by T. GormanPosted on Posted in SECActions

Two principals of an investment adviser were named as Respondents in an SEC administrative proceeding. The action centers on claims that the two men improperly advised their clients to invest in off-shore funds without fully disclosing their affiliation with those funds or the fees they were paid. In the Matter of Larry C. Grossman, Adm. Proc. File No. 3-15617 (Nov. 20, 2013).

Larry Grossman and Gregory Adams, named as Respondents, were affiliated with registered investment adviser Sovereign International Asset Management, Inc. Mr. Grossman was the sole owner of Sovereign from its formation in 2001 through October 2008 when he sold the firm and its affiliates to Mr. Adams. After the sale Mr. Grossman continued to be affiliated with the adviser until the firm was administratively dissolved in 2012.

Sovereign had about $85 million in assets under management at its peak in 2008. Many of its investors were retirees. Shortly after forming Sovereign, Mr. Grossman met Nikolai Simon Battoo, the principal of BC Capital Group, S.A. and its affiliated companies which operated off shore hedge funds. Mr. Battoo was named as a defendant in a Commission fraud action brought in 2012, SEC v. Battoo, Case No. 12CV125 (N.D. Ill.).

In 2003 Mr. Grossman executed three referral agreements and one consulting contract behalf of a Sovereign affiliate with funds and entities controlled or owned by Mr. Battoo. Under three agreements referral fees were paid to Sovereign while the fourth called for the payment of fees directly to Mr. Grossman for consulting services.

From August 2003 through October 2008 Mr. Grossman recommended to Sovereign clients that they invest almost exclusively in off-shore funds in the Battoo group. In making these recommendations the full risks of the investment were not adequately disclosed. Some investors were told that the funds were very safe, contrary to their offering documents. None were told that all of the funds were cross collateralized.

Likewise, Messrs. Grossman and Adams did not properly or fully disclosed to Sovereign’s investors the fees paid under the four agreements with the Battoo group. In some materials there was no disclosure of the fees. In others there were statements indicating that fees may be paid despite the fact that they were actually being paid. Investors were thus largely unaware of the conflict on which the investment recommendations were based.

In late 2008 one of the Battoo funds notified a shareholder class that it was suspending redemptions. Before that action was taken Mr. Grossman learned that the fund had not honored redemption requests for several months. Messrs. Gossman and Adams also learned that Mr. Battoo had stopped providing investors with audited financial statements as required in the offering materials. In addition, the two men also understood that the asset verification reports which were available on request were being prepared by parties related to Mr. Battoo, not independent third parties. Mr. Adams never questioned the reason for the suspension, accepting the representation of Mr. Grossman that it was caused by an account transfer. Mr. Grossman continued to advise Sovereign’s clients to invest in, or retain their investments in, the Battoo funds.

By 2010 Mr. Batto refused to permit withdrawals from another fund. The next year he claimed that was caused by losses incurred in the MF Global bankruptcy. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 15(a) and Advisers Act Sections 206(1), 206(2), 206(3), 206(4) and 207. The proceeding will be set for hearing.

Tagged with: , , ,

by T. GormanPosted on Posted in SECActions

JPMorgan settled its civil liability with the Department of Justice and others stemming from the mortgage market, agreeing to pay $13 billion. The long rumored settlement included admissions concerning its conduct in the residential mortgage-backed securities or RMBS market which many believe was at the center of the market crisis. The resolution is the outgrowth of investigations conducted by the Financial Fraud Enforcement Task Force’s RMBS Working Group, announced by the President in his state of the Union Address two years ago.

The settlement is the largest with a single entity in American History, according to DOJ. It is, in essence, a roll-up of several actions. It includes $9 billion in settlement of several federal agencies state claims. The federal claims, asserted by DOJ and three agencies, were resolved with payments of:

DOJ: $2 billion as a penalty under the FIRREA;

FHFA: $4 billion to the Federal Housing Finance Agency;

NCUA: $1.4 billion to the National Credit Union Administration; and

FDIC: $515.4 million to the Federal Deposit Insurance Corporation;

The state claims were resolved with payments to:

New York: $613.8 million;

California: $298.9 million;

Illinois: $100 million;

Massachusetts: $34.4;

The remaining portions of the settlement benefits consumers in the housing market. Specifically, $4 billion is for relief to consumers harmed by the unlawful conduct of JPMorgan and the two firms it acquired, Bear Stearns and Washington Mutual.

Two critical points regarding the settlement concern admissions and other investigations. As part of the settlement the bank made a series of admissions, acknowledging its employees conduct in the RMBS market. The settlement did not resolve the parallel criminal investigation into the bank’s activities in that market, the potential liability of its employees in those markets or any of the other civil and criminal investigations involving the firm which are currently underway. Thus, while the settlement resolves a significant number of actions, it is not the end of potential liability for the bank or its employees.

The SEC was not a party to this settlement. While the agency has brought a number of actions centered on the market crisis, those actions typically centered on one transaction in the RMBS market. For example, the action brought against JPMorgan was based on the sale of interests in one entity. SEC v. J.P. Morgan Securities LLC, Civil Action No. 11-04206 (S.D.N.Y.). Likewise, its action against Bank of America tied to the mortgage market was based on the sale of interest in one CDO. SEC v. Bank of America, N.A., Civil Action No. 3:130-cv-0447 (W.D.N.C.). See also, In the Matter of UBS Securities LLC, Adm. Proc. File No. 3-15407 (Aug. 6, 3013)(sale of interest in one CDO).In contrast the settlement by the Working Group focuses on the years of the market crisis.

Tagged with: , , ,