Aug 21, 2018 | Shareholder & Investor Protection
On August 20, 2018, the Securities and Exchange Commission announced that it charged the founder of San Francisco-based venture capital funds and his investment advisory firm with overcharging investors to fund personal projects, including sending millions of dollars to his own virtual reality production company.
The SEC’s complaint alleges that Michael B. Rothenberg, 34, marketed his advisory firm, Rothenberg Ventures LLC, as uniquely positioned to identify millennial entrepreneurs and invest in “frontier technology” companies. According to SEC filings, Rothenberg’s funds had nearly 200 investors and more than $64 million in assets.
The SEC’s complaint alleges that over a three-year period, Rothenberg and his firm misappropriated millions of dollars from the funds, including an estimated $7 million of excess fees, which Rothenberg used to support personal business ventures he claimed were self-funded and to pay for private parties and events at high-end resorts and Bay Area sporting arenas.
Without admitting or denying the allegations in the SEC’s complaint, Rothenberg and Rothenberg Ventures agreed to settle the charges. The settlement is subject to approval by the United States District Court, Northern District of California, which would determine the amount of disgorgement and civil money penalties. Rothenberg also agreed to be barred from the brokerage and investment advisory business with a right to reapply after five years. An SEC order imposing the bar will be instituted following court approval of the settlement.
Source: SEC.gov
Aug 20, 2018 | Shareholder & Investor Protection
On August 20, 2018, the Securities and Exchange Commission announced that it charged five individuals and four companies for unlawfully selling securities of Woodbridge Group of Companies LLC (“Woodbridge”) to retail investors. Woodbridge collapsed into bankruptcy in December 2017 and the SEC previously charged the company, its owner, and others with operating a massive $1.2 billion Ponzi scheme.
The Florida-based defendants named in the SEC’s complaints, Barry M. Kornfeld, Ferne Kornfeld, Lynette M. Robbins, Andrew G. Costa, Albert D. Klager, and their companies, were among Woodbridge’s top revenue producers, selling more than $243 million of its unregistered securities to more than 1,600 retail investors. The complaints allege that defendants reaped millions of dollars in commissions on their sales of Woodbridge securities, even though they were not registered as broker-dealers and were not permitted to sell securities. According to the SEC, Barry Kornfeld also violated a prior SEC order which barred him from acting as a broker.
According to the SEC’s complaints, the defendants touted Woodbridge as a “safe and secure” investment. Allegedly, the Kornfelds solicited investors at seminars and a “conservative retirement and income planning class” they taught at a Florida university. The SEC alleges that Klager pitched Woodbridge investments in newspaper ads, while Costa recommended them during a radio program he hosted, and Robbins used radio, television, and internet marketing.
Once Woodbridge filed for bankruptcy, investors stopped receiving monthly interest payments and have not received a return of their investment principal. Woodbridge has since agreed to settle the liability portion of the SEC’s charges without admitting or denying the allegations and reached a resolution with the SEC and creditors in a bankruptcy action regarding the ongoing control and management of Woodbridge. The SEC’s monetary claims against Woodbridge remain pending.
In its latest actions, the SEC filed charges seeking court-ordered injunctions, return of allegedly ill-gotten gains with interest, and financial penalties against the Kornfelds, Costa, Klager and their companies.
Robbins and her company, Knowles Systems Inc., agreed to settle the SEC’s charges in a separate action without admitting or denying the allegations and return more than $1 million of allegedly ill-gotten gains plus interest. Robbins also agreed to pay a $100,000 civil penalty and to an industry and penny-stock bar.
Source: SEC.gov
Aug 7, 2018 | Shareholder & Investor Protection
The SEC’s Office of Investor Education and Advocacy recently issued an Investor Bulletin containing the following basic, useful information about index funds:
What Is An Index Fund?
An “index fund” is a type of mutual fund or exchange-traded fund that seeks to track the returns of a market index. The S&P 500 Index, the Russell 2000 Index, and the Wilshire 5000 Total Market Index are examples of market indexes that index funds may seek to track.
A market index measures the performance of a “basket” of securities (e.g., stocks or bonds), which is meant to represent a sector of a stock market, or of an economy. One cannot invest directly in a market index, but because index funds track a market index, they provide an indirect investment option.
What Do Index Funds Contain?
Index funds may take different approaches to track a market index: some invest in all of the securities included in a market index, while others invest in only a sample of the securities included in a market index.
Market indexes often use a company’s market capitalization to decide how much weight that security will have in the index. Market capitalization (or “market cap”) is a measure of the total value of the company’s shares. The total value is equal to the share price times the number of shares outstanding. In a market-cap-weighted index, securities with a higher market capitalization value account for a greater share of the overall value of the index. Some market indexes, such as the Dow Jones Industrial Average, are “price-weighted.” In this case, the price per share will determine the weight of a security.
Some index funds may also use derivatives (like options or futures) to help achieve their investment objective.
How Do Index Funds Invest?
Generally, index funds have generally followed a passive, rather than active, style of investing. This means they aim to maximize returns over the long term by not buying and selling securities very often. In contrast, an actively managed fund often seeks to outperform a market (usually measured by some kind of index) by doing more frequent purchases and sales.
What Are The Costs Associated With Index Funds?
Because index funds generally use a passive investing strategy, they may be able to save costs. For example, managers of an index fund are not actively picking securities, so they do not need the services of research analysts and others that help pick securities. This reduction in the cost of fund management could mean lower overall costs to shareholders. However, keep in mind that not all index funds have lower costs than actively managed funds. Investors are reminded to always be sure to understand the actual cost of any fund before investing.
Fees and expenses reduce the value of one’sinvestment return. If the holdings of two funds have identical performance, the fund with the lower cost generally will generate higher returns for the investor. For more information, see Updated Investor Bulletin: How Fees and Expenses Affect Your Investment Portfolio
What Are Some Risks Of Index Funds?
Like any investment, index funds involve risk. An index fund will be subject to the same general risks as the securities in the index it tracks. The fund may also be subject to certain other risks, such as:
Lack of Flexibility. An index fund may have less flexibility than a non-index fund to react to price declines in the securities in the index.
Tracking Error. An index fund may not perfectly track its index. For example, a fund may only invest in a sampling of the securities in the market index, in which case the fund’s performance may be less likely to match the index.
Underperformance. An index fund may underperform its index because of fees and expenses, trading costs, and tracking error.
Some Things To Keep In Mind Before Investing In A Fund
The SEC recommends that investors carefully read all of the fund’s available information, including the fund’s prospectus and most recent shareholder report. Importantly, funds disclose their portfolio holdings quarterly in Form N-Q and shareholder reports. Usually, this information can be obtained from the fund’s website or one’s financial professional, as well as on EDGAR.
Asking the following questions may help:
What fees and expenses can I expect to pay for buying, owning, and selling this fund?
What specific risks are associated with this fund?
How is the makeup of the fund’s index determined?
How does the fund’s investment strategy fit with my investment goals?
NOTE: In recent years, new types of index funds that track custom-built indexes or benchmarks have become more common. The information provided in the SEC’s investor bulletin may not apply to “non-traditional” index funds, and the SEC encourages investors to review Investor Bulletin: Smart Beta, Quant Funds and other Non-Traditional Index Funds for more information about non-traditional index funds.
Source: Investor.gov
Aug 6, 2018 | Shareholder & Investor Protection
SEC Updates Its List of Unregistered Firms That Use Misleading Information to Primarily Solicit Non-U.S. Investors
On August 6, 2018, the SEC announced that it has updated its list of unregistered firms that use misleading information to primarily solicit non-U.S. investors, adding 16 soliciting entities, four impersonators of genuine firms, and nine bogus regulators.
The updates by the SEC Division of Enforcement’s Office of Market Intelligence, in coordination with the SEC’s Office of Investor Education and Advocacy and the Office of International Affairs, are part of the agency’s continuing effort to protect retail investors.
The SEC’s list of soliciting entities that have been the subject of investor complaints, known as the Public Alert: Unregistered Soliciting Entities (PAUSE) list, enables investors to better inform themselves and avoid being a victim of fraud. The latest additions are firms that the SEC staff found were providing inaccurate information about their affiliation, location, or registration.
Under U.S. securities laws, firms that solicit investors generally are required to register with the SEC and meet minimum financial standards and disclosure, reporting, and recordkeeping requirements.
In addition to alerting investors to firms falsely claiming to be registered, the PAUSE list flags those impersonating registered securities firms and bogus “regulators” who falsely claim to be government agencies or affiliates. Inclusion on the PAUSE list, according to the SEC, does not mean the SEC has found violations of U.S. federal securities laws or made a judgment about the merits of any securities being offered.
Before investing, the SEC strongly encourages individuals to check the background of anyone selling an investment using the free “Check Out Your Investment Professional” search tool at Investor.gov. Additionally, the SEC recommends to always verify that the seller is currently licensed or registered.
Source: SEC.gov
Jul 23, 2018 | Shareholder & Investor Protection
On July 23, 2018, the Securities and Exchange Commission announced that the SEC charged Mizuho Securities USA LLC for its failure to safeguard information pertaining to stock buybacks by its issuer customers. Mizuho, according to the SEC, failed to maintain and enforce policies and procedures aimed at preventing the misuse of material nonpublic information, including maintaining effective information barriers between different trading desks and requiring employees to keep client information confidential. Mizuho agreed to settle the charges and will pay a $1.25 million penalty.
According to the SEC’s order, during a two-year period, Mizuho traders regularly disclosed material nonpublic customer buyback information to other traders and Mizuho’s hedge fund clients. That information included the identity of the party placing the order, the order size, limit price, and indications that the orders were buyback orders. Such information was routinely communicated across trading desks, notwithstanding that during the relevant period Mizuho executed over 99.8% of all buyback orders by using algorithms, rather than through trader-negotiated open market trades.
The SEC’s order, among other things, stated:
As a result of these failures, during the Relevant Period, Mizuho’s execution and sales traders received confidential issuer buyback trade information on nearly every day that Mizuho executed buyback trades. Moreover, the head execution trader on Mizuho’s U.S. Equity Trading Desk was given direct access to Mizuho’s International Trading Desk’s order management system, which included buyback purchase trade orders, and he also routinely disseminated such information to traders on his desk.
In addition, on several occasions, Mizuho execution and sales traders disclosed to certain firm customers nonpublic customer buyback order information. The information often included the order size, the limit price, and key terms that indicated to the recipients that the orders were issuer buyback orders. This trade information was valuable to other market participants, particularly given that the party placing the trade was the issuer. Moreover, many of the issuer buyback orders that Mizuho handled during the Relevant Period comprised a significant portion of the daily trading volume in the stocks being bought back, which increased the potential impact of the buyback orders on the prices of those stocks.
“Confidential information concerning issuer stock buybacks can be material to institutional investors, particularly when such trading comprises a significant portion of the daily trading volume in the stock being repurchased,” said Antonia Chion, Associate Director of the SEC Division of Enforcement. “Broker-dealers must be attentive to their responsibilities to maintain and enforce policies and procedures to prevent the misuse of such information.”
The SEC’s order finds that Mizuho willfully violated Section 15(g) of the Securities Exchange Act of 1934. Without admitting or denying the SEC’s findings, Mizuho consented to the order imposing a $1.25 million penalty, a censure, and ordering it to cease and desist from committing or causing any future violations.
Source: SEC.gov
Jul 20, 2018 | Shareholder & Investor Protection
Improper Handling of “Pre-Released” American Depositary Receipts (“ADRs”)
On July 20, 2018, the SEC announced that two U.S.-based subsidiaries of Deutsche Bank AG will pay nearly $75 million to settle charges of improper handling of “pre-released” ADRs.
The case, according to the SEC, stems from a continuing SEC investigation into abuses involving pre-released ADRs. In proceedings against Deutsche Bank Trust Co. Americas (DBTCA), a depositary bank, and Deutsche Bank Securities Inc. (DBSI), a registered broker-dealer, the SEC found that their misconduct allowed pre-released ADRs to be used for abusive practices, including inappropriate short selling and inappropriate profiting around dividend payouts.
ADRs, which are U.S. securities that represent foreign shares of a foreign company, require a corresponding number of foreign shares to be held in custody at a depositary bank. The practice of “pre-release” allows ADRs to be issued without the deposit of foreign shares, provided brokers receiving them have an agreement with a depositary bank and the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADR represents.
In the order against DBTCA, the SEC found that it improperly provided thousands of pre-released ADRs over a more than five-year period when neither the broker nor its customers had the requisite shares. The order against DBSI found that its policies, procedures, and supervision failed to prevent and detect securities laws violations concerning borrowing and lending pre-released ADRs, involving approximately 850 transactions over more than three years.
Last year, the SEC announced settled charges against brokers ITG Inc. and Banca IMI Securities Corp., which at times obtained pre-released ADRs from DBTCA and other depositaries and lent them to other brokers, including DBSI. The SEC also charged a former managing director and head of operations at broker-dealer ITG for failing to supervise personnel on ITG’s securities lending desk who improperly handled pre-released ADRs.
Without admitting or denying the SEC’s findings, DBTCA agreed to return more than $44.4 million of alleged ill-gotten gains plus $6.6 million in prejudgment interest and a more than $22.2 million penalty, nearly $73.3 million in total. DBSI, also without admitting or denying the SEC’s findings, agreed to pay nearly $1.6 million, representing $1.1 million in disgorgement and prejudgment interest and a nearly $500,000 penalty. The SEC’s orders acknowledge each entity’s cooperation in the investigation and remedial acts.
Source: SEC.gov
