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State Street to Pay $35M Over Secret Markups, Disclosure Failures: Enforcement

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The Securities and Exchange Commission announced that State Street has agreed to pay more than $35 million to settle charges that it fraudulently charged secret markups for transition management services and separately omitted material information about the operation of its platform for trading U.S. Treasury securities.

An SEC order finds that State Street’s scheme to overcharge transition management customers generated approximately $20 million in improper revenue for the firm. 

State Street used false trading statements, pre-trade estimates and post-trade reports to misrepresent its compensation on various transactions, especially purchases and sales of bonds and other securities that trade outside large transparent markets. When one customer detected some hidden markups and confronted State Street employees, they falsely called it a “fat finger error” and “inadvertent commissions” in order to conceal the scheme, according to the SEC.   

“Agreeing to a fee arrangement and then secretly tucking in hidden, unauthorized markups is fraudulent mistreatment of customers,” said Paul Levenson, director of the SEC’s Boston Regional Office, which investigated the overcharges.

State Street Global Markets LLC, State Street Global Advisors Funds Distributors LLC, and State Street Bank and Trust Co. agreed to pay a $32.3 million penalty to settle the fraud charges for the hidden transition services markups.

In a separate SEC order, the agency finds that State Street failed to inform subscribers to its government securities trading platform called GovEx that despite marketing the system as “fair and transparent” it provided one subscriber with a “Last Look” trading functionality that allowed a short period of time for the subscriber to reject a match to a submitted quote. 

The subscriber used Last Look to reject 57 matches that each had a $1 million face value, and State Street did not inform the counterparties that their orders had been rejected with Last Look. While developing Last Look, State Street even told one subscriber that the platform did not have Last Look functionality at all.

“Firms that run trading platforms cannot mislead subscribers about their order handling operations,” said Kathryn A. Pyszka, associate director of the SEC’s Chicago Regional Office that investigated the GovEx-related disclosure failures. 

State Street Bank and Trust agreed to pay a $3 million penalty without admitting or denying the findings that its GovEx-related disclosure failures violated the Securities Act of 1933.

Advisor Charged With Stealing $1M From Clients to Go Gambling

The SEC charged a New Jersey-based tax preparer and investment advisor with stealing more than $1 million from clients to support his gambling habit and other personal expenditures. 

According to the SEC’s complaint, Scott Newsholme of Farmingdale, New Jersey, fabricated account statements, doctored stock certificates, and forged promissory notes as part of a scheme in which he convinced clients seeking his financial planning advice to give him their money to invest in various securities.

Instead of investing clients’ money, Newsholme allegedly cashed their investment checks at a check-cashing store and pocketed the funds while assuring clients that their assets were safe and flourishing. 

According to the SEC, Newsholme used investor money for personal expenses, gambling in Atlantic City, and Ponzi-like payments to clients who sought a return of their funds.

”As alleged in our complaint, Newsholme repaid his clients’ trust with betrayal,” Andrew Calamari, director of the SEC’s New York Regional Office, said in a statement.

The SEC’s complaint seeks the disgorgement of ill-gotten gains plus interest, penalties and permanent injunctions. In a parallel action, the U.S. Attorney’s Office for the District of New Jersey announced criminal charges against Newsholme.

Former Reps Settle Market Manipulation Charges in Attempted Nasdaq Listing

Three former registered representatives have agreed to settle SEC charges that they schemed to manipulate the stock of a microcap company in an attempt to get it listed on the Nasdaq stock exchange.

The SEC alleges that Richard P. Cedrone, Steven Ferris and George Thoreson coordinated manipulative trading activity including “marking the close” to enable a company called Abakan to meet specific requirements to list on Nasdaq, including the need for its share price to close at or above $2 for 90 consecutive trading days.

According to the SEC’s complaint, the men initially misunderstood the 90-day requirement to be 90 consecutive calendar days rather than trading days, and despite their manipulation efforts the company was ultimately unsuccessful at obtaining a Nasdaq listing.

According to the SEC’s complaint, Cedrone and Ferris were investor relations consultants for Abakan and worked in concert with Thoreson to monitor Abakan’s bid-and-ask activity in real time. Thoreson effected the vast majority of the trio’s trading in Abakan, ultimately amassing 629,675 shares in his personal accounts at a total cost of more than $1.3 million. Thoreson made real-time admissions during the scheme, primarily via email to Ferris and Cedrone, saying he had just marked the close or engaged in other manipulative trading to keep Abakan’s share price above $2. His admissions are corroborated by trading records.

The SEC’s complaint further alleges that Ferris engaged in illegal unregistered public offerings of Abakan stock, using the proceeds to fund the company’s operations and pay its bills.

Without admitting or denying the SEC’s allegations, Cedrone, Ferris and Thoreson consented to final judgments. The settlements, which are subject to court approval, would prohibit them from placing orders to buy or sell securities during the last 60 minutes of any trading day. Cedrone agreed to pay $5,013 in disgorgement plus $666 in interest and a $150,000 penalty. The amount of the penalty assessed against Cedrone takes into account his violation of a prior Commission order. Thoreson agreed to pay a $75,000 penalty and be barred from the securities industry and penny stock offerings. Determination of any penalty against Ferris is deferred until after the terms of his cooperation agreement in the case are completed.

Former Amazon Employee and College Friend Charged With Insider Trading

The SEC announced insider trading charges against a former Amazon financial analyst who allegedly leaked confidential information to his former fraternity brother in advance of a company earnings announcement so they could turn an illegal profit. The college friend and his trading partner also are charged in the SEC’s complaint.

The SEC alleges that Brett Kennedy accessed nonpublic 2015 first-quarter earnings information without authorization while working at Amazon and shared it with Maziar Rezakhani, who illegally traded on the financial results before their public release to make more than $116,000 in illicit profits. 

According to the SEC’s complaint, Rezakhani paid Kennedy $10,000 in cash for the tip and also shared the trading profits with Sam Sadeghi, who was advising him on his brokerage account trades and joined Rezakhani at a meeting with Kennedy to discuss the nonpublic information.  The SEC’s complaint alleges that Rezakhani and Sadeghi aimed to establish a successful track record with the trading in Rezakhani’s brokerage account and together open a hedge fund in New York that would accept investments from others.

According to the SEC’s complaint, Rezakhani boasted on at least two trading-related internet communication platforms in the days leading up to Amazon’s earnings announcement that he was predicting first-quarter revenue of $22.7 billion and earnings per share of -$0.12, writing that the “numbers are so obvious” that a “5-year-old can guess what they will do.”

Jina L. Choi, director of the SEC’s San Francisco Regional Office, said in a statement, “As alleged in our complaint, Rezakhani boasted on social media that he could accurately predict Amazon’s financial performance. But he failed to predict that we would catch him and his accomplices in their illegal scheme.”

Sadeghi and Kennedy agreed to settlements that are subject to court approval. Without admitting or denying the allegations, Sadeghi agreed to pay disgorgement of $11,600 plus $1,000 in interest and an $11,600 penalty for a total of $24,200.  Kennedy agreed to pay disgorgement of $10,000 plus interest of $875.00. 

In a parallel action, the U.S. Attorney’s Office for the Western District of Washington announced criminal charges against Kennedy.

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