This Week In Securities Litigation (Week ending June 2, 2017)
The Commission filed one settled administrative proceeding this week involving an investment adviser. The Order charged cherry picking, making misrepresentations to clients regarding certain fees and a failure to trade a fund in accord with the disclosed objectives.
FINRA announced a settled proceeding in which a former bond trader was barred from the securities business. The action centered on trading about $190 million worth of certain foreign bonds in violation of firm policy by falsifying documents. And, ESMA imposed substantial fines on two units of Moody’s for repeatedly publishing ratings that were not supported by disclosure of the methodology used to develop the rating as required by the applicable regulations.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC did not file any civil injunctive cases but did file 1 administrative proceeding, excluding 12j and tag-along proceedings.
Cherry picking: In the Matter of Laurence I. Balter, Adm. Proc. File No. 3-17614 (May 26, 2017). Respondent Balter did business as Oracle Investment Research. For a portion of the period here Oracle was a registered investment adviser; the registration was withdrawn. Mr. Balter was a registered representative with two dual registrants. He was also registered as an investment adviser with the State of Washington for a period. From January 2011 to April 2014 Respondent managed the Oracle Mutual Fund and between 100 and 200 separately managed accounts. The Order alleges that when trading Respondent allocated profitable trades to his own accounts to the detriment of several client accounts. He also told the clients who had separately managed accounts that if they invested in the Fund there would be no additional fee charges – a claim that was false. Finally, Mr. Balter executed trades for the Fund which fundamentally deviated from its investment limitations. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b), Advisers Act Sections 206(1), 206(2), 206(4) and 207 and Investment Company Act Sections 13(a) and 34(b). Respondent resolved the proceedings, consenting to the entry of a cease and desist order based on the Sections cited in the Order. He is also barred from the securities business and directed to pay disgorgement of $489,921.00, prejudgment interest and a penalty of $50,000.00.
Conflicts: SEC v. Momentum Investment Partners LLC, Civil Action No. 16-cv-00832 (D. Conn.) is a previously filed action which named as defendants the registered investment adviser and its CEO, Ronald J. Fernandes. The complaint alleged that in moving client funds from their current accounts to newly created accounts Respondents failed to inform clients that the fees would be significantly higher for no additional services. Both defendants settled, consenting to the entry of permanent injunctions based on Advisers Act Sections 206(1), 206(2) and, in addition, as to the firm, 204, 206(4) and 207. The judgment also directed that the defendants pay, on a joint and several basis, $61,275.52 in disgorgement along with prejudgment interest. The firm was directed to pay a penalty of $125,000 while Mr. Fernandes will pay $40,000. See Lit. Rel. No. 23847 (May 26, 2017).
Fraudulent markups: SEC v. Im, Civil Action No. 1:17-cv-0313 (S.D.N.Y.) is a previously filed action against two Nomura Securities International Inc. traders, James Im and Kee Chan. Both men worked on the CMBS trading desk. Both were charged with lying to customers about the markups charges. Mr. Chan settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). In addition, Mr. Chan will pay disgorgement of $51,965, prejudgment interest and a penalty of $150,000. In a related administrative proceeding he was barred from the securities business with the right to reapply after three years. See Lit. Rel. No. 23848 (May 26 2017).
FINRA
Prohibited trades: The regulator barred John Batista Bocchio, formerly of Morgan Stanley Smith Barney, from the securities business. Mr. Bocchio placed about 300 trades in Venezuelan bonds despite the fact that the firm had restricted such trades due to regulatory and anti-money laundering concerns. Mr. Bochio placed the trades, valued at about $190 million, by concealing them in several nominee accounts in the names of well known U.S. financial institutions and falsifying internal firm documents. FINRA also suspended Mr. Bocchio’s trading assistant, Rafael Barela Jacinto, for one year and fined him $10,000.
Criminal Cases
Insider trading: U.S. v. Khan (N.D. Cal.) charges Saleem Mohammad Khan with one count of conspiracy and seven counts of securities fraud. Specifically, Mr. Kahn is charged with having participated in an insider trading scheme from August 2009 through late 2012 in which he traded multiple times in the shares of Ross Stores securities while in possession of inside information. The inside information was furnished to him from his friend, Roshanial Chaganial, employed in the finance department of Ross. The trades generated over $8.2 million in profits. See also SEC v. Khan, Civil Action No. 3:14-cv-02743 (N.D. Cal.).
Pay-to-play: U.S. v. Kelly (S.D.N.Y.). Defendant Deborah Kelly, former managing director of Sterne Agee & Leach, pleaded guilty to one count of conspiracy to commit securities fraud and honest services wire fraud. The charges center on a pay-to-play scheme involving the New York State Common Retirement Fund. Ms. Kelly was charged with repeatedly paying bribes in various forms to Navnoor Kang, the Director of Fixed Income and Head of Portfolio Strategy of the Pension Fund. In return he directed millions of dollars worth of business to her firm. When the SEC opened an investigation into the matter Mr. Kang and Ms. Kelly agreed to falsify their testimony to conceal the scheme. Sentencing is scheduled for September 15, 2017.
Australia
Insider trading: Darren Thompson, formerly of Credit Suisse Management Australia, pleaded guilty to insider trading charges brought by the Australia Securities Investment Commission. The charges are based on 11 instances in which Mr. Thompson procured a close friend to purchase shares for him involving seven traded firms while in possession of inside information. The trades generated almost $500,000 in trading profits. Mr. Thompson was sentenced to serve 17 months imprisonment.
ESMA
Improper credit rating reports: The European Securities and Markets Authority fined Moody’s Deutschland Gm14 or Moody’s Germany €750,000 and Moody’s Investors Services Limited (Moody’s UK) €490,000 and issued a public notice for two negligent breaches f the Credit Rating Agencies Regulations. Specifically, the regulator concluded that the two firms issued certain ratings between June 2011 and December 2013 for nine supranational entities including the European Investment Bank, the European Investment Fund, the European Stability Mechanism, the European Financial Stability Facility and the European Union. The nineteen ratings contained only press releases and no other information. The applicable regulations require that there be disclosure of methodologies regarding the process used so that investors and market participants can check and evaluate the ratings. Here the required information was omitted.