Merrill Lynch Sanctioned $10 Million Related to Sale of Strategic Return Notes

The Securities and Exchange Commission (“SEC”) recently imposed a cease and desist order against Merrill Lynch, Pierce, Fenner & Smith in which the Commission found that Merrill Lynch failed to adequately disclose certain fixed costs in a proprietary volatility index linked to structured notes known as Strategic Return Notes (“SRN”) of Bank of America Corporation (“BAC”). Merrill Lynch offered and sold approximately $150 million of these volatility notes to approximately 4,000 retail investor accounts in 2010 and 2011. The SEC found that the disclosures made it appear as if the volatility product had relatively low fixed costs. The offering materials emphasized that investors would be subject to a 2% sales commission and a 0.75% annual fee. The offering materials failed to adequately disclose a third fixed, regularly occurring cost included in its proprietary volatility index known as the “Execution Factor”. As a result, the disclosures in the offering materials of the fixed costs associated with the Strategic Return Notes were materially misleading.

The SEC found that as an issuer of securities, BAC had a duty to disclose all material information necessary to make statements contained in the retail pricing supplements, in light of the circumstances under which they were made, not misleading. BAC delegated to Merrill Lynch principal responsibility for drafting and reviewing the retail pricing supplements. The SEC found that Merrill Lynch violated Section 17(a)(2) of the Securities Act which prohibits obtaining money or property by means of material misstatements and omissions in the offer or sale of securities.
The SEC deemed it appropriate to impose sanctions against Merrill Lynch, including a civil monetary penalty in the amount of $10 million.

If you have suffered investment losses as a result of your broker’s or brokerage firm’s misconduct, contact the Law Offices of Place & Hanley, LLC to discuss your legal options. The Law Offices of Place & Hanley, LLC is dedicated to helping investors nationwide. If you have lost money as a result of investing in Strategic Return Notes at Merrill Lynch, you may be entitled to recover your investment losses. Contact our office toll free at (866) 318-4725 for a complimentary initial consultation.

Categories: Broker Fraud.

Federal Court Orders Dante S. Giovannetti and His Companies Emini Experts, LLC and Capital Trading Concepts LLC to Pay over $2.7 Million in Restitution and Monetary Penalties for Commodity Pool Fraud and Other Violations of the Commodity Exchange Act

The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Paul G. Byron of the U.S. District Court for the Middle District of Florida (Orlando Division) entered a Default Final Judgment Order against Defendants Dante S. Giovannetti and his companies Emini Experts, LLC(Emini) and Capital Trading Concepts LLC (Capital Trading) for defrauding clients in connection with the operation of a commodity trading pool. The court’s Order requires Giovannetti, Emini, and Capital Trading jointly to pay $663,975 to defrauded customers as restitution for their losses and jointly to pay a $1,991,926 civil monetary penalty. The Order also separately imposes jointly against Emini and Giovannetti an additional $140,000 civil monetary penalty. The court also ordered Relief Defendant Capital Futures LLC, another company owned by Giovannetti, to disgorge $143,358 of ill-gotten gains.

If you have suffered investment losses as a result of your broker’s or brokerage firm’s misconduct, contact the Law Offices of Place & Hanley, LLC to discuss your legal options. The Law Offices of Place & Hanley, LLC is dedicated to helping investors nationwide. If you have lost money as a result of your broker’s recommendations, you may be entitled to recover your investment losses. Contact our office toll free at (866) 318-4725 for a complimentary initial consultation.

Categories: Commodities Fraud.

FINRA Sanctions Fidelity Brokerage Services LLC $1 Million for Supervisory Failures

The Financial Industry Regulatory Authority (FINRA) announced that it fined Fidelity Brokerage Services LLC $500,000 and ordered the firm to pay nearly $530,000 in restitution for failing to detect or prevent the theft of more than $1 million from nine of its customers, eight of whom were senior citizens. Lisa Lewis posed as a Fidelity broker, obtained her victims’ personal information, and systematically stole customer assets through numerous transfers and debit-card transactions.

FINRA found that from August 2006 until her fraud was discovered in May 2013, Lewis was running a conversion scheme by targeting former customers from another brokerage firm from which she had been fired. Lewis told the victims she was a Fidelity broker and urged them to establish accounts at the firm and also established joint accounts with her victims in which she was listed as an owner. She eventually established more than 50 accounts and converted assets from a number of these accounts for her own personal benefit. In June 2014, Lewis pleaded guilty to wire fraud, and was sentenced to 15 years in prison and was ordered to pay more than $2 million in restitution to her victims.

FINRA found that Fidelity failed to detect or adequately follow up on multiple “red flags” related to Lewis’s scheme. FINRA also found that Fidelity failed to detect Lewis’ consistent pattern of money movements and overlooked red flags in telephone calls handled by its customer-service call center in which there were indications that Lewis was impersonating or taking advantage of her senior investor victims. FINRA also found that Fidelity’s inadequate supervisory systems and procedures contributed to the failure to detect and prevent Lewis’s fraudulent activities. Though Fidelity maintained a report designed to identify common email addresses shared across multiple accounts, it failed to implement procedures regarding the report’s use and dedicate adequate resources to the review and investigation of the reports. As a result, there was a backlog in reviewing thousands of reports, including a report in March 2012 showing that Lewis’ email address was associated with dozens of otherwise unrelated accounts. The report was not reviewed by anyone at Fidelity until April 2013, more than a year after it was generated.

If you have suffered investment losses as a result of your broker’s or brokerage firm’s misconduct, contact the Law Offices of Place & Hanley, LLC to discuss your legal options. The Law Offices of Place & Hanley, LLC is dedicated to helping investors nationwide. If you have lost money as a result of your broker’s conduct, you may be entitled to recover your investment losses. Contact our office toll free at (866) 318-4725 for a complimentary initial consultation.

Categories: Broker Fraud.

FINRA Sanctions Cantor Fitzgerald & Co. $7.3 Million for Selling Billions of Unregistered Microcap Shares, and for Related Supervisory and AML Violations

The Financial Industry Regulatory Authority (FINRA) announced that it has fined Cantor Fitzgerald & Co. $6 million and ordered disgorgement of nearly $1.3 million in commissions, plus interest, for selling billions of unregistered microcap shares in violation of federal law. Cantor Fitzgerald & Co. was also sanctioned for failing to have adequate supervisory or anti-money laundering programs tailored to detect “red flags” or suspicious activity connected to its microcap activity. In addition, two of the firm’s business executives were suspended and fined: Jarred Kessler, Executive Managing Director of Equity Capital Markets during the relevant period, was suspended for three months in a principal capacity and fined $35,000 for supervisory failures; and equity trader Joseph Ludovico was suspended in all capacities for two months and fined $25,000.

FINRA found that Cantor Fitzgerald & Co.’s supervisory system was not reasonably designed to satisfy the firm’s affirmative obligation to determine whether the microcap securities that it was liquidating for clients were registered with the Securities and Exchange Commission or subject to an exemption from registration. FINRA alleged that as a result of these failures, Cantor Fitzgerald & Co. and Ludovico, as the broker of record, sold billions of shares of thinly traded microcap securities between March 2011 and September 2012 without adequate review and due diligence, a significant portion of which were neither registered nor exempt from registration.

Joseph Ludouico was registered with the securities industry for sixteen (16) years, and is registered with the following firm:

Cantor Fitzgerald & Co.
CRD # 134
New York, NY
3/15/2000- present

Jarred Kessler was registered with the securities industry for sixteen (16) years, and was registered with the following firm(s):

Cantor Fitzgerald & Co.
CRD # 134
New York, NY
1/2011-12/2015

Credit Suisse Securities, LLC
CRD # 816
New York, NY
5/2008-12/2010

Morgan Stanley & Co. Inc.
CRD # 8209
New York, NY
12/2006-5/2008

Goldman, Sachs & Co.
CRD # 361
New York, NY
7/2005-9/2006

Bear, Stearns & Co. Inc.
CRD # 79
New York, NY
3/2004-7/2005

Knight Securities, L.P>
CRD # 38599
Jersey City, NJ
4/2000-6/2002

FINRA’s Executive Vice President and Chief of Enforcement, stated, “If a broker-dealer is looking to increase its revenues by expanding a high-risk business line, the firm and its supervisors must tailor their supervision to the risks associated with those businesses. This is especially true when the new business involves the mass liquidation of microcap securities, which presents overwhelming risks of fraud and investor harm. FINRA has no tolerance for firms and business executives who choose to engage in this business without robust systems designed to ensure that they do not become participants in illegal, unregistered distributions.”

If you have suffered investment losses as a result of your broker’s or brokerage firm’s misconduct, contact the Law Offices of Place & Hanley, LLC to discuss your legal options. The Law Offices of Place & Hanley, LLC is dedicated to helping investors nationwide. If you have lost money as a result of your broker’s recommendations, you may be entitled to recover your investment losses. Contact our office toll free at (866) 318-4725 for a complimentary initial consultation.

Categories: Broker Fraud.

FINRA Sanctions Barclays Capital, Inc. $13.75 Million for Unsuitable Mutual Fund Transactions and Supervisory Failures

The Financial Industry Regulatory Authority (FINRA) recently announced that it has ordered Barclays Capital, Inc. (CRD # 19714) to pay more than $10 million in restitution, including interest, to affected customers for mutual fund-related suitability violations. These suitability violations relate to a variety of mutual fund transactions, including mutual fund switches. Additionally, FINRA alleged that the firm failed to provide applicable breakpoint discounts to certain customers. Barclays was also censured and fined $3.75 million.

According to FINRA rules, broker-dealers are obligated to ensure that any recommendations to switch mutual funds are evaluated with regard to the net investment advantage to the investor. FINRA advises that “switching among certain fund types may be difficult to justify if the financial gain or investment objective to be achieved by the switch is undermined by the transaction fees associated with the switch.” A “mutual fund switch” involves one or more mutual fund redemption transactions coupled with one or more related mutual fund purchase transactions.

FINRA found that from January 2010 through June 2015, Barclays’ supervisory systems were not sufficient to prevent unsuitable switching or to meet certain other firm obligations regarding the sale of mutual funds to retail brokerage customers. In particular, the firm incorrectly defined a mutual fund switch in its supervisory procedures to require three separate transactions within a certain time frame. Based on this incorrect definition, Barclays failed to act on thousands of automated alerts for potentially unsuitable transactions, excluded transactions from review for suitability and failed to ensure that disclosure letters were sent to customers regarding the transaction costs. As a result, during the five-year period, there were more than 6,100 unsuitable mutual fund switches resulting in customer harm of approximately $8.63 million.

Additionally, FINRA found that the firm failed to provide adequate guidance to supervisors to ensure that mutual fund transactions for its retail brokerage customers were suitable based upon customer investment objectives, risk tolerance and account holdings. During a six-month look back review, 1,723, or 39 percent of mutual fund transactions were found to be unsuitable, with 343 customers experiencing financial harm totaling more than $800,000, including realized losses.

In addition, FINRA alleged that during the same five-year period, Barclays’ supervisory system failed to ensure that purchases were properly aggregated so that eligible customers could be provided with breakpoint discounts. A six-month look back review by FINRA found that the firm failed to provide eligible customers discounts in Class A share mutual fund transactions.

If you have suffered investment losses as a result of your broker’s or brokerage firm’s misconduct, contact the Law Offices of Place & Hanley, LLC to discuss your legal options. The Law Offices of Place & Hanley, LLC is dedicated to helping investors nationwide. If you have lost money as a result of your broker’s recommendations, you may be entitled to recover your investment losses. Contact our office toll free at (866) 318-4725 for a complimentary initial consultation.

Categories: Broker Fraud.

FINRA Bars Brokers George Johnson and Joseph Mahalick and Suspends Broker Christopher Wynne

The Financial Industry Regulatory Authority (FINRA) recently announced that it has barred broker George Johnson (CRD # 2245802) from the securities industry for engaging in a manipulative trading scheme to artificially inflate the market price and trading volume for the common stock of IceWEB, Inc. (OTCBB: IWEB). FINRA also sanctioned Christopher Wynne (CRD # 7654), Johnson’s supervisor, suspending him for two years in all capacities, barring him in a principal capacity, and fining him $25,000. Joseph Mahalick (CRD # 5563167), another broker who worked with Johnson and Wynne, was suspended for six months and fined $20,000 for falsifying firm records and has been barred from the securities industry in a separate action. Johnson, Wynne and Mahalick all worked for Meyers Associates L.P. in that firm’s Chicago branch office during the time period of the misconduct.

FINRA found that Johnson manipulated the market for IWEB by recommending that certain of his customers buy at increasingly higher and artificially inflated prices while also recommending his other customers sell their shares, frequently matching trades between the customers. FINRA found that among Johnson’s motives for manipulating the stock was the fact that he wanted to obtain business from the issuer for which he would anticipate receiving compensation in connection with a future private offering. Johnson coordinated a campaign with a stock promoter to attempt to increase the stock’s share price to a level that would allow for the exercise of certain warrants.

Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement, said, “Any broker engaging in manipulative activity poses a threat to market integrity and has no place in the securities industry. The branch office manager, who was the first line of defense in supervising George Johnson’s activities, completely failed to supervise his transactions to ensure compliance with securities laws and FINRA rules.” FINRA also found that Johnson and Wynne sent customers sales materials that omitted information concerning material conflicts of interest and material risks concerning IWEB’s business, and contained misleading, exaggerated and unwarranted information. Moreover, Johnson disclosed confidential information to potential purchasers concerning another offering.

In addition to the IWEB scheme, FINRA found that Johnson committed fraud by recommending that certain of his customers purchase shares of another penny stock without disclosing to them that he was liquidating his own personal positions of the security from his own brokerage accounts. Furthermore, FINRA’s investigation found that to cover up Johnson’s violations of state securities registration requirements, Johnson, Mahalick and Wynne agreed to the practice of entering false information on more than 100 order memoranda, indicating that Wynne or Mahalick was responsible for the account or transactions, instead of Johnson.

George Johnson was registered with the securities industry for twenty three (23) years, and was registered with the following firm(s):

Newport Coast Securities, Inc.
CRD # 16944
Chicago, IL
4/2013 – 2/2016

Meyers Associates L.P.
CRD # 34171
Chicago, IL
11/2011 – 5/2013

Anderson & Strudwick, Inc.
CRD # 48
Chicago, IL
7/2010-12/2011

Jesup & LaMont Securities Corp.
CRD # 39056
Chicago, IL
11/2009-7/2010

Garden State Securities, Inc.
CRD #10083
Chicago, IL
5/2005 – 11/2009

Stifel, Nicolaus & Co.
CRD #793
St. Louis, MO
3/2001-5/2005

Auerbach, Pollak & Richardson, Inc.
CRD # 29824
Stamford, CT
12/2000-3/2001

American Fronteer Financial Corp.
CRD # 1398
Denver, CO
10/1998 – 12/2000

H.J. Meyers & Co., Inc.
CRD# 15609
Rochester, NY
7/1992-10/1998

Christopher Wynne was registered with the securities industry for sixteen (16) years, and was registered with the following firm(s):

Newport Coast Securities, Inc.
CRD # 16944
Chicago, IL
4/2013-2/2016

Meyers Associates, L.P.
CRD # 34171
Chicago, IL
11/2011-5/2013

Anderson & Strudwick, Inc.
CRD 48
Chicago, IL
7/2010-12/2011

Jesup & LaMont Securities Corp.
CRD 39056
Chicago, IL
11/2009-7/2010

Garden State Securities, Inc.
CRD 10083
Chicago, IL
5/2005–11/2009

Stifel, Nicolaus & Co.
CRD 793
St. Louis, MO
3/2001-5/2005

Auerbach, Pollak & Richardson, Inc.
CRD 29824
Stamford, CT
12/2000-3/2001

American Fronteer Financial Corp.
CRD 1398
Denver, CO
11/1999-12/2000

Joseph Mahalick was registered with the securities industry for seven (7) years, and was registered with the following firm(s):

Newport Coast Securities, Inc.
CRD 16944
Chicago, IL
4/2013-10/2015

Meyers Associates, L.P.
CRD 34171
Chicago, IL
11/2011 – 5/2013

Anderson & Strudwick, Inc.
CRD 48
Chicago, IL
7/2010-12/2011

Jesup & LaMont Securities Corp.
CRD 39056
Chicago, IL
11/2009-7/2010

Garden State Securities, Inc.
CRD 10083
Chicago, IL
9/2008-11/2009

If you have suffered investment losses as a result of your broker’s or brokerage firm’s misconduct, contact the Law Offices of Place & Hanley, LLC to discuss your legal options. The Law Offices of Place & Hanley, LLC is dedicated to helping investors nationwide. If you have lost money as a result of your broker’s recommendations, you may be entitled to recover your investment losses. Contact our office toll free at (866) 318-4725 for a complimentary initial consultation.

Categories: Broker Fraud.

FINRA Sanctions MetLife Securities, Inc. $25 Million for Negligent Misrepresentations and Omissions in Connection With Variable Annuity Replacements

The Financial Industry Regulatory Authority (FINRA) announced recently that it has fined MetLife Securities, Inc. (MSI) $20 million and ordered it to pay $5 million to customers for making negligent material misrepresentations and omissions on variable annuity replacement applications for tens of thousands of customers. FINRA alleged that each misrepresentation and omission propounded by MSI made the replacement appear more beneficial to the customer, even though the recommended variable annuities were typically more expensive than customers’ existing variable annuity. According to FINRA, MSI’s variable annuity replacement business constituted a substantial portion of its business, generating at least $152 million in gross dealer commission for the firm over a six-year period.

FINRA advises that replacing one variable annuity with another involves a comparison of the complex features of each security. Accordingly, variable annuity replacements are subject to regulatory requirements to ensure a firm and its registered representatives compare costs and guarantees that are complete and accurate.

FINRA found that from 2009 through 2014, MSI misrepresented or omitted at least one material fact relating to the costs and guarantees of customers’ existing variable annuity contracts in 72 percent of the 35,500 variable annuity replacement applications the firm approved, based on a sample of randomly selected transactions. Examples from FINRA’s review found that:

• MSI represented to customers that their existing variable annuity was more expensive than the recommended variable annuity, when in fact, the existing variable annuity was less expensive;
• MSI failed to disclose to customers that the proposed variable annuity replacement would reduce or eliminate important features in their existing variable annuity, such as accrued death benefits, guaranteed income benefits, and a guaranteed fixed interest account rider; and,
• MSI understated the value of customers’ existing death benefits in disclosures.

According to Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, “Variable annuities are complex and expensive products that are routinely pitched to vulnerable investors as a key component of their retirement planning. Firms engaging in this business must ensure that the information on the costs and benefits of these products provided to customers is accurate, and that their registered representatives are sufficiently trained to understand and explain the risks and complex features of what they are selling. These obligations take on even greater importance when a significant part of a firm’s marketing effort involves switching customers out of existing annuities.”

FINRA also found that MSI failed to ensure that its registered representatives obtained and assessed accurate information concerning the recommended VA replacements, and did not adequately train its registered representatives to compare the relative costs and guarantees involved in replacing one variable annuity with another. According to FINRA MSI’s principals did not consider the relative costs and guarantees of the proposed transactions. FINRA alleged that MSI principals ultimately approved 99.79 percent of variable annuity replacement applications submitted to them for review, even though nearly three quarters of those applications contained materially inaccurate information.

FINRA further found that MSI failed to supervise sales of the GMIB rider, the firm’s bestselling feature for its variable annuities. The rider was marketed to customers (many of whom were already holding MetLife annuities) as a means of providing a guaranteed future income stream. The GMIB rider is complex and expensive—annual fees during the relevant period ranged from 1 percent to 1.5 percent of the variable annuities notional income base value. FINRA found that a frequently cited reason for MSI’s recommendation of variable annuity replacements was to allow a customer to purchase the GMIB rider on the new variable annuity contract. Nevertheless, MSI failed to provide registered representatives and principals with reasonable guidance or training about the cost and features of the rider.

In addition, FINRA found that since at least 2009, MSI customers have received misleading quarterly account statements that understate the total charges and fees incurred on certain variable annuity contracts. Typically, the quarterly account statements misrepresented that the total fees and charges were $0.00 when, in fact, the customer has paid a substantial amount in fees and charges.

If you have suffered investment losses as a result of investing with MetLife Securities, contact the Law Offices of Place & Hanley, LLC to discuss your legal options. The Law Offices of Place & Hanley, LLC is dedicated to helping investors nationwide. If you have lost money as a result of your broker’s or brokerage firm’s recommendations, you may be entitled to recover your investment losses. Contact our office toll free at (866) 318-4725 for a complimentary initial consultation.

Categories: Securities Broker Misconduct.

Fraud Charges Filed Against Owners of Jay Peak Ski Resort Relating to Millions of Dollars Solicited under the EB-5 Immigrant Investors Program

The Securities and Exchange Commission recently announced fraud charges and an asset freeze against a Vermont-based ski resort and related businesses allegedly misusing millions of dollars raised through investments solicited under the EB-5 Immigrant Investor Program. The Securities and Exchange Commission filed a complaint for Injunctive and Other Relief against Ariel Quiros, William Stenger, Jay Peak, Inc., Q Resorts, Inc., Jay Peak Hotel Suites L.P., Jay Peak Hotel Suites Phase II L.P., Jay Peak Hotel Suites Phase II L.P., Jay Peak Management, Inc., Jay Peak Penthouse Suites L.P., Jay Peak GP Services, Inc., Jay Peak Golf and Mountain Suites L.P., Jay Peak GP Services Golf, Inc., Jay Peak Lodge and Townhouses, L.P., Jay Peak GP Services Lodge, Inc., Jay Peak Hotel Suites Stateside L.P., Jay Peak GP Services Stateside, Inc., Jay Peak Biomedical Research Park L.P., and AnC Bio Vermont GP Services, LLC. The SEC’s case was unsealed in federal court in the United States District Court Southern District of Florida, and the court has appointed a receiver over the companies to prevent any further spending of investor assets.

The SEC alleges that Ariel Quiros of Miami, Florida, William Stenger of Newport, Vermont, and their companies made false statements and omitted key information while raising more than $350 million from investors to construct ski resort facilities and a biomedical research facility in Vermont. According to the SEC complaint, investors were told they were investing in one of several projects connected to Jay Peak Inc., a ski resort operated by Quiros and Stenger, and their money would only be used to finance that specific project. The SEC complaint alleges that instead, in Ponzi-like fashion, money from investors in later projects was misappropriated to fund deficits in earlier projects. The SEC complaint alleges that more than $200 million was used for other-than-stated purposes, including $50 million spent on Quiros’s personal expenses and in other ways never disclosed to investors.

According to the SEC’s complaint, Quiros improperly tapped investor funds for such things as the purchase of a luxury condominium, payment of his income taxes and other taxes unrelated to the investments, and acquisition of an unrelated ski resort. The SEC’s complaint charges Quiros, Stenger, Jay Peak, and a company owned by Quiros called Q Resorts Inc., as well as, seven limited partnerships and their general partner companies with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Four other companies are named as relief defendants in the SEC’s complaint for the purpose of recovering investor funds transferred into their accounts.

If you have suffered investment losses contact the Law Offices of Place & Hanley, LLC to discuss your legal options. The Law Offices of Place & Hanley, LLC is dedicated to helping investors nationwide. You may be entitled to recover your investment losses. Contact our office toll free at (866) 318-4725 for a complimentary initial consultation.

Categories: Broker Fraud and Securities Fraud.

SEC Charges Aequitas Management with Defrauding Investors

The Securities and Exchange Commission recently announced that it charged an Oregon-based investment group and three top executives with hiding the rapidly deteriorating financial condition of its enterprise while raising more than $350 million from investors.  Aequitas Management LLC and four affiliates allegedly defrauded more than 1,500 investors nationwide into believing they were making health care, education, and transportation-related investments when their money was really being used in a last-ditch effort to save the firm.  Some money from new investors was allegedly used to pay earlier investors.

The SEC’s complaint, filed today in federal district court in Oregon, alleges that CEO Robert J. Jesenik and executive vice president Brian A. Oliver were well aware of Aequitas’s calamitous financial condition yet continued to solicit millions of dollars from investors to pay the firm’s ever-increasing expenses and attempt to stave off the impending collapse.  Former CFO and chief operating officer N. Scott Gillis allegedly concealed the firm’s insolvency from investors and was aware that Jesenik and Oliver continued soliciting investors so that Aequitas could pay operating expenses and repay earlier investors with money from new investors.

“We allege that Aequitas had severe and persistent cash flow shortages and top executives knew they weren’t using money raised from investors like they said they would.  But they refused to disclose the true financial condition, continued to draw lucrative salaries, and roped even more unknowing investors into a losing venture,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office.

According to the SEC’s complaint:

  • From January 2014 to January 2016, Aequitas raised money from investors by issuing promissory notes with high rates of return typically ranging from 8.5 to 10 percent.
  • While Aequitas did use some investor money to acquire trade receivables in health care, education, transportation, and other consumer credit sectors, the vast majority was concentrated in student loan receivables of for-profit education provider Corinthian Colleges.  Corinthian defaulted on its recourse obligations to Aequitas in mid-2014, which significantly exacerbated the firm’s already severe cash flow problems.
  • The executives continued to draw their lucrative salaries, use a private jet, and attend posh dinner and golf outings, all at the expense of investors.  They used the outings to raise more money from investors.  Jesenik, Oliver, and Gillis took home at least $2.5 million in combined salaries during this period.
  • By November 2015, Aequitas could no longer meet scheduled redemptions.  Last month, the firm dismissed two-thirds of its employees and hired a chief restructuring officer.

The SEC’s complaint charges violations of the federal securities laws by Aequitas Management, Aequitas Holdings LLC, Aequitas Commercial Finance LLC, Aequitas Capital Management Inc., and Aequitas Investment Management LLC as well as Jesenik, Oliver, and Gillis.  The SEC seeks permanent injunctions, disgorgement with prejudgment interest, and monetary penalties from all defendants as well as bars prohibiting Jesenik, Oliver, and Gillis from serving as officers or directors of any public company.

Aequitas and the affiliated entities have agreed to be preliminarily enjoined from raising any additional funds by offering and selling securities, and agreed to the appointment of a receiver to marshal and preserve remaining Aequitas assets for distribution to defrauded investors.  The stipulated orders are subject to court approval.

If you have suffered investment losses as a result of your broker’s or brokerage firm’s misconduct, contact the Law Offices of Place & Hanley, LLC to discuss your legal options. The Law Offices of Place & Hanley, LLC is dedicated to helping investors nationwide. If you have lost money as a result of your broker’s recommendations, you may be entitled to recover your investment losses. Contact our office toll free at (866) 318-4725 for a complimentary initial consultation.

Categories: Investor Protection, Securities Fraud, and Securities Investigations.

SEC Charges Wells Fargo With Fraud in 38 Studios Bond Offering

The Securities and Exchange Commission recently announced that it had charged a Rhode Island agency and its bond underwriter Wells Fargo Securities with defrauding investors in a municipal bond offering to finance startup video game company 38 Studios. 

The Rhode Island Economic Development Corporation (RIEDC, now called the Rhode Island Commerce Corporation) issued $75 million in bonds for the 38 Studios project as part of a state government program intended to spur economic development and increase employment opportunities by loaning bond proceeds to private companies.

According to the SEC’s complaint filed in federal district court in Providence:

  • The RIEDC loaned $50 million in bond proceeds to 38 Studios.  Remaining proceeds were used to pay related bond offering expenses and establish a reserve fund and a capitalized interest fund.
  • The loan and, in turn, bond investors would be repaid from revenues generated by video games that 38 Studios planned to develop.
  • The bond offering document produced by the RIEDC and Wells Fargo failed to disclose to investors that 38 Studios had conveyed it needed at least $75 million in funding to produce a particular video game.
  • Therefore, investors weren’t fully informed when deciding to purchase the bonds that 38 Studios faced a funding shortfall even with the loan proceeds and could not develop the video game without additional sources of financing.
  • When 38 Studios was later unable to obtain additional financing, the video game didn’t materialize and the company defaulted on the loan.

The SEC also charged Wells Fargo’s lead banker on the deal, Peter M. Cannava, and two then-RIEDC executives Keith W. Stokes and James Michael Saul with aiding and abetting the fraud.  Stokes and Saul agreed to settle the charges without admitting or denying the allegations and must each pay a $25,000 penalty.  They are prohibited from participating in any future municipal securities offerings.  The SEC’s litigation continues against Cannava, Wells Fargo, and RIEDC.

The SEC’s complaint further alleges that Wells Fargo and Cannava misled investors in an additional way in bond offering materials:

  • Wells Fargo disclosed its bond offering compensation as a share of the placement agent fee plus a $50,000 payment from 38 Studios.  No other fees or compensation to Wells Fargo were disclosed, and the bond placement agreement stated that no other money was anticipated.
  • Investors weren’t informed that Wells Fargo had a side deal with 38 Studios that enabled the firm to receive nearly double the amount of compensation disclosed in offering documents.
  • This additional compensation, totaling $400,000 and paid from bond proceeds, created a conflict of interest that Wells Fargo should have disclosed to bond investors.
  • Cannava was responsible for Wells Fargo’s failure to disclose its additional fees.

The SEC’s complaint charges the RIEDC and Wells Fargo with violations of Sections 17(a)(2) and (a)(3) of the Securities Act of 1933, and charges Stokes, Saul, and Cannava with aiding and abetting those violations.  Wells Fargo also is charged with violations of Section 15B(c)(1) of the Securities Exchange Act of 1934 and Rules G-17 and G-32 of the Municipal Securities Rulemaking Board (MSRB).  Cannava is charged with aiding and abetting those violations.

In a separate administrative proceeding, the RIEDC’s financial advisor for the bond offering – First Southwest Company LLC – agreed to settle charges that it violated MSRB rules by failing to document in writing the scope of the services the firm was providing in the bond offering until seven months after the financial advisory relationship began.  Without admitting or denying the findings, First Southwest agreed to pay disgorgement of $120,000, prejudgment interest of $22,400, and a penalty of $50,000.

If you have suffered investment losses as a result of your broker’s or brokerage firm’s misconduct, contact the Law Offices of Place & Hanley, LLC to discuss your legal options. The Law Offices of Place & Hanley, LLC is dedicated to helping investors nationwide. If you have lost money as a result of your broker’s recommendations, you may be entitled to recover your investment losses. Contact our office toll free at (866) 318-4725 for a complimentary initial consultation.

 

Categories: Broker Investigations, Investor Protection, Securities Broker Misconduct, Securities Fraud, and Securities Investigations.