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Regulation and Compliance > Federal Regulation > SEC

Ex-UBS Broker Sentenced in Puerto Rico Bond Sales Fraud Scheme: Enforcement

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A former UBS broker in Puerto Rico was sentenced to a year and a day in prison after he pleaded guilty to criminal bank fraud for pocketing $1 million in commissions in a bond sales scheme, CNBC reports.

According to CNBC, Jose Ramirez will be the first former UBS Puerto Rico employee to serve jail time for a role in the scheme, which centered on sales of the firm’s proprietary closed-end bond funds. In addition to the jail time, the judge also ordered two years of supervised release, a $500 fine and granted Ramirez’s request to voluntarily report to prison.

In 2015, FINRA and the SEC fined UBS Puerto Rico $33.5 million for failing to supervise Ramirez.

From January 2011 through September 2013, Ramirez encouraged clients to invest in UBS Puerto Rico closed-end funds using money the clients borrowed from a UBS Puerto Rico-affiliated bank — UBS Bank USA.

UBS Puerto Rico and the bank prohibited using such loans to purchase securities, and the practice exposed investors to losses while producing profits for Ramirez.

The sales generated approximately $1.2 million in commissions.

Investment Advisor’s COO Fraudulently Caused Overbilling: SEC

The Securities and Exchange Commission filed charges against the former chief operating officer of a SEC-registered investment advisor for aiding and abetting the advisory firm’s actions to overbill its clients as part of a fraudulent scheme to improperly inflate his own pay.

According to the SEC’s complaint, between 2011 and December 2018, former COO Richard Diver, a resident of Spring Lake, New Jersey, engaged in an illicit scheme to steal approximately $6 million from his employer, which, according to LinkedIn was M&R Capital Management Inc.

Diver, whose duties included managing the advisory firm’s payroll and client billing functions, allegedly inflated his salary by hundreds of thousands of dollars per year. As part of this scheme, Diver defrauded investors by causing the investment advisor to overbill more than 300 investment advisory client accounts by approximately $750,000, for the purpose of generating additional revenue.

As alleged in the complaint, Diver used this revenue to finance his inflated salary and when confronted by the investment advisor’s CEO in December 2018, Diver confessed to having carried out the scheme.

The SEC is seeking permanent injunctive relief, disgorgement plus prejudgment interest and civil monetary penalties against Diver.

Separately, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Diver.

SEC Charges Investment Advisor With Long-Running Fraud

The SEC charged registered investment advisor Direct Lending Investments with a multi-year fraud that resulted in approximately $11 million in overcharges of management and performance fees to its private funds, as well as the inflation of the private funds’ returns.

According to the SEC’s complaint, Direct Lending advises a combination of private funds that invest in various lending platforms, including online small business lender QuarterSpot Inc.

The SEC alleges that for years, Brendan Ross, Direct Lending’s owner and then-CEO, arranged with QuarterSpot to falsify borrower payment information for QuarterSpot’s loans and to falsely report to Direct Lending that borrowers made hundreds of monthly payments when, in fact, they had not.

The SEC alleges that many of these loans should have been valued at zero, but instead were improperly valued at their full value, because of the false payments Ross helped engineer. As a result, between 2014 and 2017, Direct Lending cumulatively overstated the valuation of its QuarterSpot position by approximately $53 million and misrepresented the funds’ performance by approximately 2-3% annually.

The SEC alleges that Direct Lending collected approximately $11 million in excess management and performance fees from the funds that it would not have otherwise collected, had the QuarterSpot position been accurately valued.

Without admitting to any violations of federal law alleged in the SEC’s action, Direct Lending agreed to be preliminarily enjoined from violating these provisions and to the appointment of a receiver to marshal and preserve the assets of Direct Lending and the funds. The stipulated order is subject to court approval.

The complaint also seeks disgorgement of allegedly ill-gotten gains along with interest, monetary penalties and permanent injunctions.

SEC Awards $50 Million to 2 Whistleblowers

The SEC announced awards totaling $50 million to two whistleblowers whose high-quality information assisted the agency in bringing a successful enforcement action.

One whistleblower received an award of $37 million and the other received an award of $13 million. The $37 million award is the commission’s third-highest award to date after the $50 million award made in March 2018 to joint whistleblowers and an award of more than $39 million announced in September 2018.

Whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely and credible information that leads to a successful enforcement action. Whistleblower awards can range from 10% to 30% of the money collected when the monetary sanctions exceed $1 million.

The SEC has now awarded approximately $376 million to 61 individuals since issuing its first award in 2012. 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 has been taken or withheld from harmed investors to pay whistleblower awards.

The SEC protects the confidentiality of whistleblowers and does not disclose information that could reveal a whistleblower’s identity as required by the Dodd-Frank Act.

— Check out Securities Class Action Settlements Amounted to $5B in 2018, Report Says on ThinkAdvisor.


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