Securities Industry Commentator by Bill Singer Esq

September 5, 2018

SEC Charges Telecommunications Expense Management Company with Accounting Fraud (SEC Litigation Release No. 24255)
In a Complaint filed in the United States District Court for the District Connecticut, the SEC charged Tangoe Inc. (a purported telecommunications management company), its former CEO Albert R. Subbloie, former CFO Gary R. Martino, former Vice President of Finance Thomas H. Beach, and former Senior Vice President of Expense Management Operations Donald J. Farias with violating antifraud provisions of the federal securities laws. The Complaint alleged that Tangoe improperly recognized about $40 million of revenue, and, at times, reported revenue prematurely for work that had not been performed and also for non-revenue-producing transactions .  The SEC alleges that Donald J. Farias, a Tangoe executive, falsified business records, some of which were provided to Tangoe's external auditors to support revenue recognition decisions. Without admitting or denying the allegations, Tangoe, Subbloie, Martino, and Beach have agreed to settle the SEC's charges and to pay civil penalties in the amount of $1.5 million, $100,000, $50,000, and $20,000, respectively. READ the FULL TEXT Complaint

Maryland Man Sentenced to Prison in Bank Scam That Defrauded Victims Out of Over $560,000 (DOJ Release) 
After pleading guilty to one count of wire fraud, Mohammed Mohajer was sentenced in the United States District Court for the Middle District of Florida to 33 months in prison plus three years of supervised release, and ordered to forfeit $194,000, and pay restitution in the amount of $565,000 to two victims.   Mohajer defrauded his victims out of $565,000 via a scam in which he falsely represented that he had a relationship with a bank in the Dominican Republic, and that in exchange for an up-front payment, he could help them access credit at the bank, and that the bank would confirm access to said funds via the issuance of a SWIFT interbank message to the victims' designated banks.
In a recent FINRA regulatory settlement, we know how things turned out: a stockbroker is barred. We even know what caused the mess: the diversion of an elderly customer's checks. What we can't quite figure out is how FINRA found out about the misconduct and what prompted the regulator's ensuing investigation. Yes, it all ends well from a public policy perspective but something just doesn't seem right. We can find the end. We can't quite find the beginning.

Defendant Misrepresented His Connections to the Red Hot Chili Peppers and Falsified an Escrow Account to Secure a $450,000 Payment (DOJ Release)
Quincy Krashna  pled guilty in the United States District Court for the Northern District of California to one count of wire fraud and was sentenced  to 24 months in prison plus a three-year term of supervised release, and ordered to pay $450,000 in restitution. The victims were interested in promoting Red Hot Chili Peppers concerts in Eastern Europe, and Krashna misrepresented that he would hold in an escrow account a $450,000 down payment to secure the band's services. The concert promoters wired $450,000 into a fake escrow account created by Krashna, who transferred the money into other accounts that he controlled.   

In the Matter of Massachusetts Financial Service Company, Respondent (Order Instituting Proceedings, Making Remedial Findings, and Imposing Sanctions and Cease-and-Desist; '40 Rel. No. 4999; Admin. Proc. File No. 3-18704)
In anticipation of the institution of proceedings by the SEC but without admitting or denying the findings, Massachusetts Financial Service Company ("MFS") submitted an Offer of Settlement, which the federal regulator accepted.  The SEC imposed upon MFS a Censure, Cease-and-Desist, a $1.9 million civil penalty. As set forth in the "Summary" portion of the Order:

1. This matter arises from material misstatements and omissions by registered investment adviser MFS to certain of its advisory clients and others concerning hypothetical stock returns associated with MFS's blended research stock ratings. In 2001, MFS introduced its blended research strategies to investors. The blended research strategies combine research ratings from MFS's fundamental analysts and quantitative models to manage portfolios of stocks for client investment. 

2. From approximately 2006 to 2015, MFS advertised that the basis of its blended research philosophy was that fundamental and quantitative management styles excel in differing market conditions, and that blending fundamental and quantitative stock ratings could over time yield better returns than either type of ratings alone. To illustrate the validity of its claim that blending two sources of ratings was better than one source alone, MFS advertised the results of a hypothetical portfolio of stocks rated "buy" by both MFS's fundamental analysts and quantitative models. In its advertisements, MFS showed how this hypothetical portfolio had annualized returns from 1995 forward that exceeded the annualized returns of either a hypothetical portfolio of fundamental "buy" rated stocks or a hypothetical portfolio of quantitative "buy" rated stocks. 

3. MFS's advertisements that demonstrated the superior returns of the hypothetical portfolio of stocks rated "buy" by both MFS's fundamental analysts and quantitative models were misleading because the materials failed to disclose that some of the quantitative ratings used to create the hypothetical portfolio were determined using a retroactive, back-tested, application of MFS's quantitative model. Specifically, for the period 1995-2000, MFS used back-tested quantitative ratings. For the period 2000-2003, MFS used some live quantitative ratings and some back-tested ratings. In some advertisements, MFS also falsely claimed that the hypothetical portfolio was based on MFS's own quantitative stock ratings dating back to the mid-1990s, even though before 2000 MFS did not have a quantitative research department or generate its own quantitative stock ratings. MFS started the performance period in 1995 instead of 2000 or 2003 because its stored fundamental ratings dated back to 1995 and the longer period reflected multiple market environments; but inclusion of the market environments in the backtested period also contributed to the superior performance of the blended "buy" ratings portfolio. MFS advertised these hypothetical returns to institutional clients and prospective institutional clients, financial intermediaries (including broker-dealers, insurance companies, and investment advisers) and consultants. As a result, MFS violated Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-1(a)(5) thereunder by publishing, circulating, and distributing advertisements that contained misleading statements of material fact. 

4. MFS's misleading advertisements were due in part to a failure to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder, as required by Section 206(4) of the Advisers Act and Rule 206(4)-7. Specifically, MFS failed to adopt and implement policies and procedures reasonably designed to prevent inaccurate advertisements that it directly or indirectly published, circulated, or distributed.