April 3, 2014

Bitcoin Continues to be of Concern to Regulatory Authorities

It was just a matter of time before we got to the point of using electronic currency to buy, sell and trade just about anything. Although there are a few detractors who prefer to go old-school by sticking to cold, hard cash, the use of credit cards, debit cards, PayPal, and other non-monetary forms of financial transactions have become commonplace. It spite of current means of meeting financial obligations, there seems to be a new kid in town. Enter Bitcoin and the virtual wallet. There are many 21st Century consumers and investors who see Bitcoin as the future of money and can’t wait to jump onto the digital money bandwagon.

Those proponents of a digital money system will argue that ever since man developed a barter system to acquire the goods and services he needs, money has had no intrinsic value. Whether it is cockle shells, oxen, or gold, the value of money is an agreed-upon system of trade.

Not so fast, say many regulators. It may sound like a good idea to the many who anticipate the evolution of our monetary system, but organizations such as the Financial Regulatory Authority (FINRA) and the Securities Exchange Commission have offered up warnings pertaining to Bitcoin. These regulators issue concerns about Bitcoin as it poses both significant trading risks as well as great risk of fraud to companies who use Bitcoin payment platforms and other services and products that are related to Bitcoin. A recent FINRA Investor Alert is just one of many such warnings from regulators as the industry understandably senses a very real threat of fraud for those investors who look to Bitcoin to make a quick profit.

"Speculators drawn to Bitcoin trading should understand that Bitcoin prices have fluctuated widely, and wildly, almost from the currency's inception," said Gerri Walsh, FINRA's Senior Vice President for Investor Education. "Investors looking to get in on the ground floor of a Bitcoin-related company should realize that fraudsters may see the latest digital currency trend as a chance to steal their money through old-fashioned fraud."

The Securities Exchange Commission has had its own concerns about the use and possible misuse of Bitcoin. In 2013, the SEC charged a Texas man with virtual currencies fraud in an alleged Ponzi scheme. Additionally, an SEC press release dated February 19, 2014 stated that it had temporarily suspended trading of securities of Imogo Mobile Technologies Corp. due to concerns raised about the accuracy and adequacy of information that the company was disseminating to the public regarding its business.

Many of the supporters of Bitcoin like to refer to the disintermediation of the Bitcoin system, and there in lay many of the issues that set off alarm bells for regulatory organizations. Bitcoin is tracked based upon a fully virtual world whereby auditors (referred to as miners) enter and monitor information pertaining to who has how many Bitcoins, how they obtained them, and in what transactions they are used. Although much of our lives are impacted by online activities, regulatory agencies such as the SEC and FINRA deal on a daily basis with fraud committed through network transactions.

The major concerns surrounding Bitcoin are that, like with most transactions that are handled digitally, platforms that buy and sell Bitcoins can be hacked, exposing Bitcoin-related transactions to fraud or creating transactions which are in themselves fraudulent. Additionally, the safety measures that in are place to protect banks and credit unions do not exist for Bitcoin. This is greatly evidenced by the fact Mt. Gox, a Tokyo-based trading company that handled upwards of 70% of Bitcoin transactions, suspended trading last month and closed up shop. The company stated that Bitcoins valued at more the $450 million were missing and likely stolen, according to USA Today. It has since found less than one-quarter of that amount.

If you feel that you have been the victim of Bitcoin fraud or suffered financial losses as a result in investments into Bitcoin, please call the Blum Law group at 1-877-STOCK-LAW for a free consultation.

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April 1, 2014

Two Guys Walked into a Bar: Investment Broker, Law Clerk, and “Middleman” Bilk $5.6 Million Through Insider Trading

Take one high-profile investment firm broker, one managing clerk at a law office, and throw in a middleman with a penchant for eating the written evidence at Grand Central, and what do you get? The results are a Securities Exchange Commission investigation into insider trading that sounds a lot like a bad storyline from an even worse movie.

What started out as a simple conversation between friends in February 2009 in a NYC bar quickly turned into an insider trading scam that involved millions of dollars. That’s the basis for the investigation that the SEC announced last week. It charges that Steven Metro, 40, the managing clerk at Simpson Thacher & Bartlerr LLP in New York, stole information from the files of 13 of the law firm’s clients for the express purpose of sharing that information with an undisclosed middleman. The middleman then called stock broker, Vladimir Eydelman, 42, asking him to buy additional shares of Sirius XM Radio, as Metro had disclosed to the middleman that Liberty Media Corp. was planning to invest over $500 million in the flagging company. After Eydelman also voiced anxiety over Sirius’s financial position, the middleman, a friend to both other parties, assured him of the accuracy of his information. Once the Sirius – Liberty deal was made public, Eydelman is quoted as having said, “Nice trade,” to the middleman.

SEC allegations state that Eydelman went back to his office to gather information about the next company to be targeted. In an effort to try to create a paper trail, he would e-mail the research to the middleman, including contrived thoughts about why buying the stock was a good idea. Both men seemed to think these e-mails justified why they engaged in the stock purchase.

“People often try to cover their insider trading tracks by using middlemen, destroying evidence, and creating phony documents. They should learn that sham cover stories simply don’t work and won’t deter us from finding their schemes,” said Robert A. Cohen, co-deputy chief of the SEC Enforcement Division’s Market Abuse Unit.

Although the middleman set aside funds to pay Metro as a “thank you” gesture, Metro told him to leave it in his brokerage account and then invest it for Metro once he passed him further inside information. These future transactions continued until February 2013 and included trades that he made not only on his own behalf, but also for friends, family, and clients and resulted in profits of more than $5.6 million.

Metro shared information with the middleman through various methods, including notes of ticker symbols on napkins or adhesive notes. On at least one such occasion, the middleman actually chewed up and swallowed a note while meeting Metro at Grand Central Terminal. Another method used in providing information to the middleman was Metro typing ticker symbols or company names on his cell phone screen and then indicating which one was being bought or sold. They continued with this strategy for a period of four years, investing more than $33 million in other well-known companies such as OfficeMax, Inc.

According to the FBI, Eydelman was a long-time employee for Oppenheimer & Co. at the time that he became entangled with Metro’s scheming, and he continued in his shady pursuits after making a move to Morgan Stanley. As such, Morgan Stanley has placed Eydelman on leave pending further investigation and both companies have stated that they intend to fully cooperate with authorities. A spokesperson at both companies also continued on to state that they strongly condemn insider trading of any type.

Metro was summarily terminated once Simpson Thacher found out about the charges that had been leveled against him. An email written by Brooke Gordon, spokesperson for the firm stated that the firm will review its procedures and the systems they currently have in place.

She was also quoted as saying, “Client confidentiality is of the utmost importance to Simpson Thacher, and we are reinforcing that principle to all of our lawyers and administrative staff.”

Although it is not clear how the FBI learned of the practices of the three men involved, the middleman worked with the FBI by recording conversations with Mr. Metro and Mr. Eydelman. According to the FBI complaint, in one of these encounters, Eydelman talked about how it was becoming increasingly difficult to hide the fact that their trades were based upon insider information. Yet these fears didn’t limit Eydelman’s flagrant spending of the profits he made from his crooked actions. According to U.S. Attorney, Paul Fishman, Eydelman used the ill-gotten gains buy a 2011 Maserati GranTurismo for $117,700, spent tens of thousands of dollars in jewelry, and a house in Colts Neck, N.J.

Both of the men were charged with securities fraud - Metro, 9 counts, Eydelman, 8 counts. Additional charges included each being charged with four counts of tender offer fraud and conspiracy to commit securities fraud and tender offer fraud.

In addition to these charges, Simpson Thacher has filed suit against Metro for the theft of its data, and an arrest warrant was issued by the U.S. District Court in Newark, NJ. The men appeared in court on March 19, 2014 and the magistrate set bail for each man at $1 million.

“Law firms are sanctuaries for the confidential treatment of client information, and this scheme victimized not only a law firm but also its corporate clients and ultimately the investors in those companies,” Daniel Hawke, chief of the SEC Enforcement Division's Market Abuse Unit, said in a statement.

The Blum Law Group specializes in helping people who have been victimized by brokers/firms. If you believe you have suffered financial losses as the result of this insider trading scam, give us a call at 1-877-STOCK-LAW for a free consultation.

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March 31, 2014

Puerto Rico Municipal Bonds: Not Just Another Muni

Trying to navigate your way through the world of investing in an effort to not only make good investment decisions, but also to avoid the pitfalls of poor investment advice, can be a daunting task. Some investors struggle just trying to understand the everyday language of investments. Add to that the countless types of investment vehicles available and how investment rules differ among them, and it is easy to see why investment advisors play such a critical role in helping investors decide which investments are best for them.

One popular investment opportunity is municipal bonds, also known as munis. These bonds are issued to off-set the capital expenses of municipalities or for special improvement projects such as schools or airports. Munis are publicly traded, leveraged closed-end bonds that sell a fixed number of shares, as opposed to open-end funds which do not restrict the number of shares that are issued. The money for these closed-end funds is borrowed from the issuer and then listed and traded on an open stock exchange. One of the things that both advisors and investors find appealing about municipal bonds is that they are exempt from federal taxes and, often times, also exempt from state taxes for the residents of the state in which they are issued.

In 1940, Congress passed the Investment Company Act of 1940 to prevent abuses of mutual fund and closed-end fund shareholders by requiring investment companies to release information about material details and about the financial health of each investment company. Although it applied to the United States, it exempted Puerto Rico because any investments issued there are not considered to be issued by a “state”. According to then general counsel for the Securities and Exchange Commission, David Schenker, stated that Puerto Rico was, "so far away from America that the policing aspects are quite difficult.”

As a result of this ruling, one investment that seems to keep rearing its head in investment news over the last couple of years is the Puerto Rico municipal bond. How the Puerto Rico muni bonds differ is an interesting case. The basis of leveraged bonds is that they will yield enough in returns to repay the loan with a profit above and beyond the interest rate of the loan. Leveraging creates a much higher risk for investors in an investment than is generally considered safe.

The disparity between protection of investors of domicile-issued bonds and those issued in Puerto Rico leads to a significant increase for potential losses. The exemption provided by Investment Company Act for Puerto Rico muni bonds permits issuers to leverage up to 50% of the fund’s assets, as opposed to only a 30% leverage allowance for closed-end funds that are issued within the 50 fifty states. With these Puerto Rico muni bonds, an additional 5% can be leveraged for “special circumstances”, which can cause as much as 55% of Puerto Rico muni bonds to be leveraged. This can easily result in huge losses for an investor if these muni bonds don’t perform as well as anticipated.

Wading through such issues can be complex, especially when special rules apply dependent upon where it munis are issued. If you feel that you have been misled and/or suffered a financial loss as a result of these varying rules or by investing in Puerto Rico municipal bonds, please call the office of The Blum Law Group at 1-877-STOCK-LAW. We offer a free consultation to help you understand if you are entitled to recompense.

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March 28, 2014

UBS Puerto Rico, Executives Shill Investors

Generally, only savvy investors can assess whether or not high-yield investments are worth the financial risk they may face by investing in them. This is why so many investors rely upon the recommendations of investment advisors. It is expected by investors that the level of expertise and integrity of investment advisors/firms is beyond reproach. These are not unrealistic expectations by the investors as each financial advisor and the firms that they represent have a legal obligation to endorse only those investments which meet the investor’s goals and are within the investor’s tolerance for risk. When a financial advisor/broker or a firm fails to act within the best interests of the client, it amounts to fraud. Additionally, if an advisor offers a client misinformation or acts without the knowledge of the client, it can also be considered fraud.

One area of concern pertaining to potential fraud which has been in the media recently is the investment practices of advisors at UBS Puerto Rico who have invested in Puerto Rico municipal bonds. UBS PR is the biggest brokerage firm in Puerto Rico, holding about 49% of all retail brokerage assets, and they employee roughly 230 financial advisors. Since its establishment in 1978, there have been five regulatory events filed against UBS PR, and this is not the most recent incident of regulatory issues filed against them. It has, however, resulted in the largest financial repercussions that have been ordered against the company to date.

In May, 2012, the SEC investigation determined that in 2008 and 2009, the CEO of UBS PR, Miguel A. Ferrer, and its Head of Capital Markets (HCM), Carlos Juan Ortiz-Leon, had both misrepresented and omitted critical facts to its customers regarding the pricing of certain closed-end funds (CEF). The company made claims that these funds were based upon market activity, yet they did not reveal that the prices were actually set by the trading desk.

They were also intentionally vague about the liquidity of these CEFs and although they had disclosed information about the liquidity of these CEFs in prospectuses, this information was not supplied to the secondary market. Additionally, they failed to disclose that as the dominant CEF broker, UBS controlled this secondary market. It was not revealed to investors that any secondary market sales that they may have wanted to make were dependent, to a great degree, upon UBS PR’s successful solicitation of customers.

In an effort to give the appearance of liquidity and stable pricing, in 2008, UBS PR spent millions of dollars to purchase its own CEF shares. Both the CEO and the HCM continued to promote the sale of the CEFs, even though they were aware that there existed a lower demand than there was supply.

By early 2009, UBS PR’s parent company realized the UBS PR’s burgeoning CEF stockpile could pose a large financial risk to the firm. As such, the parent company directed UBS PR to significantly cut its CEF shares. In an effort to do so, UBS PR and the HCM developed a strategy that was referred to in one document as “Objective: Soft Landing.” UBS PR instituted a methodology in which they sold their CEF shares at prices that undermined the pending sell orders of many of their clients.

Over a six-month period in 2009, UBS PR sold off approximately 75% of its CEF inventory to investors, knowing that the profitability of these funds had changed. Even so, they continued to try to sell CEFs without revealing the impact it had on the secondary market prices. The company did not reveal to clients that it had withdrawn its support for this particular market. By the fall of 2009, when UBS PR had cut back on its CEF supply, certain funds had seen a decline of 10 – 15% in market prices.

As part of the judgment of May, 2012, the SEC instituted an Order of Administrative and Cease-and-Desist proceedings (OIP) citing violations of the SEC Acts of 1933 and 1934, as well as violations pertaining to the Investment Company Act of 1940. This OIP speaks to the misrepresentations and omissions committed by Ferrer and Ortiz-Leon, as determined by the SEC investigation of 2008-2009. Even though both men deny culpability, mismanagement is an undeniable factor, as UBS PR has a history of running afoul of both regulatory entities and investors. With four other SEC investigations and three arbitration cases, UBS PR has a history of failure to provide appropriate supervision to its employees, breach of fiduciary duty, omission of facts, and misrepresentation.

As a result of the SEC investigation, UBS PR has been ordered to pay $11,500,000 in disgorgement, $1,109,739.34 in pre-judgment interest, and a civil penalty of $14,000,000. Although UBS PR has neither admitted nor denied the findings of the investigation, they have agreed to pay the disgorgement and fine, and agreed to the cease-and-desist order. The company has also agreed to hire an independent consultant to review its pricing policies and its CEF disclosures.

If you have suffered financial losses as a result of the mismanagement of UBS PR’s investment practices or the mishandling of its CEFs, please call the Blum Law Group for a free consultation at 1-877-STOCK-LAW.

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March 20, 2014

International Pyramid Scheme Gouges Investors Through Use of Social Media

Anyone who pays attention to financial news should have a fair understanding of what a pyramid scheme is and how one operates. Even if the intricacies of the sham are unclear, it is common knowledge that the words “pyramid scheme” are synonymous with fraud and financial losses. Since social media has become so pervasive in our everyday lives, it should come as no surprise that it is often used as a tool to perpetuate fraud. Individuals or companies can create profiles that vary from truthful to completely dishonest. The ability to give the appearance of being someone or something that you are not provides complete anonymity, making it the perfect medium for companies to manipulate those forms of media to dupe anyone who happens upon their website.

This type of shady behavior was the impetus for the Securities and Exchange Commission’s (SEC) recent emergency enforcement action against a pyramid scheme which is being perpetrated by Mutual Wealth, a spurious company which disguised itself as a genuine multi-national investment firm. The SEC allegations include the solicitation of investors by Mutual Wealth by means of fraudulent claims. The company uses Facebook and Twitter to redirect to its website, which then targets new investors. Some of the company’s so-called advisors use those or other forms of social media to continue to entice more investors.

It was also through these social media sites that Mutual Wealth made outlandish claims such as “HFT portfolios with ROI of up to 250% per annum. Income yield up to 8% per week.” One such Facebook post in August, 2013 claimed “$1000 investment into the Growth and Income Portfolio made on April 8th, 2013 is now worth $2,112.77.” Additionally, it was common practice for Mutual Wealth to fill the comments section of its Facebook page with bogus solicitations by their “accredited advisors.”

These practices were exposed by the SEC investigation into Fleet Mutual Wealth Limited and MWF Financial – conjointly referred to as Mutual Wealth. The SEC acquired a court order to freeze funds that it believes Mutual Wealth stole from U.S. investors through the use of social media accounts it had established on both Facebook and Twitter. Mutual Wealth made unscrupulous claims to investors that they would receive returns of two to three percent each week. The company claimed that it invested client monies by using a trading strategy that permits “capital to be invested into securities for no more than a few minutes.” Once the company had its investors, in true pyramid style, Mutual Wealth enticed those investors into becoming “accredited advisors” for the purpose of recruiting new investors, baiting them with referral fees or commissions.

The SEC’s complaint stated that there was virtually no truth to what Mutual Wealth told its investors. Instead of purchasing or selling securities for their investors, they simply diverted those funds to offshore bank accounts that are held by shell companies. Not only do they not invest the funds that they glean from the social media investors, their headquarters in Hong Kong does not exist, and it’s New York “data-centre” is fictitious, as well. The complaint also points out that the so-called executives on the company’s website do not exist and that they have made false claims about being registered with the SEC. In spite of all of its falsehoods and misrepresentations, Mutual Wealth had managed to bilk about 150 U.S. investors out of at least $300,000.

SEC’s Division of Enforcement associate director, Gerald W. Hodgkins, stated, “Mutual Wealth used Facebook and Twitter as well as a team of recruiters to spread a steady stream of lies that tricked investors out of their money. Fortunately we were able to quickly trace the fraud overseas and obtain a court order requiring Mutual Wealth to shut down its website before the scheme gains more momentum.”

The complaint continues on to point out that Mutual Wealth was able to pull off much of its deception by using entities in the U.K. and Panama. The company also used offshore bank accounts in Cypress and Latvia and foreign “payment processors” to redirect the funds gained from investors. This was accomplished by the use of forged and stolen passports by Mutual Wealth’s sole director. He also provided a false address to foreign government officials and payment processors.

In an effort to try to help investors regain their divested funds, the SEC has named several other relief defendants that it believes were involved in the diversion of funds to offshore accounts. These include: Risort Partners Inc., Hullstar Capital LLP, Camber Alliance LLP, Kimrod Estate LLP, and Midlcorp Trade LTD.

This is the type of scheme that generally goes after novice investors. They prey upon the trust of those visiting their website and count upon being involved with social media as lending credibility to their scams. Whether the fraud is committed by a wolf on Wall Street or some caricature of an investment firm created online, I am here to protect those investors who simply want to make an honest investment with honest advisors. If you feel that you have been taken advantage of by Mutual Wealth or any other investment advisor, call the Blum Law Group at 1-877-STOCK-LAW for a free consultation.

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March 18, 2014

Berthel Fisher and Affiliate, Securities Management & Research, Fined $775,000

Real estate investment trusts (REITs) are companies that own and, usually operate, income-producing real estate. This real estate can be quite diverse – from hospitals to timberlands – and are structured with the intent of providing for investment stocks. These REITs can be either privately held or publicly traded and can be classified as equity, mortgage, or a hybrid of the two. The appeal of REITS to investors is that they offer special tax considerations, high yields, and a fluid method of real estate investing. REITs, however, can be complex and therefore require strong supervisory practices to ensure they are managed with complete compliance.

Recently, Berthel Fisher & Company Financial Services, Inc., an Iowa-based financial services firm, was found to be flagging in its supervisory procedures pertaining to REITs and ETFs (exchange-traded funds). Consequently, Berthel Fisher was fined by the Financial Industry Regulatory Authority (FINRA) for failure to supervise in an adequate manner the sale of non-traded real estate investment trusts, as well as leveraged and inverse exchange-traded funds. Included in FINRA findings is Berthel Fisher affiliate, Securities Management & Research, also an Iowa-based company. FINRA has assessed a $775,000 fine against the entities. Additionally, FINRA has mandated that Berthel Fisher is required to hire an independent consultant to assure that there are no further such supervisory oversights pertaining to the sale of alternative investments.

"A strong culture of compliance is an essential element of the proper marketing of complex products. Berthel's supervision of the sales of non-traded REITs, inverse ETFs and other products fell short of this standard, as it failed to ensure that its registered representatives understood the unique features and risks of these products before presenting them to retail clients,” stated Brad Bennett, Executive VP of Enforcement for FINRA.

In its investigation, FINRA determined that over the course of nearly five years, Berthel Fisher’s supervisory and written procedures governing the sales of alternative investments were insufficient. There were several areas of concern for FINRA, and one such concern was that the firm did not properly impose standards that determined the suitability of many of these investments. They also failed in the area of suitability review for certain investments by not educating their staff on individual state suitability standards. These compliance failures are documented in the FINRA findings report as follows:

The primary tool the firm used to monitor concentration levels was an alternatives investment log, which was inadequate for two reasons. First, the log only recorded approved alternative investment transactions that were effected and approved at the firm. Accordingly, alternative investment transactions that were transferred to the firm from a broker-dealer account outside of the firm or brought in with a new customer of the firm were not recorded on the log. The firm, therefore, could not ensure that in certain instances the alternative investments listed on the log represented a complete picture of the amount of alternative investments in a customer’s portfolio. Second, the firm did not implement controls sufficient to ensure that its principals recorded all of the approved alternative investment transactions, thus compromising the suitability review for later transactions.

In addition to those findings, FINRA also discovered that from April 2009 to April 2012, Berthel Fisher did not have justifiable grounds for some leveraged and inverse ETF sales. The company fell short in suitably researching or reviewing non-traditional ETFs before permitting its agents to recommend them to clients. They also did not provide training to its sales force regarding these investments nor monitor the holding periods by clients which caused some customers to lose money.

In keeping with FINRA’s reporting requirements, Berthel Fisher has disclosed more than 20 regulatory actions which have resulted in nearly $1.2 million in fines and penalties, and they have been censured numerous times. Yet, as is often the case with companies against which such charges are leveled, Berthel Fisher and Securities Management & Research neither admitted nor denied the most recent charges against them, but they did consent to the entry of FINRA's findings.

It would seem that for many of these financial institutions that are entrusted with the financial future of others, fines and penalties are just one more cost of doing business. If these actions on the part of Berthel Fisher or Securities Management & Research have resulted in financial losses for you, please contact the Blum Law Group for a free consultation at 1-877-STOCK-LAW.

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March 7, 2014

Global Conglomerate, Credit Suisse Group AG, Fined for SEC Violations

Credit Suisse is one of the most highly regarded financial institutions in the world. In fact, it has been speculated that as a company with such influence, it has the ability to upset the global economy. Yet in recent years, it has been fraught with controversy and now the SEC has fined Credit Suisse $196 million for cross-border transactions which violates the SEC’s registration requirements.

The violation of federal securities laws governing cross-border transactions is not the first SEC infraction committed by Credit Suisse, nor is it the first time that they have been investigated by either the U.S. or foreign countries. In 2006, the company admitted to misconduct by aiding foreign countries in hiding transactions from U.S. authorities, which resulted in Credit Suisse paying a $536 million settlement. Then in 2011, the Department of Justice accused four Credit Suisse bankers of fraud when it determined that these bankers were helping some wealthy U.S. citizens avoid paying taxes.

The Securities Exchange Act of 1934 was created in an effort to regulate U.S. financial markets and the broker-managers who trade in those markets. It was from this legislation that the Securities Exchange Commission was formed. The legislation requires that all companies that are involved in the trading of certain securities in the U.S. to register with the Securities and Exchange Commission. In doing so, each company must provide a description of the company’s properties, business, the type of security it will be offering, management information, and financial statements that have been verified by independent accounts. This information allows investors to make clear choices about the companies that they rely upon for investment purposes; however, there are those companies that try to circumvent the process.

The most recent SEC investigation revealed that, although not registered with the SEC, international financial services company, Credit Suisse Group AG, has been engaging in financial transactions with U.S. customers. These activities include cross-border brokerage and investment advising through the use of relationship managers who entered the U.S. with the express purpose of targeting U.S citizens. These relationship managers provided investment advice and facilitated securities transactions to approximately 8,500 U.S. accounts, even though they were not registered with the SEC nor were they affiliated with any agencies that had fulfilled the registration requirements. These transactions resulted in accounts that contained nearly $5.6 billion in assets and in garnering roughly $82 million in fees for Credit Suisse.

Beginning in 2002, the years-long investigation by the SEC revealed that Credit Suisse was in violation of both the Securities Act of 1934 and the Investment Advisers Act of 1940. Consequently, the SEC has fined the banking giant $196 million. The company has not only conceded to pay the fine, but also admitted to its culpability, agreed to comply with a cease-and-desist order, and to retain an independent consultant to ensure such issues are avoided in the future.

Aware of the federal securities laws mandating registration, Credit Suisse took steps to prevent such violations. Those internal controls, however, were neither properly implemented nor supervised in a manner conducive to preventing such occurrences until long after they began. The SEC’s order states that it was only after a high-profile criminal and civil investigation in 2008 into conduct of the same nature by UBS that Credit Suisse began to try to cease its cross-border services in the U.S.; however, it did not completely abandon these actions until mid-2013.

Andrew J. Ceresney, Director of the SEC’s Division of Enforcement stated, “The broker-dealer and investment advisor registration provisions are core protections for investors. As Credit Suisse admitted as part of the settlement, its employees for many years failed to comply with these requirements, and the firm took far too long to achieve compliance.”

If you feel that you have suffered financial losses due to the cross-border trading actions of Credit Suisse, please call us for a free consultation at 1-877-STOCK LAW (1-877-786-2552).

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March 4, 2014

AML Violations Lead to Historic Penalty for Brown Brothers Harriman

Compliance Officer Also Fined and Suspended

As one of the oldest and largest private banks in the United States, Brown Brothers Harriman should have known better. Formed as the result of a merger in 1931 between investment firms Brown Brothers & Co. and Harriman Brothers & Co., this assemblage united over a century of combined financial knowledge and experience. This resulted in creating an institution that has been around longer than many of today’s laws that govern it. With clients in the areas of investment banking, wealth management, commercial banking, investor services and more, it is critical that a company such as BBH maintain a fiduciary responsibly to hold itself to the highest standards of the financial industry.

Yet earlier this month, a FINRA investigation resulted in the assessment of an $8 million fine as a consequence of the poor anti-money laundering (AML) practices maintained by BBH, as well as other related violations. This is not the first time that BBH has been called on the carpet over such issues. In 2007, FINRA and the New York State Banking Department castigated BBH by imparting a formal order for the company to cultivate better internal operations, including the need to meet all AML regulatory requirements. Prior to the $8 million fine handed down to BBH, the highest AML-related fine ever levied was against Banc of America Investment Services in 2007, also for AML compliance offenses. Just as in that case, the BBH AML compliance failure pertains to penny stocks. In addition to this $8 million fine, Harold Crawford, the company’s former Global AML Compliance Officer, was also fined $25,000 and suspended from BBH for a month.

There is an inherent risk involved with penny stocks. Their low buy-in cost makes them an appealing target for those who are willing to commit fraud. In fact, FINRA’s investigation revealed that over the course of a 4½ year-period, BBH was involved in the commission or delivery of securities that involved over 6 billion shares of penny stocks. Some of these stock transactions were made through foreign banks that are considered shelters for banks who strive to maintain level of secrecy about such transactions, with little or no knowledge of the actual customers. Often BBH was unaware of any basic information about the stock’s owner, the relationship between the seller and the issuer, or even how the stock was obtained. This blind-eye approach resulted in at least $850 million in proceeds to the customers of BBH, and a major outcome of the investigation was in highlighting Brown Brothers Harriman’s failure to determine the legality of the stocks.

The current compliance insufficiencies also include BBH’s failure to have an AML program in place that acts in a supervisory capacity, a program which would detect fraudulent or otherwise suspicious activities pertaining to penny stocks, a particularly vulnerable area of investment. BBH also failed to thoroughly investigate penny stock activity, even after a red flag had been raised, nor did they properly file a Suspicious Activity Report. Additionally, Brown Brothers Harriman lacked a method to prevent the distribution of unregistered securities.

BBH stated that the activity for which it has been fined is only one small section of the services that they offer and excludes their investment management and private banking divisions. Neither the company nor Crawford admitted nor denied culpability for results of the investigation, yet both agreed to the entry of FINRA’s decision. However, in response to the findings of the investigation, a spokesperson for the firm stated, “As previously announced to its non-U.S. bank financial intermediary clients, BBH has made changes to its handling of low-priced securities, as well as to its surveillance of this activity, to mitigate a possible recurrence of this matter.”

BBH is entrusted with over $20 billion in assets. It is therefore it is imperative that they have practices in place that provide complete transparency and act in a supervisory capacity that ensures that they not only meet the needs of their clients, but those of regulatory agencies. If you feel that the actions of BBH have negatively impacted your financial interests, please give us a call at 1-877-STOCKLAW.

February 26, 2014

SEC Takes Action to Minimize Microcap Fraud: Targets Hundreds of Shell Companies

Recently, the Securities and Exchange Commission released a statement concerning its continued efforts to minimize the risk of incidents of microcap stock fraud. Since its inception in 2012, the SEC’s fraud-fighting initiative, Operation Shell-Expel, has made strides toward ensuring that microcap fraud is reduced to the greatest degree possible. One way the SEC is working to this end is by forming the Microcap Fraud Task Force in 2013. The primary purpose of this task force is to focus on attorneys, brokers, and others who tend to be serial offenders of microcap scams. Also of grave concern to the SEC is that often times these dormant shell companies are attractive opportunities for organized crime to capitalize on these shell companies.

One recent major effort to crack down on this particular type of fraud is the SEC’s Enforcement Division’s Office of Market Intelligence suspension of trading in 255 dormant companies that they believe are a high risk for over-the-counter market fraud. This suspension in trading prevents those who commit fraud from manipulating these shell companies.

Microcap stocks differ from other stocks in that they are generally defined as those with a market capitalization of under $250 million. Usually the smaller a company is, the greater the risk when investing in them. These companies usually don’t meet the requirements of traditional stock exchanges therefore they are usually traded through OTC Bulletin Board or the pink sheets. Often these microcap fraud set-ups include the use of the Internet and various types of social media to pull off such schemes.

One of the most common types of fraudulent plans involving microcaps is called pump-and-dump, although this is just one of several unscrupulous methods used. Some disreputable advisors or other administrators of stocks will promote microcap stock to the market by making false or misleading statements about a given microcap company. They manipulate the price of stocks by purchasing stocks at a lower price and then sell them when the price goes up as a result of their hype. This provides them with huge profits by selling at inflated prices.

“A frequent element in pump-and-dump schemes has been the use of dormant shells,” said Andrew J. Ceresney, director of the SEC Enforcement Division. “Because these shells all too often are used by those looking to manipulate stock prices, we will continue to protect unwary investors by suspending trading in shells.”

The scope of this trading suspension is tremendous, as it involves dormant shell companies in 26 states and two foreign countries. This type of suspension is successful in reducing microcap fraud because once suspended from trading, a stock cannot be relisted without financial documentation that shows a company is operational. It is quite uncommon for a company to meet this stipulation. Since this seldom occurs, the trading suspension causes the shell company to become basically worthless, therefore unable to meet the need of those who would perpetrate this type of fraud.

“Policing this sector of the markets can be a challenge,” said Margaret Cain, a microcap specialist in the Office of Market Intelligence. “There is often little or no reliable information about a microcap issuer, and the sheer number of these companies stretches law enforcement resources thin and makes this sector particularly dangerous for investors. The approach we take with Operation Shell-Expel is both economical and efficient as the SEC continues its commitment to preventing microcap fraud.”

If you have suffered losses as the result of the unsavory practice of microcap fraud, please call the Blum Law Group at 1-877-STOCKLAW or visit us online at www.stockattorneys.com. We can offer you a free case evaluation and work on strictly a contingency basis.

February 18, 2014

Know Your Stock Attorney

Attorneys can practice many types of law simultaneously so they are not required by the State of Florida to disclose any particular area of practice. This can make it quite confusing when determining who to choose if you find yourself the victim of investment fraud. Call any attorney’s office in Florida, and you may well be told that they can help you. This is unfortunate because if you have been taken advantage of by a disreputable broker or brokerage firm, the last thing you need is to end up in the hands of someone who does not have a real ability to help you recover your losses. Picking up the phone and playing dial-a-lawyer is probably not the best way to select someone when you need to have your best interests addressed. The area of stock law is a very narrow field indeed, and any attorney you choose to represent you needs to have an intimate knowledge of investment practices and securities law. You should find out as much about the stock attorney you are considering hiring as you can. Consequently, I’d like to share my background with you.

I am originally from New York City. I lived there and in the South Florida area for so long that I should be considered native to both areas. Always having an interest in law, I was motivated to study Criminal Justice at the University of Florida in Gainesville. This ignited a desire to learn more, so I then spent time studying the legal structure of third-world nations and the varying securities laws in many other countries. These countries include South America, Africa, India, Malaysia, China, Taiwan, and Japan.

I became a stock and commodities broker and worked at the Commodity Exchange in the World Trade Center when it still existed. It was during this time that I became exposed to the practices of some brokerage firms that I felt were either unethical or just plain negligent. Time and again I would see or hear of investors losing their life savings due to these egregious practices. This was the impetus that I needed to pursue a law degree.

I went on to become an arbitrator for NASD Dispute Resolution, Inc., now known as FINRA, which is the forum where approximately 90% of all securities disputes are resolved. It was while assisting in the adjudication of hundreds of cases at NASD that I learned the ins and outs of securities arbitration. I moved on from there to work for one of the largest law firms in the world which represents brokers and brokerage firms. After just a short time in that position, I felt compelled to represent investors who have suffered investment losses due to the unfair actions of such brokerage firms.

I began aggressively representing aggrieved investors in 1997. My specific purpose was to help those investors who have been the target of investment fraud with a primary focus on practicing Securities Arbitration and Litigation. With a host of attorneys, paralegals, and staff, Blum Law Group has handled over $1 billion in investors’ claims over the course of nearly two decades. We have done so with such a high level of success that we have been featured in national publications such as The Wall Street Journal, The New York Times, and Investment News. Additionally, many of my cases have been featured on television shows such as CNN, Inside Edition, CNBC, and in many news reports.

My background provides me with the skills, knowledge, and confidence needed to go after the “big boys” of the investment industry. I have been counsel in numerous securities arbitration cases against such brokerage firms as Merrill Lynch, Bank of America, Morgan Stanley Smith Barney, Wells Fargo, Securities America, Oppenheimer, UBS and many others. I have also had the honor of being a guest lecturer and speaker on legal matters. Additionally, I have experience as an Editor for the Law Review, and I have authored many articles which include Punitive Power: Securities Arbitrators Need It and NASD Mediations: PLI Securities Update.

I have recovered over $100 million in investor losses. We have represented clients at both the state and Federal level and in arbitration through the Financial Industry Regulatory Authority, the National Futures Association, and the American Arbitration Association. We work on a contingency fee basis and provide our clients with a free case evaluation. We have locations in both Florida and North Carolina, and we are able to represent investors anywhere in the United States and overseas.

If you have suffered losses due to the inappropriate actions of an investment firm, recovering those losses is too important to leave to a lawyer who lacks clear insight into the investment industry. Contact us at 1-877-STOCKLAW or stockattorneys.com for your free case evaluation.

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February 13, 2014

Legg Mason Affiliate Charged with Defrauding Clients

Western Asset Management to Pay Nearly $21 Million

It has become nearly commonplace to hear about investors losing large sums of money, often in the millions. Although it is rarely shocking, few stories of investment fraud incite others as much as those involving retirees. Such is the case with the recent SEC investigation of Western Asset Management, a subsidiary of Legg Mason. Western Asset Management is a privately owned asset management company which manages many institutional clients. More than 100 of these clients are pension plans that are governed by the Employment Retirement Income Security Act. (ERISA is a law that was enacted in 1974 with the specific purpose of protecting employees who participate in employee benefit plans.)

The Securities and Exchange Committee has sanctioned this Pasadena, CA.- based company for numerous violations. A coding error resulted in the improper allocation of a private investment to ERISA clients. By the time the coding error was revealed, the bottom had fallen out of the private investment; an investment which was prohibited to ERISA plans. Western Asset’s reticence to acknowledge the coding error for nearly two years resulted in significant losses to investors, even though their correction policy requires them to reimburse clients who suffer losses of this nature. Additionally, by the time they revealed the coding error, those securities had been liquidated.

“When the coding error was discovered, Western Asset put its own interests above its clients and avoided telling investors what had caused losses in their accounts,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office. “By concealing the error, Western Asset avoided reimbursing clients for their losses.”

In addition to this violation, the SEC also determined that Western Asset had participated in illegal cross-trading. They were covertly moving a security from one account to another. Although this is a common practice that can often benefit both selling and buying clients by reducing costs, there can also arise a conflict of interest on the part of the advisor in ensuring that the best interests of both clients is represented fairly.

The SEC determined that Western Asset misrepresented the long-term value of certain securities. Instead, they arranged the purchase of these securities from some of their selling clients who, in turn, sold them back to other Western Asset clients with more substantial risk tolerance in prearranged cross-trades. The method by which Western Asset secured these cross-trades, through the use of the bid price as opposed to the average price, resulted in the company inadequately appropriating the total gains of the market savings to the clients who bought these securities. Furthermore, these actions prevented the selling clients from obtaining over $6 million in savings.

Julie M. Riewe, the co-chief of the SEC Enforcement Division, stated, “…by moving securities across client accounts in prearranged, dealer-interposed transactions, Western Asset unlawfully deprived its selling clients of their share of the savings.”

According to the SEC, Western Asset neither admitted nor denied the SEC findings. They did, however, agreed to censure and to stop engaging in such actions in effort to avoid the cost and uncertain outcome that may result from litigation.

In an agreement between the SEC and the Department of Labor, Western Asset will suffer stiff financial ramifications for their actions. Regarding the disclosure violations pertaining to the coding error, the company must pay approximately $12 million, which includes reimbursement to those clients effected. This amount includes the penalties owed to the SEC and the Department of Labor. For the cross-trading violations, Western Asset must distribute more than $9 million to clients and in penalties to the SEC and Department of Labor. They also are required to retain an independent client consultant to ensure that both violations are addressed.

Blum Law Group represents clients who have been victimized by brokers. If you have been negatively impacted by the actions of Western Asset Management’s failure to disclose their coding error or cross-trading practices, please call 877-STOCK-LAW for your free consultation with the Blum Law Group.

February 12, 2014

SEC’s Risk Alert Regarding Alternative Investments Due Diligence

Generally, when we think of investing, we think of stocks and bonds. Now, however, there seems to be an increasing trend for investment advisors to recommend alternative investments to their clients. Although there is no clear definition of alternative investments, these are non-traditional investments that can include tangible goods such as hedge funds, private equity, commodities, and many others.

Late last month the Securities and Exchange Commission (SEC) issued a Risk Alert pertaining to studies conducted over a six-year period by its staff. These studies were of investment advisors who offer alternative investments to their clients. Of particular concern to the SEC Staff was the due diligence processes of these advisors. Due to the nature of these investments, the SEC Staff’s primary purpose was to ensure that advisors who recommend or place these investments on behalf of their clients are enacting and maintaining a high level of due diligence. This can be more difficult than with traditional investments because they can include private investment opportunities or other offerings of greater complexity.
“Money continues to flow into alternative investments. We thought it was important to assess advisors’ due diligence processes and to promote compliance with existing legal requirements, including the duty to ensure that such investments or recommendations are consistent with client objectives,” said Drew Bowden, Director of the SEC’s Office of Compliance Inspections and Examinations.

Unlike some other investment practices, there are no clearly defined due diligence practices for non-traditional investments. During their observation, the SEC Staff did notice some positive trade practices that had not previously been noted. One such practice was that advisors were working harder to glean more accurate information from those managing these transactions in an effort to validate these alternative investments. The use of third parties to confirm information provided by said managers was one of the methods used to help establish the accuracy of information. Additionally, the practice of performing risk assessments and more comprehensive analyses of these investments, as well as those who manage them, helped advisors make more sound decisions on the part of their investors.

Although these are tremendous strides toward developing due diligence standards for alternative investments, the SEC Staff found several areas of concern. It was established that the annual reviews of some investment advisors did not include due diligence practices, even though many advisors had invested a good deal of their clients’ money in these types of investments. There was also a failure to have due diligence practices in place that varied from those mentioned in disclosures provided to clients. Additionally, it was observed that some of the marketing materials provided by these advisors could be construed as misleading.

The fiduciary responsibility that these investment advisors hold demands that they comport themselves in the most ethical manner possible. Each advisor needs to assess the client’s investment objectives and use that knowledge judiciously when selecting alternative investment opportunities. It is in the best interests of both the investor and the investment advisor to engage in superior due diligence practices. This not only safeguards transparency within the industry, but it also assists in maintaining integrity in the practice of capitalizing on alternative investments. In achieving these goals, investors can rely more readily upon their investment advisor or manager to choose options that are most likely to result in positive returns on their investments.

Blum Law Group represents clients who have been victimized by brokers. If you have been questions or concerns about alternative investments, please call 877-STOCK-LAW for your free consultation with the Blum Law Group.