipt of investor monies. She was also the target of a temporary asset freeze.

The SEC is seeking relief for investors, including return of allegedly ill-gotten gains, with interest and financial penalties. The investigation is continuing.

Former Engineering Exec Charged by SEC With Bribing Qatar Officials

Walid Hatoum, a former executive at the PBSJ Corp., an engineering and building firm, was charged by the SEC with violating the Foreign Corrupt Practices Act (FCPA) by offering and authorizing bribes and employment to foreign officials to secure Qatari government contracts. PBSJ is now known as the Atkins North America Holdings Corp. and no longer offers public stock in the U.S.

According to the agency, Hatoum offered to funnel nearly $1.4 million in bribes to a local company owned and controlled by a foreign official in order to secure two multimillion-dollar Qatari government contracts for PBSJ in 2009. The official then provided Hatoum and PBSJ’s international subsidiary with access to confidential sealed-bid and pricing information that enabled the PBSJ subsidiary to tender winning bids for a hotel resort development project in Morocco and a light rail transit project in Qatar. Hatoum also offered employment to a second foreign official in return for assistance as the bribery scheme began to unravel and PBSJ lost the hotel resort contract. Even though the bribes themselves were not delivered before the scheme was uncovered by the company, PBSJ earned approximately $2.9 million in illicit profits because it continued work on the light rail project until a replacement company could be found.

Without admitting or denying the charges, Hatoum has agreed to pay a $50,000 fine. In addition, the agency has reached a separate deferred prosecution agreement (DPA) with the company that defers FCPA charges for two years and requires the company to comply with certain conditions.

Under the terms of the DPA, PBSJ must immediately pay $3.4 million, of which $3,032,875 is disgorgement and interest, and a penalty of $375,000; that reflects the company’s significant cooperation with the SEC investigation.

FINRA Censures, Fines Michigan Firm for Supervisory, Compliance Failures

Ann Arbor, Michigan-based Sigma Financial Corp. was censured by FINRA and fined $185,000 after the agency found an array of supervisory and compliance failures.

Sigma, said FINRA, was unreasonably relying on a limited number of people from an entity with common ownership to remotely conduct all supervisory and compliance functions, for a total of 1,274 registered representatives and 854 branch offices between the firm and another broker-dealer, as well as its affiliated advisor.

In addition, FINRA found that the firm’s system for reviewing registered representatives’ emails was not reasonably designed, which meant that the firm’s email communications were inadequately supervised. Additional supervisory and compliance failures included failure to conduct branch office inspections in a timely manner and inadequate supervision of representatives’ creation and use of consolidated statements.

Other problems were found in the monitoring of the outside entity’s financial statements and the expense, gift, and gratuity logs to guard against potential issues of influence. Representatives’ websites were also inadequately monitored for supervision of required changes or compliance. The firm’s written supervisory procedures also failed to address monitoring of activity at representatives’ accounts held at other member firms.

Not only that, the firm failed to conduct its own independent due diligence on the structured products recommended to customers, instead relying completely on the determination of its fixed-income distributors to sell the structured products as providing enough evidence of suitability. It also failed to determine whether such products were appropriate for its customers.

Also, when a customer sold a variable annuity and purchased a fixed annuity, neither transaction was recorded on the firm’s books and records, and no supervisory review of the variable-to-fixed annuity transaction’s suitability was conducted.

Other failures included not monitoring for client changes of address, for the protection of confidential customer information, the use of passwords, antivirus and antispyware tools, and lack of a supervisory system concerning the registration of branch offices that executed trades.

The firm neither admitted nor denied the findings, but consented to FINRA’s actions.

— Check out 8 Oddest Enforcement Cases of 2014 on ThinkAdvisor.