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Regulation and Compliance > Federal Regulation > SEC

Enforcement: SEC Awards Company Outsider $700,000 Whistleblower Award

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Among recent enforcement actions by the Securities and Exchange Commission were a $2 million fine against Ocwen Financial Corp. and a $700,000 award to a whistleblower whose assistance resulted in a successful enforcement action.

Also, the Financial Industry Regulatory Authority censured and fined a firm for sales of unsuitable investments to customers.

SEC Awards Whistleblower More than $700,000

A whistleblower, a company outsider who conducted a detailed analysis that led to a successful SEC enforcement action, was awarded more than $700,000 by the SEC.

“The voluntary submission of high-quality analysis by industry experts can be every bit as valuable as first-hand knowledge of wrongdoing by company insiders,” Andrew Ceresney, director of the SEC’s enforcement division, said in a statement.

The SEC’s whistleblower program has paid more than $55 million to 23 whistleblowers since the program’s inception in 2011; awards for unique and useful information that leads to a successful enforcement action may be eligible for an award that can range from 10% to 30% of the money collected when the monetary sanctions exceed $1 million.

All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators; no money is taken or withheld from harmed investors to pay whistleblower awards.

“This award demonstrates the Commission’s commitment to awarding those who voluntarily provide independent analysis as well as independent knowledge of securities law violations to the agency,” Sean McKessy, chief of the SEC’s Office of the Whistleblower, said in a statement. “We welcome analytical information from those with in-depth market knowledge and experience that may provide the springboard for an investigation.”

Ocwen Settles with SEC for $2 Million

Ocwen Financial Corp. has agreed to pay a $2 million penalty to settle SEC charges that it misstated financial results by using a flawed, undisclosed methodology to value complex mortgage assets.

According to the agency, its investigation found that the company inaccurately disclosed to investors that it independently valued these assets when that was not how the assets were valued.

Instead, Ocwen had sold the rights to service some mortgages that were a financing liability in its accounting, and instead of calling in an independent auditor, it used the valuation performed by the party to which it sold the rights—despite the fact that the party was related.

Ocwen’s audit committee never reviewed the valuation methodology with company management or its outside auditor, and the related party’s valuation deviated from fair value measures. As a result, Ocwen misstated its net income for the last three quarters of 2013 and the first quarter of 2014.

In addition, the firm’s internal controls failed to prevent conflicts of interest involving its executive chairman, who was involved in both sides of many related party transactions. Despite the fact that Ocwen told investors its executive chairman was required to recuse himself from transactions with related companies where he also served in a leadership position, he did not do so — and the firm had no written policies or procedures on recusals for related party transactions. What recusal practice it did have was faulty.

As a result, Ocwen’s executive chairman was able to approve transactions from both sides, including a $75 million bridge loan to Ocwen from a company where he also served as chairman of the board. FINRA Censures, Fines Firm on Unsuitable Investments

FINRA censured Capital Securities Management Inc., fined the firm $470,000 and ordered it to pay restitution to customers of $226,448.90, plus interest.

According to the agency, the firm recommended and effected, through a registered representative, unsuitable purchases of customized reverse-convertible notes (RCNs) totaling approximately $4 million for the accounts of customers. Most of the customers were over the age of 60, with modest or conservative investment objectives and risk profiles. All of the customers’ accounts were heavily concentrated in RCNs, with the amounts of these investments constituting a substantial portion of their net worth.

The firm failed to train representatives regarding the sale of RCNs, and its supervisory system and written supervisory procedures weren’t up to the task of overseeing RCN sales to clients. It also failed to have an exception report that could track concentrations of RCNs in customer accounts.

FINRA also tagged the firm on anti-money laundering failures, including failure to act on red flags, and other failures, including failure to apply sales-charge discounts to eligible unit investment trust (UIT) and mutual fund purchases, resulting in customers paying $32,343.31 in excess sales charges. It charged customers excessive commissions on equity transactions, and did not have WSPs and a supervisory system to review commissions.

Without admitting or denying FINRA’s findings, the firm agreed to the sanctions.

— Check out Clients’ Dementia Presents Ethical Challenges for Advisors on ThinkAdvisor.


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