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Regulation and Compliance > Federal Regulation > SEC

SEC Enforcement: Advisor Pushed Risky Investments in Firms He Owned

By Marlene Y. Satter

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Among recent enforcement actions by the Securities and Exchange Commission were fraud charges against an RIA and its owner; enforcement actions against 22 underwriting firms for fraudulent municipal bond offerings; and an $8 million penalty against a high-frequency trading firm on market structure violations.

Also, a China-based company and its CEO are on the hook for $55.6 million thanks to inaccurate disclosures, and two former executives of ContinuityX Solutions were charged with defrauding investors.

SEC: Advisor Pushed Risky Investments to Benefit Himself

The SEC has charged Family Endowment Partners LP and its owner, Lee Dana Weiss of Newton, Massachusetts, with fraud for engaging in self-dealing and failing to disclose material facts to clients regarding conflicts of interest, use of investor funds, and the risks of the investments they recommended.

According to the agency, FEP and Weiss urged clients to invest more than $40 million in illiquid securities issued by several related companies without disclosing Weiss’s ownership interest in the entities’ parent company, or that he received payments from the companies.

Between 2010 and 2012, FEP and Weiss advised 11 FEP clients, and Weiss caused two FEP-affiliated hedge funds, to invest more than $40 million in securities issued by subsidiaries of a French company that supposedly had designed ways to lower the harmful effects of tobacco smoking. But Weiss had a financial interest in the French company, and he, along with entities he controlled, raked in over $600,000 in payments from that company and related entities shortly after the investments were made.

FEP and Weiss also recommended that clients invest in entities that Weiss owned and controlled without letting them know that the investments would primarily benefit FEP. In July 2011, Weiss got an FEP client to invest $2.5 million in one of the French company’s subsidiaries, despite knowing the client’s money would pay delinquent interest owed to other FEP clients.

Between late 2012 and 2014, FEP and Weiss recommended that five FEP clients invest approximately $8.25 million in notes or shares of companies that were owned by Weiss, while failing in at least one case to tell the FEP client that Weiss owned the company in question. Other times, they kept clients in the dark about their plans to use funds to pay FEP’s financial obligations instead of benefiting the companies clients invested in. They also failed to advise clients that it was likely the notes would never be repaid because the companies were financially troubled.

And in late 2011, FEP and Weiss recommended that FEP clients invest $5 million in a consumer loan portfolio. Weiss structured the transaction so that a $300,000 chunk of the investment proceeds was paid to a so-called third-party “manager.” FEP and Weiss failed to tell clients that the “manager” was an inactive real estate company owned by Weiss’s close friend, and that the payments were transferred by that company to Weiss and other third parties he designated.

SEC Tags 22 Underwriting Firms for Muni Bond Fraud

A total of 22 underwriting firms were the targets of SEC enforcement actions for violations in municipal bond offerings.

According to the agency, between 2010 and 2014, the firms sold municipal bonds via offering documents containing materially false statements or omissions about the bond issuers’ compliance with continuing disclosure obligations. In addition, the underwriting firms failed to conduct adequate due diligence to find and correct the misstatements and omissions before offering and selling the bonds to their customers.

Without admitting or denying wrongdoing, the 22 firms consented to the SEC’s actions, and will pay civil penalties based on the number and size of the fraudulent offerings identified, up to a cap based on the size of the firm. The maximum penalty imposed is $500,000. Also, each firm agreed to retain an independent consultant to review its policies and procedures on due diligence for municipal securities underwriting.

The actions are the second round of filings in the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, a voluntary self-reporting program targeting material misstatements and omissions in municipal bond offering documents.

The firms and penalty amounts are: Ameritas Investment Corp., $200,000; BB&T Securities LLC, $200,000; Comerica Securities Inc., $60,000; Commerce Bank Capital Markets Group, $40,000; Country Club Bank, $140,000; Crews & Associates Inc., $250,000; Duncan-Williams Inc., $250,000; Edward D. Jones & Co. L.P., $100,000; Estrada Hinojosa & Co. Inc., $40,000; Fifth Third Securities Inc., $20,000; The Frazer Lanier Co. Inc., $100,000; J.J.B. Hilliard, W.L. Lyons, LLC, $420,000; Joe Jolly & Co. Inc., $100,000; Mesirow Financial Inc., $100,000; Northland Securities Inc., $220,000; NW Capital Markets Inc., $100,000; PNC Capital Markets LLC, $500,000; Prager & Co. LLC, $100,000; Ross, Sinclaire & Associates LLC, $220,000; UBS Financial Services Inc., $480,000; UMB Bank, N.A. Investment Banking Division, $420,000; and U.S. Bank Municipal Securities Group, a Division of U.S. Bank National Association, $60,000.

Latour to Pay $8 Million on Market Structure Violations

High-frequency trading firm Latour Trading LLC was charged by the SEC with market structure violations, and has agreed to a settlement that includes more than $8 million in disgorgement and penalties.

According to the agency, Latour violated the Market Access Rule and Regulation National Market System over a nearly four-year period in which Latour sent millions of noncompliant orders to U.S. exchanges.

The firm shared portions of its electronic trading infrastructure with its parent company, Tower Research. Some Tower Research employees could change the computer code without Latour’s knowledge or approval, and that resulted in unintended consequences on Latour’s trading due to inadequate safeguards against such occurrences.

In June 2011, Tower Research changed coding that introduced an error into the shared infrastructure. That resulted in Latour sending millions of orders to exchanges that did not comply with the requirements of Regulation NMS. Some of these orders were executed, and as a result Latour received gross trading profits and rebates paid by stock exchanges.

After learning of the error, Latour corrected many of the issues by October 2012 and addressed the rest by August 2014.

Without admitting or denying the SEC’s findings, Latour agreed to pay a $5 million penalty, disgorgement of $2,784,875 of gross trading profits and exchange-paid rebates, plus prejudgment interest of $268,564.

China-Based Company, CEO to Pay $55.6 Million for Inaccurate Disclosures

China-based Focus Media Holding Ltd. and its chief executive officer Jason Jiang have agreed to a settlement with the SEC to resolve charges of inaccurate disclosures about the China-based advertising company’s partial sale of a subsidiary to insiders, including Jiang.

According to the agency, in March 2010, Focus Media disclosed an incentive initiative in which some of its managers and directors and certain employees, managers and directors of its wholly owned Internet advertising subsidiary bought a 38% stake in the subsidiary, Allyes Online Media Holdings Ltd.

The purchase price, which Focus Media said was based on an independent third-party valuation, represented an implied value of $35 million for the entire subsidiary. But shareholders didn’t know that before the sale was finalized, a private equity firm had talked with Allyes about acquiring the company for $150 million to $200 million.

The potential acquirer’s business records stated that Allyes asked it to “hold off the deal” until the insiders’ purchase was finalized. In July 2010, Focus Media announced that Allyes had been sold to the private equity firm for an amount that valued it at $200 million, nearly six times what the insiders paid just months earlier.

Not only did the Focus Media board not receive accurate information about the deal, the company’s public disclosures were false and misleading, since red flags were ignored both by Jiang and by Focus Media.

Without admitting or denying the SEC’s findings, Jiang agreed to disgorge $9.69 million of ill-gotten gains, plus prejudgment interest of $1.6 million, and pay a $9.69 million penalty; Focus Media agreed to pay a $34.6 million penalty. In addition, the SEC has ordered the creation of a Fair Fund to return money to injured investors.

ContinuityX Execs Charged With Faking SEC Filings to Bilk Investors

The SEC has charged two former executives of ContinuityX Solutions Inc. with fabricating nearly all of the company’s revenue and enriching themselves in the process. David Godwin, former CEO, and Anthony Roth, former chief financial officer, profited from the scheme, the SEC said, with Godwin getting $1.3 million in compensation from ContinuityX and Roth $351,800 in compensation and $456,098 of profits from sales of ContinuityX stock.

According to the agency, Metamora, Illinois-based ContinuityX was a publicly traded company that claimed to sell Internet services to businesses. The company is now in bankruptcy, and its former CEO was criminally charged last year with six counts of wire fraud for conduct related to the SEC’s allegations.

The SEC said that ContinuityX reported revenues of $27.2 million from April 2011 to September 2012, but 99% of it came from phony sales. Godwin and Roth used faked SEC filings to raise millions of dollars from investors in a private offering of ContinuityX securities.

The SEC seeks return of ill-gotten gains with interest, financial penalties and permanent injunctions against further violations of the securities laws, and also seeks a bar against Godwin and Roth acting as public company officers or directors and requiring them to reimburse ContinuityX for bonuses, incentive and equity-based compensation and stock sale profits.

In a separate administrative action, ContinuityX agreed to the revocation of its securities.

The SEC’s investigation is continuing.

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