Mar 8, 2018 | Shareholder & Investor Protection
Merrill Lynch Settles Charges with SEC for Merrill’s Failure to Perform Required Gatekeeping Functions in the Unregistered Sales of Securities on behalf of Longtop Financial
The SEC announced on March 8, 2018 that it settled charges against Merrill Lynch, Pierce, Fenner & Smith Inc. for its failure to perform required gatekeeping functions in the unregistered sales of securities on behalf of a China-based issuer and its affiliates.
Merrill Lynch Sold Almost Three Million Shares of Longtop Financial Technological Limited’s Securities Despite “Red Flags” Indicating Sales Could be Part of an Unlawful Unregistered Distribution
The SEC’s Order found that Merrill Lynch sold almost three million shares of Longtop Financial Technological Limited’s (“Longtop”) securities into the market despite red flags indicating that the sales could be part of an unlawful unregistered distribution. The distribution, ultimately, generated almost $38 million in proceeds for the overseas issuer and its affiliates.
SEC’s Order Finds Merrill Lynch Violated Sections 5(a) and 5(c) of Securities Act of 1933
The SEC’s Order found that Merrill Lynch violated Sections 5(a) and 5(c) of the Securities Act of 1933. In settlement, without admitting or denying the SEC’s findings, the firm agreed to be censured and consented to the order requiring it to cease and desist from committing or causing any future violations of the registration provisions of the Securities Act. The Order also requires Merrill Lynch to pay a penalty of $1.25 million and more than $154,000 in disgorgement and prejudgment interest from commissions and fees earned on the improper sales.
Summary of the SEC’s Order Against Merrill Lynch
According to the SEC’s Order:
From January 24, 2011 to August 18, 2011 Merrill violated the registration provisions of the federal securities laws by effecting unregistered sales of almost 3 million shares of Longtop . . . securities for a customer. Longtop’s securities were trading in the United States as American Depositary Shares (“ADSs”). Longtop’s Chairman had obtained the 3 million unregistered shares from Longtop as one of its founders. In the summer of 2010, the Chairman purported to gift Longtop ordinary shares through a trust to existing and ex-employees of Longtop, who were the purported beneficiaries of that trust. The related ADSs were then sold in about 68 transactions through an account at Merrill’s Singapore branch office held in the name of the trust’s nominee (“Nominee”).
Section 5 of the Securities Act generally requires registration of securities offerings, or an available exemption from registration, including for resales such as the sales through the Nominee account at Merrill. Although brokers frequently rely on an exemption under Section 4(a)(4) of the Securities Act, known as the brokers’ transaction exemption, this exemption was not available to Merrill for any of the Longtop ADS sales through the Nominee account. For this exemption to be available, Merrill was required, before selling securities on its customers’ behalf, to engage in a reasonable inquiry into the facts surrounding the customers’ proposed sales to determine if the customers were engaging in an unlawful distribution of securities. The amount of inquiry a broker must conduct as part of this reasonable inquiry varies with the facts and circumstances of each transaction. The requirement that a broker conduct a reasonable inquiry is not limited to penny stock transactions.
Here, the Merrill team evaluating the proposed sales engaged in some inquiry before the first sales that revealed red flags that Longtop, its management, and the Chairman maintained control of the securities, thus indicating the purported gifts were not bona fide and the sales could be part of an unlawful unregistered distribution by Longtop and its affiliates. Nevertheless, Merrill did not properly investigate, failed to inquire about the identities of the purported sellers and whether they were affiliates of Longtop, and instead allowed the sales to go forward.
In January 2011, Merrill cleared a block of almost 1 million Longtop ADSs for future sales through the Nominee account by unknown sellers. Merrill did not conduct any subsequent reviews when these ADSs were sold between January 24, 2011 and May 4, 2011. During this time, Merrill was presented with additional red flags that should have prompted the firm to conduct further inquiry and consider whether an exemption from securities offering registration was available. For instance, Merrill failed to perform any inquiry after an April 2011 online report accused Longtop of financial fraud and questioned the legitimacy of the Chairman’s gift of shares.
Likewise, in early May 2011, when nearly 2 million more Longtop unregistered securities were deposited into the Nominee account, Merrill failed to conduct any inquiry before effecting additional sales of the Longtop ADSs. Even after learning of more red flags, including that Longtop’s auditor resigned in late May 2011, citing the Chairman’s admissions of fraud, and Longtop’s securities were delisted by the NYSE in August 2011, Merrill still made no inquiry to determine whether the ADSs could be sold without registration.
Accordingly, Merrill did not perform a reasonable inquiry and was not entitled to rely on the brokers’ transaction exemption. Merrill engaged in an unregistered distribution through the Nominee account, generating approximately $38 million in proceeds for the benefit of Longtop and its affiliates. Merrill wired the proceeds from the Nominee account to a Hong Kong bank account in the name of a different entity. This entity also was controlled by Longtop management. Merrill received over $127,000 in commissions and fees during the relevant period. By virtue of its conduct, Merrill willfully violated Sections 5(a) and 5(c) of the Securities Act.[]
SEC Has Revoked the Registration of Longtop’s Securities
The SEC has revoked the registration of Longtop’s securities, and for additional information, please see the SEC’s Order Making Findings and Revoking Registration by Default.
Source: SEC.gov
Mar 7, 2018 | Shareholder & Investor Protection
Preliminary Injunction Order Issued Against Patrick K. McDonnell and His Company, CabbageTech, Corp., d/b/a Coin Drop Markets, in Connection with Fraudulent Virtual Currency Scheme
On March 6, 2018, the Commodity Futures Trading Commission (“CFTC”) announced that a federal judge entered a Preliminary Injunction Order against Defendants Patrick K. McDonnell (“McDonnell”) and CabbageTech, Corp. d/b/a Coin Drop Markets (“Coin Drop Markets”). The decision stems from the CFTC’s January 18, 2018 complaint charging Defendants McDonnell and Coin Drop Markets with fraud and misappropriation in connection with purchases and trading of the virtual currencies Bitcoin and Litecoin.
U.S. District Court Judge Finds CFTC Showed Reasonable Likelihood that Defendants McDonnell and Coin Drop Markets Will Continue to Violate the Commodity Exchange Act
Following a hearing on March 6, 2018, the federal judge found that the CFTC had shown a reasonable likelihood that the Defendants will continue to violate the Commodity Exchange Act. The Order of the United States District Court for the Eastern District of New York prohibits the Defendants from engaging in fraud in violation the Commodity Exchange Act, requires the Defendants to preserve books and records, and requires the Defendants to provide expedited discovery.
In its continuing litigation, the CFTC seeks, among other relief, a permanent injunction against future violations of federal commodities laws, restitution to defrauded customers, disgorgement of benefits from violations of the Commodity Exchange Act and CFTC Regulations, civil monetary penalties, and trading bans, as charged.
CFTC Charges McDonnell and His Company, CabbageTech, Corp., d/b/a Coin Drop Markets, with Engaging in Fraudulent Virtual Currency Scheme
On January 19, 2018, the CFTC announced that on January 18, 2018, a federal civil enforcement action was filed by the CFTC in United States District Court for the Eastern District of New York against Defendants McDonnell and Coin Drop Markets, charging them with fraud and misappropriation in connection with purchases and trading of Bitcoin and Litecoin.
An Alleged Deceptive, Fraudulent Virtual Currency Scheme
The CFTC’s January 18, 2018 complaint alleges that from approximately January 2017 to the present, McDonnell and Coin Drop Markets engaged in a deceptive and fraudulent virtual currency scheme to induce customers to send money and virtual currencies to Coin Drop Markets, purportedly in exchange for real-time virtual currency trading advice and for virtual currency purchasing and trading on behalf of the customers under McDonnell’s direction. In fact, as charged in the CFTC complaint, the supposedly expert, real-time virtual currency advice was never provided, and customers who provided funds to McDonnell and Coin Drop Markets to purchase or trade on their behalf never saw those funds again. In short, McDonnell and Coin Drop Markets used their fraudulent solicitations to obtain and then simply misappropriate customer funds.
The CFTC complaint alleges that to conceal their scheme, soon after obtaining customer funds, Defendants McDonnell and Coin Drop Markets removed the website and social media materials from the Internet and ceased communicating with Coin Drop Markets customers who lost most, if not all, of their invested funds due to the Defendants’ fraud and misappropriation. Further, the CFTC complaint alleges that neither Defendant has ever been registered with the CFTC.
Source: CFTC.gov
Mar 4, 2018 | Shareholder & Investor Protection
U.K. Brokerage Firm, Investment Manager, CEO, and Others Charged by SEC for Manipulating the Securities of Microcap Issuers HD View 360 Inc. and West Coast Ventures Group Corp.
On March 2, 2018, the SEC announced securities fraud charges against a U.K.-based broker-dealer and its investment manager in connection with manipulative trading in the securities of HD View 360 Inc., a U.S.-based microcap issuer. Charges were also announced against HD View’s CEO, another individual, and three entities they control for manipulating HD View’s securities, as well as the securities of another microcap issuer, West Coast Ventures Group Corp. Additionally, the SEC announced that an order suspending trading in the securities of HD View was instituted.
SEC’s Charges and FBI Undercover Operation Resulting in Criminal Prosecutions
The SEC’s charges stem, in part, from an undercover FBI operation, which also resulted in related criminal prosecutions against these defendants by the United States Attorney’s Office, Eastern District of New York.
The SEC’s Complaint Against Beaufort Securities and Peter Kyriacou
In a complaint filed in the United States District Court, Eastern District of New York, the SEC alleges that Beaufort Securities Ltd. (“Beaufort”) and Peter Kyriacou (“Kyriacou”), an investment manager at Beaufort, manipulated the market for HD View’s common stock. The scheme involved an undercover FBI agent who described his business as manipulating U.S. stocks through pump-and-dump schemes. Kyriacou and the undercover FBI agent discussed depositing large blocks of microcap stock in Beaufort accounts, driving up the price of the stock through promotions, manipulating the stock’s price and volume through matched trades, and then selling the shares for a large profit.
Allegedly, Beaufort and Kyriacou:
- Opened brokerage accounts for the undercover FBI agent in the names of nominees in order to conceal his identity and his connection to the anticipated trading activity in the accounts.
- Suggested that the undercover FBI agent could create the false appearance that HD View’s stock was liquid in advance of a pump-and-dump by “gam[ing] the market” through matched trades.
- Executed multiple purchase orders of HD View shares with the understanding that Beaufort’s client had arranged for an associate to simultaneously offer an equivalent number of shares at the same price.
The SEC’s Complaint Against HD View CEO Dennis Mancino, William Hirschy, DJK Investments 10 Inc., TJM Investments Inc. & WT Consulting Group, LLC
A second complaint filed by the SEC in United States District Court, Eastern District of New York, alleges that in a series of recorded telephone conversations with the undercover FBI agent, HD View CEO Dennis Mancino (“Mancino”) and William T. Hirschy (“Hirschy”) agreed to manipulate HD View’s common stock by using the undercover agent’s network of brokers to generate fraudulent retail demand for the stock in exchange for a kickback from the trading proceeds. According to the complaint, the three men agreed that Mancino and Hirschy would manipulate HD View stock to a higher price before using the undercover agent’s brokers to liquidate their positions at an artificially inflated price. The SEC’s complaint also alleges that Mancino and Hirschy executed a “test trade” on Jan. 31, 2018, coordinated by the undercover FBI agent, consisting of a sell order placed by the defendants filled by an opposing purchase order placed by a broker into an account at Beaufort.
Mancino and Hirschy, however, were not aware that the Beaufort account used for this trade was a nominal account that was opened and funded by the agent. The SEC’s complaint also alleges that, prior to their contact with the undercover agent, Mancino and Hirschy manipulated the market for HD View and for West Coast by using brokerage accounts that they owned, controlled, or were associated with –including TJM Investments Inc., DJK Investments 10 Inc., WT Consulting Group LLC – to effect manipulative “matched trades.”
The SEC’s complaint against Beaufort and Kyriacou charges the defendants with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC also charged Hirschy, Mancino, and their corporate entities with violating Section 17(a)(1) of the Securities Act of 1933, Sections 9(a)(1), 9(a)(2), and 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder.
The SEC is seeking injunctions, disgorgement, prejudgment interest, penalties, and penny stock bars from Beaufort and Kyriacou. With respect to Hirschy, Mancino, and their corporate entities, the SEC is seeking injunctions, disgorgement, prejudgment interest, penalties, penny stock bars, and an officer-and-director bar against Mancino.
Source: SEC.gov
Mar 2, 2018 | Shareholder & Investor Protection
Three-Time Recidivist Charged with Operating an Unregistered Broker-Dealer, Facilitating an Unregistered Securities Offering, and Defrauding Small Businesses
On March 1, 2018, the SEC issued a litigation release regarding Securities and Exchange Commission v. Steven J. Muehler, Claudia M. Muehler, Koorosh “Danny” Rahimi, AltaVista Capital Markets, LLC, AltaVista Private Client, LLC, and AltaVista Securities, LLC, No. 18-cv-01677 (C.D. Cal., filed February 28, 2018). According to the SEC’s litigation release:
Three-time recidivist Steven J. Muehler (“Muehler”) was charged with operating an unregistered broker-dealer, facilitating an unregistered securities offering, and defrauding small businesses, while promising to help them raise money from investors. Three companies under Muehler’s control, Muehler’s wife, Claudia M. Muehler, and his associate, Koorosh “Danny” Rahimi (“Rahimi”), were also charged. The SEC, since the scheme is ongoing, is seeking a preliminary injunction to stop Muehler’s ongoing violations of the securities laws, pending trial of the action.
According to the SEC’s complaint, Muehler’s companies are not registered as broker-dealers. Since at least November 2015, however, Muehler and his companies have agreed to provide broker-dealer services to more than 20 small businesses, including identifying and soliciting investors and utilizing a purportedly proprietary online securities exchange to help raise funds from investors. Muehler and his companies, in return, received fees, the right to a percentage of any funds raised from investors, and the right to an equity stake in each small business customer.
The SEC also alleges that in offering broker-dealer services, Muehler and his companies made numerous fraudulent claims to potential customers, including that Muehler and his companies had $50 million on-hand to invest in their customers’ securities, that they had previously helped customers raise millions of dollars, and that their proprietary online exchange was registered with the SEC. They also concealed that Muehler is subject to an SEC cease-and-desist order and has been sanctioned by California and Minnesota securities regulators.
The SEC’s complaint also charges Muehler with violating a cease-and-desist order issued by the SEC in 2016 barring Muehler from associating with any broker-dealer, and the SEC has filed a parallel action in the same court to enforce that SEC order.
The SEC’s complaint alleges that Claudia Muehler and Danny Rahimi helped Muehler carry out this scheme.
The SEC’s complaint, which seeks permanent injunctions, disgorgement plus interest, and penalties, charges Muehler and the three companies he controls (AltaVista Capital Markets, LLC, AltaVista Private Client, LLC, and AltaVista Securities, LLC) with violating Section 5(c) of the Securities Act of 1933 and Section 15(a), Section 10(b), and Rule 10b-5 of the Securities Exchange Act of 1934, and also charges Muehler with violating Section 15(b)(6) of the Securities Exchange Act of 1934. It charges Claudia Muehler with aiding and abetting Muehler’s and the AltaVista Companies’ violations of the Securities Exchange Act of 1934, and charges Rahimi with violating Section 15(a) of the Securities Exchange Act of 1934.
Source: SEC.gov
Mar 1, 2018 | Shareholder & Investor Protection
Georgetown University Voluntary Contribution Retirement Plan & Georgetown University Voluntary Contribution Retirement Plan Subject of ERISA Class Action
On February 23, 2018, a class action complaint was filed in U.S. District Court for the District of Columbia against Georgetown University on behalf of a class of participants and beneficiaries of the Georgetown University Voluntary Contribution Retirement Plan and the Georgetown University Voluntary Contribution Retirement Plan (“Georgetown University Retirement Plan(s)” or “Retirement Plans”).
According to the class action complaint:
Eligible faculty and staff members of Georgetown University are able to participate in the [Georgetown University Retirement Plans]. The [Retirement] Plans provide a primary source of retirement income for many employees of Georgetown University. Contributions to the [Retirement] Plans are based upon deferrals of employee compensation and employer matching contributions. The ultimate retirement benefit provided to investors in the [Retirement] Plans – who in retirement plan-speak also are known as “plan participants” or just “participants” . . . depends on the performance of investment options chosen for the [Retirement] Plans by the Defendants net of fees and expenses. Participants . . . have a right to direct the investment of their accounts among the available investment choices.
The class action complaint also alleges that
. . . instead of leveraging the [Retirement] Plans’ substantial bargaining power to benefit participants and beneficiaries, Defendants failed adequately to evaluate and monitor the [Retirement] Plans’ expenses and caused the [Retirement] Plans to pay unreasonable and excessive fees for investment and administrative services.
Defendants’ first breach of duty [in this regard] was to fail to select a suitable, single service provider to provide administrative and recordkeeping services to the [Retirement] Plans in exchange for a reasonable amount of compensation.
Rather than negotiating a separate, reasonable and fixed fee for recordkeeping with a single administrative provider to the [Retirement] Plans, Defendants continuously retained three different service providers – the Teachers Insurance and Annuity Association of America and College Retirement Equities Fund (“TIAA-CREF” or “TIAA”), The Vanguard Group and/or Vanguard Fiduciary Trust Company (“Vanguard”) and Fidelity Investments (“Fidelity”). Each of these recordkeepers supplied the [Retirement] Plans with a separate menu of investment choices including mutual fund share classes that charged higher fees than (i) other less expensive investment alternatives that offered the same investment strategies or (ii) less expensive share classes of the exact same investment fund, or (iii) both.
The class action complaint against the Retirement Plans alleges that TIAA-CREF, Vanguard, and Fidelity were the “three platform providers” which created “three investing segments” for the Retirement Plans, and plan participants could only choose from, and invest in, the investment choices of one of the three investing segments. Retirement plan participants, according to the complaint, “. . . paid asset-based fees for administrative services, which continued to increase as the value of their accounts increased through additional contributions and investment returns[,] even though no additional services were being provided to Plaintiffs as their fees went up.”
The significant volume of investment choice selections from the three investing segments (hundreds of mutual fund and annuity investment choices) “. . . indicates that Defendants failed properly to monitor and evaluate the historical performance and expense of the[] funds,” and “. . . the inclusion of many investment alternatives . . . unreasonably burdens plan participants who do not have the resources to pre-screen investment alternatives in the way Defendants do.” According to the complaint, “. . . Defendants selected and maintained investment options for the Plans that historically and consistently underperformed their benchmarks and charged excessive fees.”
The complaint provides additional evidence of the Retirement Plans’ “flawed fiduciary process,” as evidenced by “. . . approval of a TIAA loan program for [Georgetown] University employees who elected to borrow against their retirement plan savings. This program (i) required excessive collateral as security for repayment of these loans, (ii) required an illegal transfer of plan assets to TIAA as collateral for the loan repayment when no such transfer is necessary or permitted, and (iii) violated DOL rules for retirement plan participant loan programs.” (Emphasis added.)
401(k), 403(b), Employee Stock Ownership & Other Retirement Plan Participants
If you believe your retirement plan investments have suffered losses due to imprudent investments, breaches of fiduciary duty, misrepresentations, excessive, unreasonable or undisclosed retirement plan fees or other corporate wrongdoing by retirement plan administrators and managers, please contact Kehoe Law Firm, P.C. by completing the form above on the right or sending an e-mail to [email protected].
Feb 28, 2018 | Shareholder & Investor Protection
Ameriprise Financial Settles Charges That It Overcharged Retirement Account Customers for Mutual Fund Shares
On February 28, 2018, the Securities and Exchange Commission announced that Minnesota-based Ameriprise Financial Services, Inc., a broker-dealer and investment adviser, has agreed to settle charges for recommending and selling higher-fee mutual fund shares to retail retirement account customers and for failing to provide sales charge waivers.
According to the SEC’s Ameriprise Financial Services Order, Ameriprise Financial Services, Inc. disadvantaged certain retirement account customers by failing to ascertain their eligibility for less expensive mutual fund share classes. Ameriprise Financial recommended and sold these customers more expensive mutual fund share classes when less expensive share classes were available. Ameriprise Financial also failed to disclose that it would receive greater compensation from the purchases and that the purchases would negatively impact the overall return on the customers’ investments.
According to the SEC, approximately 1,791 customer accounts paid a total of $1,778,592.31 in unnecessary up-front sales charges, contingent deferred sales charges, and higher ongoing fees and expenses as a result of the practices of Ameriprise Financial. Further, Ameriprise Financial cooperated with the SEC and voluntarily identified the affected accounts, issued payments including interest to the affected customers, and converted eligible customers to the mutual fund share class with the lowest expenses for which they are eligible, at no cost.
According to the SEC’s Order:
From at least January 2010 through June 2015 . . ., Ameriprise disadvantaged certain retirement plan customers (“Eligible Customers”)[] by failing to ascertain that they were eligible for a less expensive share class, and recommending and selling them more expensive share classes in certain open-end registered investment companies (“mutual funds”) when less expensive share classes were offered to these Eligible Customers by Ameriprise on its platform. Ameriprise did so without disclosing that it would receive greater compensation from the Eligible Customers’ purchases of the more expensive share classes. Eligible Customers did not have sufficient information to understand that Ameriprise had a conflict of interest resulting from compensation it received for selling the more expensive share classes. Specifically, Ameriprise recommended and sold these Eligible Customers Class A shares with an up-front sales charge or Class B or Class C shares with a back-end contingent deferred sales charge (“CDSC”) (a deferred sales charge the purchaser pays if the purchaser sells the shares during a specified time period following the purchase) and higher ongoing fees and expenses, when these Eligible Customers were eligible to purchase load-waived Class A shares. Ameriprise omitted material information concerning its compensation when it recommended the more expensive share classes to these Eligible Customers. Because Ameriprise did not ascertain these customers’ eligibility for load-waived A shares, it did not disclose to Eligible Customers that the purchase of the more expensive share classes would negatively impact their overall return, in light of the different fee structures for the different fund share classes. (Emphasis added)
The SEC’s order instituting a settled administrative and cease-and-desist proceeding finds that Ameriprise violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, and without admitting or denying the findings, Ameriprise Financial consented to a cease-and-desist order, a censure, and a penalty of $230,000.
Source: SEC.gov
