by T. GormanPosted on Posted in SECActions

When investment advisers and brokers misrepresent the value of the account to a client it is frequently because something untoward has occurred – huge trading losses, misappropriation or other malfeasance. The Commission’s most recent case in this area however has none of that. Rather, the complaint centers on claims that the adviser repeatedly misrepresented the amount in retirement accounts. Those account were declining significantly in value. No reason is given. An earlier FINRA proceeding did find that the adviser had engaged in unsuitable and excessive trading. SEC v. Cody, Civil Action No. 1:16-cv-12510 (D. Mass. Filed December 12, 2016).

Richard Cody is an investment adviser and a former broker representative. In 2009 he formed Boston Investment Partners, LLC. By the end of 2015 he had about 100 advisory accounts with over $14 million in assets under management.

From 2004 to the present Mr. Cody is alleged to have made misrepresentations to three clients regarding the value of their retirement accounts. During the period the value of the three accounts declined substantially. Mr. Cody did not tell the three clients that fact however. To the contrary, Mr. Cody continually told the clients that their accounts were fine.

To continue the ruse, Mr. Cody had to conceal the true value of the accounts from the clients. To do this he at times falsely represented that withdrawals could not be made because the funds were invested in an annuity which prevented a withdrawal. When insufficient funds were available for a withdrawal he wired money into the client bank account from other sources to conceal the diminished value of the investment account. He also furnished the clients with tax filings that contained false values while continuing to misrepresent the true value of the accounts.

In 2008 FINRA brought an action against Mr. Cody. It alleged that he engaged in unsuitable and excessive trades. That action went to hearing. Ultimately Mr. Cody was suspended in a decision upheld on appeal.

The Commission’s complaint does not specify the reason the three accounts declined in value, only that Mr. Cody concealed that fact. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The action is pending. See Lit. Rel. No. 23702 (December 13, 2016).

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by T. GormanPosted on Posted in SECActions

Stock manipulations often take place in the over-the-counter markets which are less regulated than major exchanges such as the New York Stock Exchange and NASDAQ. Frequently the manipulations are raw pump-and-dumps where the promoters hold a large or even a controlling position in the stock, cause misleading publicity to be sent out regarding the stock in conjunction with manipulative trading and then sell their stake as the price climbs. When the promoter has sold his or her block of stock the publicity ends and the price collapses. The manipulator wins; the public loses.

The Commission’s most recent manipulation case has none of these elements. Rather, it took place on major exchanges and was built only on manual trading without false publicity. But over 2,000 stocks were manipulated and $26 million in profits were generated in about two years. SEC v. Taub, Civil Action No. 2:16-cv-09130 (D. N.J. Filed December 12, 2016).

Defendant Joseph Taub directed the scheme with assistance from defendant Elazar Shmalo. EAC Capital LLC and LNW Direct LLC, both limited liability companies controlled by Mr. Taub, were involved. Mr. Taub was previously a registered representative. Mr. Shmalo describes himself as either self-employed or unemployed.

The scheme began in January 2014 and continued through the end of 2015. During that period the defendants controlled 36 accounts at nine brokerage firms. Generally, securities were traded in a coordinated fashion with one account being the “winner” and the other the “helper.” The scheme, which in some ways mimicked high speed trading in the form of spoofing without the high speed, involved the following steps:

Accounts: Defendants would trade two accounts in coordination on the same day using the same exchange traded stock; typically that stock was thinly traded;

Initial trades: The helper account would place multiple buy (or sell) orders to create the appearance of upward (or downward) pressure on the stock price; the price would move up (or down);

Follow-up trades: The winner account would primary place large buy (or sell) orders executed at the artificial prices generated by the helper account;

The process would then be reversed. The same manipulation would take place on the opposite side. In this instance a series of small buy order of 100 to 400 shares in one or more helper accounts were placed. The winner account would then execute against those orders in blocks of 1,000 to 1,400. Once the winner account completed its trades the remaining orders would be cancelled. Profits would be a few thousand dollars while the helper account would have small losses.

The defendants repeated this processed at least 23,000 times during the period yielding millions of dollars in profits. About 20% of the time small losses averaging about $600 per event resulted.

Generally, the trades were placed using accounts in the name of the defendants or those of relatives. In a number of instances the trades were flagged by the compliance department of the brokerage firm. In those instances the traders would feign ignorance. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 9(a)(2) and 10(b). The action is pending.

The U.S. Attorney’s Office brought a parallel criminal action.

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