SEC Steps Up Its Policing of Accounting Fraud

The Wall Street Journal recently reported that the Securities and Exchange Commission has stepped up its policing of accounting fraud. “The SEC’s first year-over-year increase in such enforcement actions since 2007, comes as the agency returns its focus to alleged financial-reporting and disclosure problems that might have gone unpunished as crisis-era misconduct, such as selling of flawed mortgage securities, dominated its attention in recent years. These new cases are on a smaller scale and typically involve conduct that is far less egregious than the accounting scandals of the early 2000,such as the implosion of energy giant Enron Corp.,” said the newspaper.

FINRA Wants Barred Brokers Out of Insurance Too

FINRA is trying to keep banned registered securities representatives, or brokers, from using a loophole that lets them continue selling financial products to members of the public as authorized insurance agents, The Wall Street Journal reports. FINRA – the U.S. securities industry’s self-regulatory agency – will “begin providing to state insurance regulators a monthly report of its disciplinary actions against securities brokers,” the newspaper says. For now, FINRA sends the report only to state securities regulators, who don’t always communicate with the insurance watchdogs down the hall. The Journal says its reporters “recently reviewed securities- and insurance-industry records for 395 brokers who in 2013 were permanently banned by Finra from the securities industry.” From this survey, it found that “at least 13% of the barred brokers still retain their insurance licenses” as of December 1, 2014.

SEC Announces Charges Against Standard & Poor’s for Fraudulent Ratings Misconduct

On January 21, 2015, the Securities and Exchange Commission announced a series of federal securities law violations by Standard & Poor’s Ratings Services involving fraudulent misconduct in its ratings of certain commercial mortgage-backed securities (CMBS). S&P agreed to pay more than $58 million to settle the SEC’s charges, plus an additional $19 million to settle parallel cases announced today by the New York Attorney General’s office ($12 million) and the Massachusetts Attorney General’s office ($7 million). The SEC issued three orders instituting settled administrative proceedings against S&P. One order, in which S&P made certain admissions, addressed S&P’s practices in its conduit fusion CMBS ratings methodology. The SEC alleged that S&P’s public disclosures affirmatively misrepresented that it was using one approach when it actually used a different methodology in 2011 to rate six conduit fusion CMBS transactions and issue preliminary ratings on two more transactions. As part of this settlement, S&P agreed to take a one-year timeout from rating conduit fusion CMBS.

SEC Investigating Several Companies Over Whistleblower Treatment

The U.S. Securities and Exchange Commission has sent letters to several companies asking for years of nondisclosure agreements, employment contracts and other documents to investigate whether companies are muzzling corporate whistleblowers, the Wall Street Journal reported. The inquiries come as SEC officials have expressed concern about a possible corporate backlash against whistleblowers, the newspaper said. The 2010 Dodd-Frank Act gave the SEC the power to start a whistleblower program that lets the agency reward people who report misconduct, if that tip leads to the collection of more than $1 million in monetary sanctions.

SEC Charges Texas-Based Brokerage Firm With Violating Supervisory and Customer Protection Rules

The Securities and Exchange Commission recently charged an Irving, Texas-based brokerage firm with violating key customer protection rules after failing to adequately supervise registered representatives who misappropriated customer funds. H.D. Vest Investment Securities agreed to settle the charges by paying a financial penalty and retaining an independent compliance consultant to improve its supervisory controls. According to the SEC’s order instituting a settled administrative proceeding, H.D. Vest has more than 4,500 registered representatives typically working as independent contractors who also operate tax businesses outside of their securities businesses. H.D. Vest failed to have proper policies and procedures in place to monitor its representatives’ outside business activities, and as a result some representatives used their outside businesses to defraud brokerage customers in such ways as transferring or depositing customer brokerage funds into their outside business accounts.

FINRA Settles Matter Against Registered Representative For Failing to Timely Amend his Form U4 to Disclose Misdemeanor Charge, State and Federal Tax Liens, and Civil Judgment

FINRA settled a matter involving a registered representative who failed to timely amend his Form U4 to disclose a misdemeanor charge, state tax lien, federal tax lien and civil judgment. In June 2009, the Commonwealth of Pennsylvania’s Department of lnsurance filed a criminal charge against the representative in the Court of Common Pleas of Montgomery County, alleging that the representative paid “an unlicensed person commissions from the sale of fixed insurance products between 2005 and 2007.” In August 2010, the Commonwealth of Pennsylvania filed a tax lien against the representative in the amount of $18,687 for unpaid taxes in 2005, 2006 and 2007. In October 2011, the Internal Revenue Service (IRS) filed a tax lien against the representative in the amount of $50,220 for unpaid taxes in 2005, 2006 and 2007. Finally, in January 2013, the representative was the subject of a civil judgment in the amount of $35,157.

SEC Reaches Settlement With Evercore Insider Trader

The U.S. Securities and Exchange Commission reached a $682,000 settlement with a former Evercore Partners Inc. investment banker who was sentenced to 30 months in prison for insider trading. Under the terms of the deal, Frank Perkins Hixon Jr., formerly a senior managing director in Evercore’s mining and metals group, would pay the sum and be restrained from future securities violations, according to court documents. The settlement has been in the works since September, court filings said. Hixon pled guilty in April to related criminal charges in New York, admitting that he traded the stocks of Evercore clients based on inside information about upcoming deals in a scam that netted more than $700,000.

Banks Say 10th Circ. Barclays Ruling Can’t Help RMBS Suits

Credit Suisse Securities(USA) LLC, Morgan Stanley & Co. Inc. and UBS Securities LLC told a Kansas federal judge Monday that the National Credit Union Association couldn’t use a Tenth Circuit decision to revive multimillion-dollar suits over soured residential mortgage-backed securities previously found to be time-barred.

The Tenth Circuit’s decision in NCUA v. Barclays Capital Inc. found that while a three-year extender to the statute of limitations in the related case could not be paused by a tolling agreement, specific language in that agreement held Barclays from raising any time-related defenses in the case.

The banks told U.S. District Judge John W. Lungstrum in separate filings that the former finding – that the extender wouldn’t pause in spite of a tolling agreement – applied to the cases, making many of the NCUA’s claims time-barred. However, the banks say that any specific language preventing them from pursuing time-related defenses was removed from their tolling agreements, killing any similarity to the Barclays case and decision.

“Plainly, NCUA did not – and could not – rely on a promise that the parties intentionally removed from their agreement. Thus, there is no basis to estop UBS from asserting its defense that, under ‘applicable law,’ the purported tolling of the extender statute by private agreement is void,” UBS’ reply to the motion for reconsideration said. “Accordingly, the claims at issue remain time-barred.”

FINRA Sanctions Three Firms for Inadequate Supervision of Consolidated Reports

The Financial Industry Regulatory Authority (FINRA) announced today that it has sanctioned three firms – H. Beck, Inc., LaSalle St. Securities, LLC, and J.P. Turner & Company, LLC – with fines of $425,000, $175,000 and $100,000, respectively, for inadequate supervision of consolidated reports provided to customers and other violations. A consolidated report is a single document that combines information regarding most or all of a customer’s financial holdings, regardless of where those assets are held.

Supreme Court Denies Request to Hear Insider Trading Case

The justices let stand a decision by the federal appeals court in New York last year that threw out insider trading convictions of two high-profile hedge fund managers.

The 2nd U.S. Circuit Court of Appeals overturned the convictions of Anthony Chiasson of Manhattan and Todd Newman, of Needham, Mass., after finding they were too far removed from inside information to be prosecuted.

Prosecutors warned the ruling could hinder the government’s campaign to curb insider trading on Wall Street, a crackdown that has resulted in more than 80 arrests and 70 convictions over several years.

In overturning the convictions, the appeals court said prosecutors needed to show that the person disclosing the information received a clear benefit — something more than the nurturing of a friendship.

The appeals court also said the person being prosecuted had to know about the benefit. That issue wasn’t before the Supreme Court.