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SEC, FINRA Enforcement: State Street to Pay $12M Over Pay-to-Play Violations

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Among recent enforcement actions by the Securities and Exchange Commission were charges against 11 bank officers and directors for fraud. State Street also agreed to pay the SEC over pay-to-play violations.

In addition, the Financial Industry Regulatory Authority censured and fined BNP Paribas for deficiencies in its large option position reporting system and position limit, and Citadel Securities on written supervisory procedure failures.

State Street Pays $12M for Pay-to-Play Violations

State Street Bank and Trust Co. agreed to pay $12 million to settle SEC charges that it conducted a pay-to-play scheme through its then-senior vice president and a hired lobbyist to win contracts to service Ohio pension funds.

An SEC investigation found that Vincent DeBaggis, who headed State Street’s public funds group responsible for serving as custodians or sub-custodians to public retirement funds, entered into an agreement with Ohio’s then-deputy treasurer to make illicit cash payments and political campaign contributions. 

In exchange, State Street received three lucrative sub-custodian contracts to safeguard certain funds’ investment assets and effect the settlement of their securities transactions. 

DeBaggis agreed to settle the SEC’s charges by paying $174,202.81 in disgorgement and prejudgment interest and a $100,000 penalty. 

“Pension fund contracts cannot be obtained on the basis of illicit political contributions and improper payoffs,” said Andrew Ceresney, director of the SEC’s Enforcement Division. “DeBaggis corruptly influenced the steering of pension fund custody contracts to State Street through bribes and campaign donations.” 

The SEC further alleges that Robert Crowe, a law firm partner who worked as a fundraiser and lobbyist for State Street, participated in the scheme and entered into undisclosed arrangements with the then-deputy treasurer to make secret illegal campaign contributions to obtain and retain business awarded to State Street.

The SEC filed a complaint against Crowe on Thursday in U.S. District Court for the Southern District of Ohio.

“Our complaint alleges that Crowe served as a conduit for corrupt payments from State Street to influence decisions about public pension fund service contracts,” said David Glockner, Director of the SEC’s Chicago Regional Office. “Pay-to-play schemes are intolerable, and lobbyists and their clients should understand that the SEC will be aggressive in holding participants accountable.”

11 Officers, Directors of Failed Bank Hid Bad Loans: SEC

The SEC has filed fraud charges against 11 former executives and board members at Birmingham, Alabama-based Superior Bank and its holding company who were involved in various schemes to conceal the extent of loan losses as the bank was faltering in the wake of the financial crisis.

According to the agency, those charged worked to mislead investors and bank regulators by propping up the bank’s financial condition, using straw borrowers, phony appraisals and insider deals. The fraud involved many of the largest loans in Superior Bank’s portfolio, and the group’s tactics included the improper extension, renewal and rollover of bad loans to avoid impairment and the need to report allowances for mounting loan and lease losses in the bank’s financial accounting.

Among the tactics they used were the issuance of nonrecourse loans, which replaced borrowers of record for severely delinquent loans with alternative borrowers who in general were already in default on multiple other loans with the bank. The alternative borrowers accepted the new loans, knowing that they would thus not be on the hook for repayment of the new loans and could also avoid foreclosure or collection efforts on their prior loans.

The 11 also used years-out-of-date appraisals that were wildly inaccurate, or used appraisers who were under obligation either to the bank or to the borrower. In approving renewals or modifications of severely delinquent loans, they either rolled forward relevant payment dates or funded new loans to the borrower, using those proceeds to pay down the prior loan.

They also proposed, structured, and documented nonrecourse joint venture agreements with defaulted borrowers and a now-deceased outside director of Superior Bancorp that made the loan look current despite almost certain new delinquency or default, thus making it look as if Superior Bank was in a better position.

As a result, Superior Bank overstated its net income in public filings by approximately 99% for 2009 and 50% for 2010. The bank failed in 2011.

While nine of the 11 have agreed to settle with the SEC, Kenneth Pomeroy, formerly president of the bank’s central Florida region, and William McKinnon, formerly a senior vice president and commercial loan officer, are contesting the charges.

The other nine settling with the agency have neither admitted nor denied the charges, but they have agreed to a range of penalties.

Charles Bailey, former CEO and chairman of the bank’s holding company Superior Bancorp, must pay a $250,000 penalty. James White, former chief financial officer of Superior Bancorp, and Dewayne Maddox, former market executive at Superior Bank, must each pay a $200,000 penalty. William Caughran, former general counsel of Superior Bank and Superior Bancorp, must pay a $150,000 penalty. Charles Roberts III and Robert Parrish Jr., who served as outside directors at Superior Bancorp, must each pay $100,000 penalties.

Superior Bank’s former president and CEO Charles Scott Jr., former chief credit officer John Figlewski and former president George Hall have each agreed to bifurcated settlements in which the court will determine financial penalties at a later date.

The SEC’s investigation is continuing.

FINRA Censures, Fines BNP Paribas $2.4 Million

BNP Paribas Securities Corp. was censured by FINRA, fined $2.4 million and ordered to address large options position reporting (LOPR) system and position limit deficiencies. The firm must implement procedures reasonably designed to achieve options rules compliance.

According to the agency, the firm failed to report some over-the-counter options positions to the LOPR, including transactions involving foreign underlying securities or in which the firm misclassified the counterparties. The firm also inaccurately reported other OTC options positions to the LOPR, including underreporting positions with an incorrect multiplier; inaccurately reporting positions with “TBA” in certain data fields; reporting positions with an incorrect strike price; reporting positions without entries in the tax identification and/or tax type data fields; and reporting positions with the incorrect quantity of contracts.

The firm also performed opening transactions for customer and proprietary accounts that exceeded the applicable position limit in certain OTC options. Its supervisory system was not reasonably designed to achieve compliance with the rules on position limits and the reporting of positions to the LOPR, nor did it include sufficient written supervisory procedures to ensure the proper reporting of positions to the LOPR.

Without admitting or denying the findings, the firm consented to the sanctions.

FINRA Censures, Fines Citadel Securities on WSP Failures

FINRA has censured Citadel Securities LLC, fined the firm $200,000 and required it to revise its written supervisory procedures.

According to the agency, as a result of using a trading logic that applied to some customer orders over 10,000 shares in securities priced below a dollar, the firm failed to execute a substantial portion of marketable orders fully and promptly, and its WSPs were inadequate to prevent the problem.

The firm adopted the logic in response to perceived market conditions, and used the logic only during the review period, but the logic unreasonably delayed the execution time of marketable orders.

In addition, the firm failed to preserve thousands of email communications according to SEC requirements, and also failed to establish and maintain a supervisory system reasonably designed to achieve compliance.

The firm has neither admitted nor denied the findings but consented to the sanctions.

— Check out Goldman Fined $15M by SEC Over Reg SHO Violations on ThinkAdvisor.