by T. GormanPosted on Posted in SECActions

The market crisis may have ended years ago, but not the SEC’s supply of cases from that time period. The agency filed a settled action in which those soliciting sophisticated investors misrepresented the risks of two funds, contrary to the warnings in the materials. In the Matter of Citigroup Alternative Investments LLC, Adm. Proc. File No. 3-16757 (August 17, 2015).

Respondent Citigroup Alternative is a subsidiary of Citigroup Inc. It was the investment manager for the ASTA/MAT and Falcon funds. Respondent Citigroup Global Markets Inc., is an affiliate of Citigroup Inc. It recommended and sold share of ASTA/MAT, a leveraged municipal arbitrage fund, and Falcon fund, a multi-strategy fund invested in fixed income strategies and asset-backed securities which was also leveraged, to investors associated with it.

From September 2002 through early 2007 Respondents offered and sold about $1.9 billion of investments in ASTA/MAT to about 2,700 investors and advisory clients of Citigroup Global. From late 2004 through October 2007 Respondents sold about $936 million of investments in Falcon to about 1,300 investors and advisory clients of Citigroup Global. Each fund was managed per disclosed investment strategies and was leveraged. Shares in the two funds were not generally sold to retail investors. Rather, they were limited to qualified purchasers.

Those marketing the shares claimed that Falcon was safe, low-risk and could be considered a bond substitute. Similarly, ASTA/MAT was represented to be safe and low risk despite the disclosures in its offering materials. Those claims were not accurate, according to the Order. The funds used significant amounts of leverage which increased the risk of a margin call. Back testing for ASTA/MAT demonstrated there was more risk than investors were told. Thus the risk of loss for that fund, which also accounted for about 20% of Falcon’s investments, was higher than those selling the interests were told.

In August 2007 Falcon experienced margin calls. The fund manager sold about $2 billion of fund assets. An urgent request for a contingency liquidity plan in the amount of $200 million – essentially a loan from Citigroup Alternative or Citigroup Inc. — was denied. Investors were not informed about its financial condition. Misrepresentations continued to be made about its performance. Indeed, in September and October 2007 about $110 million was raised from new investors who were not told the actual financial condition of the fund. From November 2007 through March 2008 Falcon continued to experience severe liquidity shortage.

During the same period those marketing ASTA/MAT orally misrepresented its condition and ability to survive a declining market. Investors were told that the biggest risk to the fund was the institution of a flat tax. Those in charge of the sales groups, who played a part in drafting and disseminating information regarding the funds, did not implement policies and procedures to prevent the misrepresentations to the investors. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Advisers Act Sections 206(2) and 206(4).

To resolve the action Respondents consented to the entry of cease and desist orders based on the Sections cited in the Order as well as censures. In addition they will pay disgorgement of $139,950,239 along with prejudgment interest.

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by T. GormanPosted on Posted in SECActions

A recurrent theme in today’s enforcement environment is parallel and often overlapping proceedings. That is the case with a District of Columbia based broker that drew sanctions from the SEC, FINRA and DC. In the Matter of Success Trade, Inc., Adm. Proc. File No. 3-16755 (August 14, 2015).

Respondent Success Trade is the Washington, D.C. based parent of registered broker dealer Success Trade Securities, Inc., also a Respondent, and BP Trade, Inc., a software company. Both are operated by Fuad Ahmed, as is BP Trade. Success Trade Securities operated as a deep discount broker.

The firm never generated sufficient cash flow to be successful. Success Trade lost over $600,000 in 2008. Working capital was raised by issuing two ten year promissory notes totaling $800,000 to a New York investor with annual interest rates of 50-53%. To repay the notes in March 2009 Respondents put together an offering of Success Trade notes. Those notes were marketed largely to the clients of Investment Adviser A, a firm based in McLean, Virginia which catered to professional athletes. Many of Adviser A’s clients had brokerage accounts at Success Trade Securities. Mayn of Adviser A’s clients were young and financially unsophisticated – not qualified investors.

The notes were offered using a PPM. It claimed the bulk of the offering proceeds would be used to grow the business. A chart in the PPM illustrated how the proceeds would be spent. Those statements did not, however, reflect the actual manner in which the investor funds were employed. In fact those funds were expended to pay: interest to the New York investor; Investment Adviser A; Mr. Ahmed’s personal expenses; and to fund a loan to Mr. Ahmed’s brother. The PPM contained other misrepresentations.

By November 2012 Respondents were again facing severe financial pressure. Success Trade did not have cash flow to cover its obligations. Accordingly, Respondents persuaded a number of note holders to either extend the notes or convert their investment to equity, typically offering higher interest rates or lower conversion prices than were authorized by the PPM. In connection with those efforts, note holders were not told the true financial condition of the firm. They were informed that a report Mr. Ahmed had prepared valued the business at $47.1 million without being given a copy or being told that the valuation was of BP Trade, not Success Trade, based on a series of unverified assumptions regarding its cash flow. To the contrary, investors were given the incorrect impression that the report and its valuation number took into consideration the actual financial condition of Success Trade. Investors were also given the false impression that the firm’s stock would be listed on a European exchange in the immediate future.

The note offering was not registered or exempt from registration. While the firm filed a Form D Note of Exempt Offering with the SEC claiming the offering was exempt under Rule 505, in fact it was not, according to the Order. Under that provision the offering cannot include more than 35 non-accredited investors or any investors who are both non-accredited and unsophisticated. The Success Trade offering did not meet the requirements of the Rule.

The Order alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Respondents resolved the action, consenting to the entry of a cease and desist order based on the Sections cited in the Order. They also agreed to pay, on a joint and several basis, disgorgement of $12,777,395.80 and prejudgment interest. Respondents will, in addition, pay on a jointly and severally, a penalty of $12,777,395.80. Additional proceedings will be held to determine if a bar order as to Mr. Ahmed is appropriate.

Previously, a FINRA hearing panel issued an order expelling Success Trade from membership, barring Mr. Ahmed from association with any FINRA member firm and requiring him and his firm, jointly and severally, to pay investor restitution and prejudgment interest of $13,706,288.28. The order, dated June 25, 2014 was based on the Success Trade note offering. It is on appeal.

In February 2015 the District of Columbia’s Department of Insurance, Securities and Banking entered a cease and desist order against the firm and Mr. Ahmed based on the note offering. The order also prohibits them from engaging in the securities business in the District of Columbia and directs, on a joint and several basis, the payment of investor restitution of $12,529,804.34 and a penalty of $650,000.

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