Among recent enforcement actions by the Securities and Exchange Commission were charges against two California men and their investment firms for operating a Ponzi scheme targeting middle-class investors; against a Nashville investment advisory firm and its owner for collecting extra fees from hedge funds; against a mortgage company and six former executives for fraud; against an investment manager for failure to prevent misuse of material nonpublic information by consultants; against an investment banker and a plumber for insider trading; and against a brokerage firm for anti-money laundering failures.
Meanwhile, the Financial Industry Regulatory Authority censured and fined E-Trade $900,000 on supervisory violations.
SEC: Fake Advisors Stole $2.8M in Tech Stock Ponzi Scheme
The SEC has charged Jaswant “Jason” Gill and Javier Rios and their investment firms after it said they were operating a Ponzi scheme, claiming to specialize in serving middle-class investors and securing exorbitant returns by investing in hot pre-IPO stocks. The agency got an asset freeze against them, to keep them from disposing of client funds, and an order to prevent them from raising additional investor money.
According to the SEC, instead of using the firm’s supposed proprietary trading models and investing in pre-IPO shares of well-known tech companies like Uber, Alibaba and Airbnb as they promised investors they would, Gill and Rios instead pocketed at least $2.8 million in investor funds.
The two used some of the money to pay for excursions to high-end restaurants and luxury retail stores, as well as jaunts to Las Vegas casinos, gentlemen’s clubs and professional sporting events. They never actually invested in any pre-IPO shares, and paid earlier investors any supposed returns out of funds they got from new investors.
They have raised approximately $10 million through their firm, JSG Capital Investments, and related entities, by catering to average retail investors and promising them exclusive investment opportunities “previously only available to the one-percenters,” with guaranteed annual returns of up to 60%.
Gill, in particular, has trumpeted phony credentials, telling investors he founded his firm after serving as a managing director at Morgan Stanley. He also boasted partnerships with several Silicon Valley venture capital firms. Gill, Rios and JSG Capital Investments are not registered with the SEC or any state regulator. Rios’ background is in food service.
In a parallel action, the U.S. Attorney’s Office for the Northern District of California has announced criminal charges against Gill and Rios.
The agency seeks permanent injunctions, plus disgorgement and monetary penalties, from Gill, Rios, JSG Capital Investments and related entities.
SEC Fines Brokerage Firm in First SAR Case
Wall Street-based Albert Fried & Co. was found, after an SEC investigation, to have failed to file suspicious activity reports (SARs) with bank regulators for more than five years. This was in spite of red flags tied to its customers’ high-volume liquidations of low-priced securities.
More than once, an AF & Co. customer’s trading in a security on a given day exceeded 80% of the overall market volume. In other occurrences, customers were trading in stocks issued by companies that were delinquent in their regulatory filings or involved in questionable penny stock promotional campaigns. Some customers also were the subject of grand jury subpoenas received by the firm.
While the SEC has charged other firms with anti-money laundering failures under the federal securities laws, this is the first case against a firm solely for failing to file SARs when appropriate.
Without admitting or denying the charges, AF & Co. agreed to be censured and pay a $300,000 penalty. The SEC credited the firm for its cooperation and for remedial measures already undertaken.
Hedge Fund Firm Charged by SEC With Taking Extra Fees
Nashville, Tennessee-based Hope Advisers Inc. and its owner, Karen Bruton, have been charged by the SEC with scheming to collect extra monthly fees from a pair of hedge funds they managed.
According to the agency, the activity was found during an examination of the firm. The SEC said that, to get around the funds’ fee structure — under which the firm is only entitled to fees if the funds’ profits that month exceed past losses — Hope Advisers and Bruton have been orchestrating certain trades that enable the funds to realize a large gain near the end of the current month while basically guaranteeing a large loss to be realized early the following month. Without those trades, Hope Advisers would have received almost no incentive fees since October 2014.
The two private hedge funds managed by Hope Advisers and Bruton, named Hope Investments LLC and HDB Investments LLC, have more than $175 million in net asset value. The only compensation Hope Advisors gets for managing those funds is an incentive fee, calculated as a 10% or 20% share of the profits earned in the funds’ accounts each month.
But Hope Advisers and Bruton launched an ongoing pattern of trading that inflated that compensation. The way trades were conducted not only delayed realization of losses but intentionally sized some trades so the funds realized a profit every month.
The scheme allowed Hope Advisers to avoid realization of more than $50 million in losses in the hedge funds while earning millions of dollars in fees to which they were not entitled.
The SEC seeks disgorgement of ill-gotten gains plus interest and penalties as well as permanent injunctions; its complaint also names Bruton’s charity, Just Hope Foundation, as a relief defendant for the purposes of returning money it received out of the fees to which the firm was not entitled. The complaint does not allege that the Just Hope Foundation participated in the wrongdoing.
Hope Advisers and Bruton have consented to an interim order that restricts them from accessing $7 million of their own investments in the funds, prohibits them from collecting any further fees unless they satisfy the high-water mark in the funds’ fee structure and restricts them from taking additional investments in the fund. Without admitting or denying the allegations, Hope Advisers and Bruton also are preliminarily enjoined from violating federal antifraud statutes.
Mortgage Company Fined for Claiming Good Mortgages Were Bad
A California-based mortgage company and six former executives were charged by the SEC in a scheme to defraud investors in the sale of residential mortgage-backed securities guaranteed by the Government National Mortgage Association (Ginnie Mae).
According to the agency, First Mortgage Corp. (FMC), a mortgage lender, issued Ginnie Mae RMBS backed by loans it originated. But from March 2011 to March 2015, FMC and its senior executives pulled current performing loans out of Ginnie Mae RMBS by falsely claiming they were delinquent in order to sell them at a profit into newly issued RMBS.
FMC made its Ginnie Mae RMBS prospectuses false and misleading by misusing a Ginnie Mae rule that gave issuers the option to repurchase loans that were delinquent by three or more months.
FMC purposely delayed depositing checks from borrowers who had been behind on their loans, then lied both to investors and to Ginnie Mae, claiming that those loans were still delinquent when they were actually current. This was done with the knowledge and approval of the company’s senior management.
Once the loans were repurchased at prices applicable to delinquent loans, FMC was able to resell them into new Ginnie Mae RMBS pools at higher prices applicable to current loans for an immediate, nearly risk-free profit. Investors, meanwhile, were cheated out of the interest payments on the repurchased loans. Without admitting or denying the charges, the company and executives have agreed to pay $12.7 million to settle with the SEC and each of the six executives has also agreed to be barred from serving as an officer or director of a public company for five years. The settlements are subject to court approval.
Clement Ziroli Sr., chairman and CEO, agreed to a $100,000 penalty; Clement Ziroli Jr., company president, agreed to pay $411,421.98 plus $27,203.92 in interest and a $200,000 penalty. Pac Dong, chief financial officer, agreed to pay a $100,000 penalty; Ronald T. Vargas, senior vice president, who headed FMC’s capital markets department, agreed to pay a $60,000 penalty. Scott Lehrer, SVP, agreed to pay a $50,000 penalty; and Edward Joseph Sanders, managing director of the servicing department, agreed to pay disgorgement of $51,576.51 plus $6,811.19 in interest. Sanders cooperated in the SEC’s investigation.
SEC Fines Firm $1.5 Million on Failure to Prevent Misuse of Insider Info
The SEC has fined Federated Global Investment Management Corp. (FGIMC), a registered investment advisor to the Federated Kauffman Funds, $1.5 million after the agency found the firm had failed to establish, maintain and enforce written policies and procedures to prevent misuse of material nonpublic information in connection with FGIMC’s use of outside consultants as part of its securities research and analysis services.
According to the agency, from approximately 2001 to 2010, FGIMC used third-party consultants and research services, including one particular consultant who worked closely with the firm and periodically provided analysis and buy, sell, and hold recommendations with respect to pharmaceutical and biotechnology stocks.
Throughout the period of the consulting relationship, however, the consultant also served on the boards of four public companies, the stocks of which FGIMC’s funds held at the time — without the knowledge of FGIMC’s senior management and compliance department. That meant that sometimes the consultant had access to nonpublic information regarding those companies, as well as information about the holdings of funds advised by FGIMC.
While the latter had written policies and procedures on the use of material nonpublic information, none established or enforced a mechanism to identify consultant relationships that created the risk of misusing it. That constituted a gap in FGIMC’s compliance program.
The firm neither admitted nor denied the findings but consented to the penalties.
Investment Banker, Plumber Charged With Insider Trading
The SEC has charged investment banker Steven McClatchey and his close friend Gary Pusey, a plumber, with insider trading after the analysis and detection center within the SEC enforcement division’s market abuse unit uncovered an illicit pattern of trading by Pusey, whom McClatchey tipped with nonpublic information on 10 different occasions ahead of public merger announcements.
McClatchey and Pusey became close friends upon meeting at a marina where they kept their fishing boats.
McClatchey had regular access to highly confidential nonpublic information about impending transactions being pursued for investment bank clients. One of his job responsibilities was to collect timely information about potential mergers and acquisitions involving clients of the investment bank where he worked in New York City. He used that ready access to confidential information to tip Pusey on a regular basis.
Pusey then used the nonpublic information he got from McClatchey and purchased securities in 10 companies before their acquisitions were announced publicly. That brought him $76,000 in illicit trading profits.
Pusey “paid” McClatchey for the tips with free services during his bathroom remodel, as well as giving him thousands of dollars in cash that he typically placed in McClatchey’s gym bag while at the marina or handed to him directly in his garage.
The SEC seeks disgorgement of ill-gotten gains, plus interest and penalties. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York has announced criminal charges. FINRA Censures, Fines E-Trade $900,000 on Supervisory Failures
E*Trade Securities LLC was censured by FINRA and fined $900,000 for failing to conduct an adequate review of the quality of execution of its customers’ orders and for supervisory deficiencies concerning the protection of customer order information.
Because it routes customer orders to exchanges and nonexchange markets, E-Trade is required to assess the quality of competing markets to which it directs order flow, and to periodically conduct “regular and rigorous reviews” of the quality of customer order executions to see whether material differences exist in execution quality among the markets trading the security.
According to the agency, to do this, E-Trade established a Best Execution Committee to review execution quality it received on its customers’ orders. But the committee lacked the information to properly evaluate its execution quality.
In addition, the committee failed to take into account internalized order flow sent to its affiliated broker-dealer market maker G1 Execution Services (G1X) and failed to adequately consider the actual execution quality provided by the market centers to which it routed orders. E-Trade also regularly accepted requests from G1X to change prioritization in E-Trade’s order routing system and to redirect certain order flow, without determining whether these changes would improve the quality of execution received by its customers.
The firm also lacked adequate systems and controls to make sure that confidential customer order data was not misused by individuals dually registered with E-Trade and G1X.
E-Trade neither admitted nor denied the charges but agreed to the sanctions.
— Check out Ex-AIG Chairman Greenberg Ordered to Face Trial in N.Y. Suit on ThinkAdvisor.