Securities Industry Commentator by Bill Singer Esq

March 9, 2018

Voya Advisers Agree to Repay Clients and Settle Charges That They Failed to Disclose Securities Lending Conflict (SEC Press Release 2018-35)
The SEC charged two investment adviser subsidiaries of Voya Holdings Inc. with failing to disclose conflicts of interest and making misleading disclosures in connection with their practice of recalling securities on loan so their affiliates could receive tax benefits. The Voya adviser affiliates agreed to be censured and consented to the entry of the SEC's order finding that they willfully violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940, and Rule 206(4)-8.  Also, the advisers agreed to cease and desist from committing any further violations, and neither admitted nor denied the findings. Finally, they agreed pay about $3.6 million, which includes over $2 million directly to the affected mutual funds for the benefit of their investors. READ the FULL TEXT SEC Order.
As set forth in part in the SEC Press Release:

[V]oya Investments LLC and Directed Services LLC served as investment advisers to certain insurance-dedicated mutual funds offered to annuity and life insurance customers through insurance companies affiliated with the advisers.  In order to generate additional income for the mutual funds and their investors, the Voya advisers lent securities held by the funds to parties looking to borrow the securities.  The Voya advisers recalled loaned securities before their dividend record dates so that the advisers' insurance company affiliates, who were the record shareholders of the funds' shares, could receive a tax benefit based on the dividends received.  But, as the order explains, the recall practice caused the funds and their investors to lose securities lending income without receiving any offsetting tax benefit.  The order found that the Voya advisers failed to disclose the conflict of interest to the funds' board of directors or in the funds' prospectuses.

In anticipation of the institution of proceedings by the SEC but without admitting or denying the findings, Merrill Lynch, Pierce, Fenner & Smith Incorporated submitted an Offer of Settlement, which the federal regulator accepted. In the Matter of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Respondent (Order Instituting Administrative And Cease-And-Desist Proceedings, Making Findings, And Imposing Remedial Sanctions And A Cease-And-Desist Order; Invest. Adv. Act Rel. No. 4665; Admin. Proc. File No. 3-17879 / March 13, 2017) (the "OIP"). READ the FULL TEXT OIP  Merrill Lynch agreed to be censured, consented to the order requiring it to cease and desist, and agreed to pay a penalty of $1.25 million and more than $154,000 in disgorgement and prejudgment interest from commissions and fees earned on the improper sales.  The SEC revoked the registration of Longtop's securities.
As set forth in the OIP "Summary" 
From January 24, 2011 to August 18, 2011 Merrill violated the registration provisions of  the federal securities laws by effecting unregistered sales of almost 3 million shares of Longtop  Financial Technologies Limited's ("Longtop") securities for a customer. Longtop's securities were trading in the United States as American Depositary Shares ("ADSs"). Longtop's Chairman had obtained the 3 million unregistered shares from Longtop as one of its founders. In the summer of 2010, the Chairman purported to gift Longtop ordinary shares through a trust to existing and ex-employees  of Longtop, who were the purported beneficiaries of that trust. The related ADSs were then sold in about 68 transactions through an account at Merrill's Singapore branch office held in  the name of the trust's nominee ("Nominee").  

Section 5 of the Securities Act generally requires registration of securities offerings, or an  available exemption from registration, including for resales such as the sales through the Nominee  account at Merrill. Although brokers frequently rely on an exemption under Section 4(a)(4) of the  Securities Act, known as the brokers' transaction exemption, this exemption was not available to  Merrill for any of the Longtop ADS sales through the Nominee account. For this exemption to be available, Merrill was required, before selling securities on its customers' behalf, to engage in a reasonable inquiry into the facts surrounding the customers' proposed sales to determine if the customers were engaging in an unlawful distribution of securities. The amount of inquiry a broker must conduct as part of this reasonable inquiry varies with the facts and circumstances of each transaction. The requirement that a broker conduct a reasonable inquiry is not limited to penny stock transactions.  

Here, the Merrill team evaluating the proposed sales engaged in some inquiry before the  first sales that revealed red flags that Longtop, its management, and the Chairman maintained  control of the securities, thus indicating the purported gifts were not bona fide and the sales could  be part of an unlawful unregistered distribution by Longtop and its affiliates. Nevertheless, Merrill did not properly investigate, failed to inquire about the identities of the purported sellers and whether they were affiliates of Longtop, and instead allowed the sales to go forward.  

In January 2011, Merrill cleared a block of almost 1 million Longtop ADSs for future sales  through the Nominee account by unknown sellers. Merrill did not conduct any subsequent reviews when these ADSs were sold between January 24, 2011 and May 4, 2011. During this time, Merrill was presented with additional red flags that should have prompted the firm to conduct further inquiry and consider whether an exemption from securities offering registration was available. For instance, Merrill failed to perform any inquiry after an April 2011 online report accused Longtop  of financial fraud and questioned the legitimacy of the Chairman's gift of shares. 

Likewise, in early May 2011, when nearly 2 million more Longtop unregistered securities  were deposited into the Nominee account, Merrill failed to conduct any inquiry before effecting  additional sales of the Longtop ADSs. Even after learning of more red flags, including that  Longtop's auditor resigned in late May 2011, citing the Chairman's admissions of fraud, and  Longtop's securities were delisted by the NYSE in August 2011, Merrill still made no inquiry to  determine whether the ADSs could be sold without registration. 

Accordingly, Merrill did not perform a reasonable inquiry and was not entitled to rely on  the brokers' transaction exemption. Merrill engaged in an unregistered distribution through the Nominee account, generating approximately $38 million in proceeds for the benefit of Longtop  and its affiliates. Merrill wired the proceeds from the Nominee account to a Hong Kong bank account in the name of a different entity. This entity also was controlled by Longtop management.  Merrill received over $127,000 in commissions and fees during the relevant period. By virtue of its conduct, Merrill willfully violated Sections 5(a) and 5(c) of the Securities Act.

Investment Adviser Settles Charges for Cheating Clients in Fraudulent Cherry-Picking Scheme (SEC Press Release 2018-36)
For almost three years, Rober Mark Magee, the principal, sole owner, and sole employee of Valor Capital Asset Management LLC, allegedly traded securities in Valor's omnibus account but waited to allocate the trades to client accounts until after the securities' performance changed over the course of the day. Allegdly, Magee  disproportionately allocated profitable trades to his accounts and unprofitable trades to his clients' accounts, which resulted in cherry-picked profits for himself at his clients' expense. Without admitting or denying the SEC's findings, Magee and Valor agreed to the entry of a cease-and-desist order and to pay disgorgement, prejudgment interest, and civil penalties totaling $715,871.57. Magee also agreed to be barred from the securities industry. READ the FULL TEXT SEC Order.

Wells Fargo Unpaid Overtime Class Action Gets Second Circuit Nod for AAA Arbitration ( Blog)
In 2015, former Wells Fargo Advisors, LLC entry-level financial advisors Reagan Tucker, Benjamin Dooley, Marvin Glasgold, Livia Sappington, Ewa Kelly, and Patrick LaBorde filed putative class arbitrations before the Financial Industry Regulatory Authority ("FINRA") and the American Arbitration Association ("AAA") seeking unpaid overtime from Wells Fargo pursuant to the Fair Labor Standards Act ("FLSA") and State wage and hour laws. The Employees' employment contract required arbitration under Missouri law. FINRA rejected the actions citing its rules forbidding class and collective arbitrations. Read how the disputes fared on appeal to the United States Court of Appeals for the Second Circuit.

SEC Charges Company and Executives in Oil-and-Gas Offering Fraud
(SEC Press Release 2018-33)
The SEC filed a Complaint in the United States District Court for the Northern District of Texas charging Shezad Akbar, his company, Americrude, Inc. and Americrude's nominal President Daniel Waite with defrauding  investors in seven securities offerings that purportedly raised at least $950,000 in funds to acquire working interests in oil-and-gas prospects. Without admitting or denying the SEC's allegations, Waite consented to the entry of a final judgment that permanently restrains and enjoins him from violating Sections 5(a), 5(c) and 17(a)(2) of the Securities Act and Sections 10(b) and 15(a) of the Exchange Act and Rule 10b-5(b) thereunder; restrains and enjoins him from participating in the issuance, purchase, offer, or sale of any oil-and-gas related securities, provided however that such injunction does not prevent Waite from purchasing or selling oil-and-gas related securities for his own personal account; and orders him to pay disgorgement of ill-gotten gains totaling $32,409.52, prejudgment interest of $1,763.30, and a penalty of $100,000. READ the FULL TEXT Complaint.

Florida Man Indicted for International Email Impersonation and Fraud Scam (DOJ Press Release)
Frank Gregory Cedenowas indicted for conspiracy to commit wire fraud and conspiracy to commit money laundering in connection with a scam that solicited over $1.3 million and caused over $235,000 in losses. As alleged in the criminal Complaint, Cedenowas and his co-conspirators defrauded victims by pretending to be employees of the Securities and Exchange Commission. Co-conspirator Leonel Alexis Valerio Santana was previous charged and is detained pending trial. That complaint alleged that, between June 2015 and June 2017, there were at least 95 victims targeted by the scam, with fraudulent solicitations exceeding $1.3 million and actual losses of more than $235,000. As set forth in part in the DOJ Press Release;

The indictment alleges that, from at least April 2016 through November 2017, Cedeno conspired with others to defraud victims by pretending to be employees of the Securities and Exchange Commission (SEC). Under that guise, members of the conspiracy allegedly demanded money from victims, directing them to send it to members of the conspiracy, including Cedeno. The conspirators who received the money generally withdrew it from bank accounts quickly, then forwarded much of it to individuals in the Dominican Republic. In one common version of the scam, victims received e-mails that used official-seeming documentation and the SEC seal to induce the victim to pay a fee in order to receive a portion of a legal settlement. In another version, victims received e-mails and official-seeming documents labeling the victim a defendant in a civil lawsuit, in which the victim owed tens of thousands of dollars in supposed disgorgement, penalties, and fees. The documents gave the victim a choice of either appearing in court to contest the lawsuit or paying a smaller fee.