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 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.

January 30, 2014

KPMG Violates Directives Regarding Auditor Independence

Financial auditing is an attestation of a client’s financial records therefore, it is critical that those auditors remain impartial. KPMG is one of the largest public services companies in the world, and financial auditing is one of the services they provide. Possessing a global impact makes it especially important for a company such as KPMG to behave ethically. Even so, over the last several years, they have appeared in the media regarding several issues pertaining to corporate ethics. Most recently they have been charged by the Securities and Exchange Commission (SEC) with violating the rules mandating the independence of auditors from the companies they are auditing.

In an effort to clarify the rules regarding independence from clients, the SEC issued a report which states that audit firm employees cannot work for clients in a way that could be construed as the staff acting as employees for the client company. The SEC’s investigation determined that KPMG was allowing some of its staff to perform such tasks as bookkeeping to its affiliates for whom they were providing audit services. It was also determined that some of KPMG staff owned stock in the very companies that were their clients. This lack of independence gives the appearance of impropriety and creates a conflict of interest.

“Auditors are vital to the integrity of financial reporting, and the mere appearance that they may be conflicted in exercising independent judgment can undermine public confidence in our markets,” said John T. Dugan, associate director for enforcement in the SEC’s Boston Regional Office. “KPMG compromised its role as an independent audit firm by providing prohibited non-audit services to companies that it was supposed to be auditing without any potential conflicts.”

During the course of its investigation, the SEC found that reports submitted by KPMG continued to state that they were independent although they were knowingly committing various violations over a four-year period. These actions negated their independent status. One example of this lack of independence is the hiring by KPMG of a retired affiliate of one of their clients. They then “loaned” him back to the client firm from which he retired where he provided services to that client. These services that he provided violated Rule 2-01 of Regulation S-X of the Securities Exchange Act of 1934. This particular violation resulted in more violations of other sections of the Exchange Act.

Although KPMG neither admitted nor denied the allegations of the SEC, they agreed to pay $8.2 million to settle the allegations made by the SEC. This includes $5,266,347 in disgorgement fees, prejudgment interest in the amount of $1,185,002, and a penalty fee of $1,775,000. Additionally, they have agreed to make internal changes and more closely monitor their compliance with auditor independence requirements. They will also employ an independent consultation to make sure these changes are in place and effective.

With the field of financial auditing being both necessary and lucrative, it is imperative that those firms doing the auditing always perform these services in a conservative manner. The SEC’s chief accountant, Paul A. Beswick, states, “The accounting profession must carefully consider whether engagements are consistent with the requirements to be independent of audit clients. Resolving questions about permissibility of non-audit services is always best done before commencing the services.”

Blum Law Group represents clients who have been victimized by brokers. If you have been negatively impacted by the lack of independence of a financial auditing firm, please call 877-STOCK-LAW for your free consultation with the Blum Law Group.

October 28, 2013

Lost Money in Puerto Rico Bonds or Bonds Funds?

Some of the Puerto Rico funds being investigated include:

Puerto Rico AAA Portfolio Target Maturity Fund
Puerto Rico GNMA US Government Target Maturity Fund
Puerto Rico Fixed Income Fund
Puerto Rico Fixed Income Fund II
Puerto Rico Fixed Income Fund III
Puerto Rico Fixed Income Fund IV
Puerto Rico Fixed Income Fund V
Tax-Free Puerto Rico Fund, Inc.
Tax-Free Puerto Rico Fund II, Inc.
Tax-Free Puerto Rico Target Maturity Fund, Inc.
Tax Free Puerto Rico Fund
Puerto Rico AAA Portfolio Bond Fund
Puerto Rico AAA Portfolio Bond Fund II
Multi-Select Securities Puerto Rico Fund
Puerto Rico AAA Portfolio Target Maturity Fund, Inc.
Puerto Rico AAA Portfolio Bond Fund
Puerto Rico AAA Portfolio Bond Fund II
Puerto Rico Fixed Income Fund
Puerto Rico Fixed Income Fund II
Puerto Rico Fixed Income Fund III
Puerto Rico Fixed Income Fund IV
Puerto Rico Fixed Income Fund V
Puerto Rico Fixed Income Fund VI
Puerto Rico GNMA & U.S. Government Target Maturity Fund
Puerto Rico Investors Tax-Free Fund
Puerto Rico Investors Tax-Free Fund II
Puerto Rico Investors Tax-Free Fund III
Puerto Rico Investors Tax-Free Fund IV
Puerto Rico Investors Tax-Free Fund V
Puerto Rico Investors Tax-Free Fund VI
Puerto Rico Mortgage-Backed & U.S. Government Securities Fund
Puerto Rico Short Term Investment Fund
Tax-Free Puerto Rico Fund
Tax-Free Puerto Rico Fund II
Tax-Free Puerto Rico Target Maturity Fund

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April 11, 2013

UBS facing Millions of Dollars in Claims

Blum Law Group has commenced an investigation into the activities of UBS Financial with relation to its clients who purchased stocks or bonds over the past 24 months. Investors who sustained losses at UBS or in their investment accounts should contact Blum Law Group
at 1-877-Stock Law (786-2552) or email us at blum@stockattorneys.com for a free case evaluation.

October 25, 2012

Blum Law Group Investigates David Lerner Associates, Inc.

Blum Law Group has commenced an investigation into the activities of David Lerner and David Lerner Associates, Inc., based in Syosset, New York with relation to its clients who purchased Apple REITs. David Lerner was recently banned from the securities industry for a year and his firm ordered to pay $12 million for misleading investors into buying real estate investment trusts. Investors who sustained losses in David Lerner Associates, Inc. or Apple REIT investment accounts should contact Blum Law Group at 1-877-Stock Law (786-2552) or email blum@stockattorneys.com for a free case evaluation.

October 18, 2012

Blum Law Group Investigates JW Korth & Company

Blum Law Group has commenced an investigation into the activities of JW Korth & Company, based in Miami, Florida, with relation to its clients who purchased Banco Cruzeiro do Sul SA bonds. James W. Korth is their Managing Partner. Investors who sustained losses in JW Korth & Company or Banco Cruzeiro do Sul SA investment accounts should contact Blum Law Group at 1-877-Stock Law (786-2552) or email blum@stockattorneys.com for a free case evaluation.

August 24, 2012

Peregrine CEO pleads Not Guilty even After he admits to wrongdoing in a note

The former chief executive of the failed brokerage firm Peregrine Financial Group (PFG), who last month wrote a note admitting that he had committed a long-ranging investment fraud, pleaded not guilty on Friday to lying to federal regulators. Federal prosecutors charged Russell Wasendorf Sr., the former head of Peregrine, with 31 counts of deceiving regulators about the value of his customers’ accounts. If convicted, he would face a maximum prison sentence of 155 years.

Blum Law Group is representing investors who lost money that was invested at PFG or through their Introducing Brokers, such as Liberty Trading Group. Just because you lost money does not mean you have a case. Rather, the Blum Law Group will provide a free case evaluation to determine if you have a claim worth filing. If you do, our law firm handles cases on a contingency fee so if we do not recover money for you, you will not pay any attorneys fees. Call us ASAP at 1-877-Stock Law (1-877-786-2552) or go to http://www.stockattorneys.com.

July 10, 2012

Blum Law Group Investigates Liberty Trading Group and Peregrine Financial Group

Blum Law Group has commenced an investigation into the activities of Liberty Trading Group, based in Tampa Florida. James Cordier is their President. On Monday, July 9, 2012, the NFA announced banking irregularities at Liberty Trading Group's clearing firm, PFG (Peregrine Financial Group Inc). What this means is that clients can only close out any of their positions. There is a hold placed on all incoming and outgoing wires and checks, as per the NFA. Investors who sustained losses in Liberty Trading Group or PFG investment accounts should contact Blum Law Group at 1-877-Stock Law (786-2552) for a free case evaluation.

August 24, 2011

Blum Law Group Announces its Investigation of the Laeroc Funds

The Law Offices of Blum Law Group is currently investigating the LaeRoc Funds, including the Laeroc 2002 Income Fund LP, Laeroc 2004-2005 Income Fund LP, Laeroc 2005-2006 Income Fund LP, Laeroc Edge Fund LP and Laeroc Income Fund 007, LP.

The Laeroc funds are real estate private placements (under Regulation D) that were sold by brokerage firms like LPL Financial LLC and Commonwealth Financial Network. According to its website, Laeroc Funds is a real estate investment firm managing over $650 million in assets in the last 23 years and has created 14 funds. The Company focuses on income producing properties in the western US with a concentration in southern California.

Many of the Laeroc funds have suffered substantial declines in value. Laeroc 2002 Income Fund, L.P. recently announced the dissolution of the fund to its investors. While the Laeroc 2005-2006 Income Fund LP is currently attempting to raise another $11 million to $14.5 million to pay off at least $49 million of debt. This fund recently issued a cash call to investors, asking investors to contribute additional money for preferred partnership status.

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