House of Representatives Committee Holds Oversight Hearing on FINRA

Yesterday, the House of Representatives’ Financial Services subcommittee held an oversight hearing on FINRA, which levied a record $173 million in fines on members of the financial services industry in 2016. The committee questioned FINRA CEO Robert Cook on a number of concerns. Among the issues discussed were how funds FINRA collects from fines are spent, executive pay, and FINRA’s $1.6 billion reserve fund.

According to Rep. Tom Emmer (R-MN) one of the biggest concerns is FINRA’s lack of transparency in its rulemaking process and enforcement decisions. Member firms receive little information on these processes. Cook pointed to FINRA’s new FINRA 360 self-examination initiative as a response to this concern. Cook said that the initiative has led to re-structuring of FINRA’s enforcement arm, and that it now offers new online tools that should help small firms to comply with FINRA rules.

Cook was also questioned on how FINRA uses its funding. Though FINRA collected $173 million in fines last year, just $27.9 million of that money was distributed to investors. Cook said that fine revenues are important in helping FINRA to protect investors, and that he was “very open” to providing Congress with details on how the money is collected and used by FINRA. Cook also said that FINRA’s $1.6 billion reserve is used to fund regulatory initiatives and progress. The House committee suggested that FINRA’s top executives are overpaid, as seven top executives were paid over $1 million last year, and Republican lawmakers expressed concerns that the self-regulated organization was beginning to look too much like a government agency.

During the hearing, Cook told the committee that FINRA will now allow the public to download information on broker’s records in bulk. This will allow investors to find patterns at specific firms, which had been difficult to do previously. A Reuters analysis of data from 2016 and 2017 found at least 30% of employees at 48 broker-dealers had regulatory violations on their records. Cook also confirmed that FINRA would support a uniform fiduciary standard on broker-dealers and investment advisors across all types of accounts.

For more information please contact Conway & Conway at 212-938-1080 or by e-mailing HERE.

Sources:

Investment News

http://www.investmentnews.com/article/20170907/FREE/170909941/house-lawmakers-grill-finra-ceo-robert-cook-on-fine-money-executive

NY Daily News

http://www.nydailynews.com/newswires/news/business/finra-reverses-policy-brokercheck-information-access-bulk-data-article-1.3479056

Law360

https://www.law360.com/articles/959547/house-panel-questions-finra-s-self-regulatory-model

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Wells Fargo Discloses Discovery of 1.4 Million Additional Fraudulent Accounts

In September 2016, Wells Fargo was fined $185 million by government regulators, including the Consumer Financial Protection Bureau, due to fraudulent sales practices. Initially, the bank reported that its employees had opened about 2.1 million accounts without customers’ permission. As a result of the scandal, 5,300 Wells Fargo employees were fired, and several high-ranking executives at the bank were removed.

Wells Fargo announced on Thursday that an independent review uncovered an additional 1.4 million fraudulent accounts, for a total of 3.5 million accounts. While the original review uncovered 130,000 accounts that were charged with unnecessary fees for the fake accounts, the number of accounts fraudulently charged has now been estimated to be 190,000. The analysis also led to the discovery of 528,000 customers who were enrolled in online bill pay without their authorization. These new findings are expected to lead to an additional $10.7 million in refunds and compensation to customers.

The newly completed analysis that uncovered the accounts went back to January 2009, whereas the original analysis only reviewed the period from May 2011 to mid-2015. Wells Fargo executives first knew of related fraudulent actions in 2002, when they fired employees over it, but claim that the low quality of Wells Fargo’s data from before 2009 (when the company merged with Wachovia) prevents it from evaluating accounts from that time period.

While Wells Fargo hopes that this new announcement will help bring closure to the scandal, it has called into question whether the banking giant’s $142 million settlement of a class-action lawsuit with its customers will receive final approval from a U.S. District Judge. The settlement deal has already received preliminary approval, and final approval is scheduled to be considered on January 4, 2018. The bank is also likely to face increased scrutiny from the government due to the analysis’s findings. Senator Elizabeth Warren (D-MA) today called for the removal of every Wells Fargo board member who served during the scandal.

For more information please contact Conway & Conway at 212-938-1080 or by e-mailing HERE.

Sources:

Bloomberg

https://www.bloomberg.com/news/articles/2017-09-01/wells-fargo-accounts-accord-called-into-question-as-victims-grow

Investment News

http://www.investmentnews.com/article/20170831/FREE/170839988/wells-fargo-increases-fake-account-estimate-67-to-3-5-million

CNBC

https://www.cnbc.com/2017/08/31/wells-fargo-scandal-disclosure-could-be-a-positive-kbw-anlayst.html

CNN Money

http://money.cnn.com/2017/08/31/investing/wells-fargo-fake-accounts/index.html?iid=SF_River

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Department of Labor Proposes Delay of Fiduciary Rule Implementation

The Department of Labor’s (“DOL”) Fiduciary Rule, issued on April 6, 2016 and set to take full effect on January 1, 2018, is facing challenges from the new administration. The rule creates a new fiduciary standard for retirement investment accounts, requiring brokers who offer retirement investing advice to put clients’ interests ahead of their own. The DOL has now proposed a delay to full implementation of the rule until July 1, 2019.

The brokerage industry largely opposes the rule, which aims to protect investors. A study by the Securities Industry and Financial Markets Association asserts that the cost to the industry related to the rule will be in excess of $4.7 billion, which is far above the DOL’s initial estimates. Industry groups also suggest that the rule is bad for consumers, as it will force brokers to abandon clients with smaller accounts because they will not be able to afford to service them under a fiduciary standard. They also assert that the fiduciary standard will limit the types of investment opportunities available to consumers.

Several government agencies have undertaken efforts to change the rule. President Donald Trump ordered a review of the rule by the DOL in February, and the DOL recently ended its period of solicitation for comments on the rule. The Securities and Exchange Commission has also become involved in review of the rule. Last month, the House of Representatives passed two bills aiming to eliminate and replace the rule: one replacing it with an advice standard based on disclosing conflicts of interest, and one preventing the DOL from funding enforcement of the rule (though these measures are unlikely to make it through the Senate). As a result of all of this activity, the DOL has decided that its best course of action is to delay the rule for 18 months.

For more information please contact Conway & Conway at 212-938-1080 or by e-mailing HERE.

Sources:

Investment News

http://www.investmentnews.com/article/20170809/FREE/170809924/dol-seeks-to-delay-fiduciary-rule-until-july-2019

http://www.investmentnews.com/article/20170810/FREE/170819991/dol-fiduciary-rule-compliance-costs-exceed-4-7-billion-sifma-study

http://www.investmentnews.com/article/20170808/FREE/170809936/financial-trade-groups-to-dol-advisers-dumping-small-accounts

http://www.investmentnews.com/article/20170719/free/170719918/house-panel-passes-bill-to-replace-dol-fiduciary-rule-with-one

Bloomberg

https://www.bloomberg.com/news/articles/2017-08-09/trump-administration-seeks-further-delay-in-labor-fiduciary-rule

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Martin Shkreli Convicted of Securities Fraud

On Friday, August 4, 2017 a Brooklyn jury convicted Martin Shkreli on three of eight counts of securities fraud and conspiracy, in the Eastern District of New York. Shkreli, infamous for raising the price of the HIV drug Daraprim by 5,000%, was convicted of securities fraud in connection with MSMB Capital Management LLC, securities fraud in connection with MSMB Healthcare LP, and conspiracy to commit securities fraud in connection with Retrophin, Inc. shares. MSMB Capital and MSMB Healthcare were failed hedge funds that had been run by Shkreli, and Retrophin is a publicly traded pharmaceutical company founded by Shkreli.

Shkreli repeatedly lied to potential investors in order to raise money for his funds. The MSMB manager, a graduate of Baruch College in New York City, told one investor who had not finished college that he had not either, another that he had graduated from Columbia, and a third that he had dropped out of college like Steve Jobs. Shkreli continued to lie to investors after they had entrusted him with their money, at one point producing fabricated statements showing that there was $40 million in one of his funds when it really held only about $300.

When the funds failed because of his poor investment decisions, Shkreli looted Retrophin of $11 million in order to repay his investors and cover personal debts. The jury convicted Shkreli on three counts despite the fact that most of the investors he deceived made their money back. Shkreli, who referred to his case as a “silly witch hunt,” faces up to 20 years in prison upon sentencing.

For more information please contact Conway & Conway at 212-938-1080 or by e-mailing HERE.

 

Sources:

 

NY Times

https://www.nytimes.com/2017/08/04/business/dealbook/martin-shkreli-guilty.html

Washington Post

https://www.washingtonpost.com/business/jury-deliberates-for-5th-day-at-martin-shkrelis-fraud-trial/2017/08/04/871ad9c6-7924-11e7-8c17-533c52b2f014_story.html?_hsenc=p2ANqtz-_spBD4BwCtFaZODSDzFcoSDdKfvFSDxJfmCYEHa9vxqbtKd38zc3Rb_pGrSkbLCzVXKDnXlgM&utm_term=.6c25de2d181a

CNN Money

http://money.cnn.com/2017/08/04/news/martin-shkreli-verdict/index.html

Posted in Securities Arbitration & Litigation, White Collar Crime | Leave a comment

Bank of America’s Math Error Punished by Shareholders

Bank of America announced last month that for the first time since the financial crisis, it would be able to commence boosting dividend payments to the company’s shareholders as well as conduct $4 billion in stock buybacks. This announcement was the result of Bank of America’s self-reported success at passing the Federal Reserve’s “stress test,” and it symbolized the company’s rebound from the most recent recession.

Unfortunately for Bank of America’s shareholders, a slight math error in the company’s calculations was discovered during what DealBook described as a “routine accounting review.” This error led to a distortion in the bank’s capital position, forcing BofA to renege on its deal last month. In response, shareholders retaliated, as the bank’s stock fell 5% yesterday – roughly $9 billion of its market value.

The miscalculation was apparently found in some structured bonds owned by Merrill Lynch, and the error is being chalked up to a miscommunication in the workplace. WJS reports that incorrect values in the structured bonds were a result of an internal error between the bank’s treasury unit and the capital-management group.

BofA will now be required to resubmit its capital plan, most likely resulting in much smaller dividends and buybacks than what they had previously reported. The error is not going to put the company in any significant financial problems, but the move is yet it another blunder on the company’s already long track record.

For more information please contact Conway & Conway at 212-938-1080 or by e-mailing HERE.

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JPMorgan To Pay $1.7 Billion Penalty

The United States Attorney’s Office of Manhattan came to an agreement with JPMorgan Chase regarding the latter’s involvement with the Bernie Madoff scheme. According to a press release by the U.S. Attorney’s Office, as a part of the agreement, JPMorgan agreed to pay a $1.7 billion penalty to the victims of the Madoff scheme in the form of a civil forfeiture. In addition, JPMorgan has agreed to refrain from future criminal conduct and cooperate fully with the government investigation, to continue to reform its compliance program in accordance with the Bank Secrecy Act, and to the stipulation of the accuracy a “Statement of Facts.”

Including the $1.7 billion penalty, JPMorgan will have paid $20 billion in penalties to the government for the last year. Even with these penalties, the New York Times reports that JPMorgan shares are up 28% over the last year and that JPMorgan will earn as much as $23 billion in profit this year, questioning the effectiveness of governmental fines in regulating banks and from preventing future criminal behavior from banks.

While the bank is being criminally charged with two felony violations of the Bank Secrecy Act, the government has agreed to deferred prosecution because of JPMorgan’s concessions. Manhattan U.S. Attorney Preet Bharara has stated that “[i]nstitutions, not just individuals, have an obligation to follow the law and to police themselves. They must exercise due care not only with their own money, but with other people’s money also.”

This statement, made on January 7, 2014, comes days after a CNN opinion article written by Mark Calabria and Lisa Gilbert entitled “Are Banks Too Big To Jail?” Mr. Calabria and Ms. Gilbert question the decision of the Department of Justice not to indict HSBC after the bank permitted drug traffickers to lauders hundreds of millions of dollars through HSBC subsidiaries. The Justice Department instead chose to enter into a deferred prosecution agreement, whereby, similarly to the JPMorgan case, the government agreed not to prosecute the bank and in exchange HSBC would pay a fine, acknowledge wrongdoing, cooperate with the government, and agree to improve its compliance program. Attorney General Eric Holder said in a general statement about the prosecution of large financial institutions that he is concerned that the prosecution of large financial institutions will have an adverse effect on the national, and possibly, the global economy, resulting in the “too big to jail” dilemma.

For more information please contact Conway & Conway at 212-938-1080 or by e-mailing HERE.

 

Sources:

CNN

Are Banks Too Big To Jail? Mark Calabria and Lisa Gilbert

http://www.cnn.com/2014/01/06/opinion/calabria-gilbert-too-big-to-jail/index.html?iref=allsearch

 

New York Times

Steep Penalties Taken in Stride by JPMorgan Chase Peter Eavis

http://dealbook.nytimes.com/2014/01/07/steep-penalties-taken-in-stride-by-jpmorgan-chase/?_r=0

 

US Attorney’s Office SDNY

Manhattan U.S. Attorney And FBI Assistant Director-In-Charge Announce Filing Of Criminal Charges Against And Deferred Prosecution Agreement With JPMorgan Chase Bank, N.A., In Connection With Bernard L. Madoff’s Multi-Billion Dollar Ponzi Scheme

http://www.justice.gov/usao/nys/pressreleases/January14/JPMCDPAPR.php

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Judgment Against Citigroup Global Markets and Edward James Mulcahy

August 1, 2013

In 2006, a customer transferred a large position in Royal Bank of Scotland into a retail account at Citigroup after a representative of the Broker/Dealer stated that the position could and would be hedged. Although the Claimant repeatedly asked Citi to hedge his RBS stock and despite the broker/dealer’s numerous promises to do so, Citi failed to provide protection for the position. By the end of 2008, Claimant lost more than $15 million as a result of Citi’s failure to follow through on its representations.

In 2010, Claimant filed a FINRA action against Citigroup for its negligent handling of the account. Claimant was later granted leave to amend the Complaint to add branch manager Edward James Mulcahy as a Respondent and an additional claim of Failure to Supervise. The proceedings continued until the final day of hearings on July 17, 2013. The arbitration panel found Citigroup liable to Claimant in the amount of $10.75 million dollars and Mr. Mulcahy personally liable for $250,000. Respondents were also ordered to pay all costs as well as interest at the statutory rate for a total award of $15 million dollars.

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Former Governor to be Sued

Jon Corzine, former Governor of New Jersey, could be faced with a civil lawsuit for his capacity as the executive of MF Global. The Commodity Futures Trading Commission (CFTC) plans to sue Corzine for the firm’s misuse of costumer money. As MF Global was about to collapse in 2011, lower-level employees transferred costumer money to “plug holes” in the firm’s own accounts in an attempt to save the firm. This led to the disappearance of $1 billion in costumer money.

The CFTC will file suit in civil court on grounds that Corzine is responsible for lower-level employee conduct under failure to supervise and control person liability statutes. The agency plans on taking legal action without offering Corzine the opportunity to settle. If Corzine is found liable, he could have to pay millions of dollars in fines.

This marks a contrast to previous governmental investigations that did not hold employees or executives of major failing companies liable, such as Lehman Brothers.

SOURCE: NY Times

For more information please contact Conway & Conway by calling 212-938-1080 or emailing HERE

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Praetorian Global Fund Manager Gets 11 Years in Prison

On Friday, June 21, 2013 John Mattera, former Manager at Praetorian Global Fund, was sentenced to 11 years in prison after pleading guilty in October 2012 for securities fraud, wire fraud, and money laundering. Mattera is also required to pay $11.8 million in restitution to defrauded investors.

Mattera defrauded investors from 2010 to 2011 by claiming to have access to shares in private companies such as Facebook and Groupon. He lured investors in with the promise of future IPOs and falsely assured them that their money would be safely held in escrow accounts until the companies went public. However, Mattera misappropriated approximately $13 million investor funds, using $4 million for his own personal use.

Mattera had been previously charged of defrauding investors in 2009. As a result of his criminal background, Matter has been given a rather lengthy sentence.

Source: United States Attorney’s Office, Southern District of New York

For more information please contact Conway & Conway by calling 212-938-1080 or emailing HERE

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Co-Founder of Wasson Capital Advisors Gets 30 Months for Securities Fraud

Anand Sekaran, co-founder of Wasson Capital Advisors, has been sentenced to 30 months in prison for committing securities fraud costing investors roughly $2.3 million. After the 2008 financial crisis, during which his fund suffered substantial losses, Sekaran began operating a Ponzi scheme in which Sekaran distributed fraudulent account and performance statements and misled investors as to the value of his fund. He also misused investor money and used new investor funds to satisfy redemption requests.

In November 2012 Sekaran pled guilty to one count of securities fraud and one count of mail fraud. In addition to 30 months in prison, Sekaran has been ordered to pay $2.3 million in restitution.

Source: United States Attorney’s Office, Southern District of New York

For more information please contact Conway & Conway by calling 212-938-1080 or emailing HERE

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