Posted On: April 11, 2011

FINRA Sanctions UBS Nearly $11 Million for Down Playing Risks Associated with Lehman Principal Protected Notes Sold to its Customers

The Financial Regulatory Authority (FINRA) announced today that it has fined UBS Financial Services, Inc. $2.5 million, and ordered UBS to pay $8.25 million in restitution for omissions and statements regarding the “principal protection” feature of the 100% Principal-Protected Notes (PPNs) issued by Lehman Brothers Holdings Inc. prior to its September 2008 bankruptcy filing. FINRA is a self-regulatory organization that regulates all broker-dealers doing business in the United States, including UBS.

According to the papers filed by FINRA, during the period between March 17, 2008 to June 2008, in connection with the Lehman PPNs that UBS marketed and sold, UBS made statements and omitted certain facts through communications through some of its financial advisors, which had the effect of misleading certain customers regarding characteristics and risks associated with investing in Lehman PPNs, including material information regarding the product’s “100% Principal Protection” features.

FINRA further alleged that UBS failed to disseminate adequately to its financial advisors certain market information relating to Lehman’s financial conditions and UBS failed to establish an adequate supervisory system for its financial advisors training, marketing and sale of PPNs. FINRA also alleged that UBS did not adequately analyze the suitability of sales of Leman PPNs to certain UBS customers. As a result of the foregoing, FINRA alleged that UBS violated numerous FINRA rules and sanctioned it accordingly.

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Posted On: April 8, 2011

SEC Shuts Down Multiple Chinese Companies Listed on U.S. Stock Exchanges and Investigates their Practices

In 2010 the SEC’s Corporate Finance and Enforcement divisions began a wide-spread investigation into small cap Chinese companies that became public in the United States through a process referred to as “reverse mergers.” The SEC is also investigating the individuals in the U.S. who helped orchestrate these reverse mergers. A reverse merger is also commonly referred to as a reverse takeover or RTO.

In a RTO, a Chinese company is acquired by an American shell company. An American shell company is a company which already has stock trading on a U.S. public exchange, but the company does not operate a business or own assets. The Chinese company merges into the shell. This way, the Chinese company is brought public in the U.S. without the regulatory scrutiny of the Initial Public Offering (IPO) process.

The SEC has found accounting inaccuracies in many of these companies. Companies listed on a U.S. stock exchange are required to maintain and submit audited financials by a firm registered with the Public Company Accounting Oversight board. According to the SEC’s Chief Accountant, hundreds of Chinese companies brought public in the U.S. through the RTO process were using small, largely unknown auditing U.S. firms, who in turn may have been contracting the work back out to local Chinese firms.

The SEC has accused many of the Chinese companies listed on U.S. stock exchanges as engaging in pump and dump scams and other fraudulent practices.

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