SEC

SEC rule amends certain broker/dealer reporting, audit and notification requirements

The amendments issued by the Securities and Exchange Commission (the “SEC”) last month include:

a requirement that broker-dealer audits be conducted in accordance with standards of the Public Company Accounting Oversight Board (the “PCAOB”) “in light of explicit oversight authority provided to the PCAOB by the Dodd-Frank Wall Street Reform and Consumer Protection Act to oversee these audits;”
a requirement that a broker-dealer that clears transactions or carries customer accounts agree to allow representatives of the Commission or the broker-dealer’s designated examining authority (“DEA”) to review the documentation associated with certain reports of the broker-dealer’s independent public accountant, and to allow the accountant to discuss the findings relating to the reports with those representatives when requested in connection with a regulatory examination of the broker-dealer; and
a requirement that a broker-dealer file a new form with its DEA that elicits information about the broker-dealer’s practices with respect to the custody of securities and funds of customers and non-customers.

August 7th, 2013|Business Transactions, Legislation|

Disciplinary action serves as reminder of due diligence requirement in Reg. D offerings

A recent disciplinary action reaffirmed FINRA member firms’ obligations to conduct a reasonable investigation of the issuer and the securities it recommends in offerings made under the SEC’s Regulation D, commonly known as private placements. Regulation D provides exemptions from the registration requirements of Section 5 under the Securities & Exchange Act, but it does not exempt these transactions from the antifraud provisions of the federal securities laws. A broker-dealer thus has a duty—enforceable under federal securities laws and FINRA rules—to conduct a reasonable investigation of the securities it recommends. Moreover, any broker-dealer that recommends securities offered under Regulation D must meet the suitability requirements under NASD Rule 2310, and comply with the advertising and supervisory rules of FINRA and the SEC.

A broker-dealer’s reasonable investigation must be tailored to each Regulation D offering, as its scope will depend on factors such as the sophistication of the investors, the broker-dealer’s affiliation with the issuer, and other facts and circumstances of the offering. The investigation, at a minimum, should include background checks of the issuer and its management, the business prospects of the issuer, the assets held or to be acquired by the issuer, the claims being made, and the intended use of the proceeds.

A firm that engages in Regulation D offerings also must have supervisory procedures under NASD Rule 3010 that are designed to ensure that its personnel and representatives conduct an inquiry that is sufficient to comply with the legal and regulatory requirements; that they perform the suitability analysis required by NASD Rule 2310; that they qualify the investors’ eligibility to purchase the securities; and that they abide by the antifraud provisions of the federal securities laws and FINRA rules regarding the preparation and distribution of offering documents or sales literature. And a broker-dealer has a further duty to adequately investigate any information located during the investigation that may be considered a “red flag.”

August 7th, 2013|Employment Decisions, Fraud|

SEC approves JOBS Act requirement to lift general solicitation ban and adopts final rule to disqualify bad actors from certain offerings

The Securities and Exchange Commission (the “SEC”) today adopted a new rule implementing a JOBS Act requirement to lift the ban on general solicitation or general advertising for certain private securities offerings. In connection with this new rule, the SEC issued an amendment proposal requiring issuers to provide additional information about these offerings to better monitor the market with that ban now lifted. The proposal provides for additional safeguards as the market changes and new practices develop.

Continuing the momentum, the SEC also adopted a long-awaited rule that disqualifies felons and other bad actors from participating in certain securities offerings as required by the Dodd-Frank Act. Under this final rule, an issuer cannot rely on the Rule 506 exemption if the issuer or any other covered person had what the SEC considers a “disqualifying event,” briefly described as a securities-related criminal conviction, court injunction or restraining order, final bar order, SEC disciplinary, cease-and-desist or stop order, suspension or expulsion from membership in a self-regulatory organization, or U.S. Postal Service false representation order.

The final rule provides an exception from disqualification when the issuer can show that it did not know and, in the exercise of reasonable care, could not have known that a covered person with a disqualifying event participated in the offering. The disqualification applies only for events that occur after the effective date of this rule. However, matters that existed before the effective date and that otherwise would be disqualifying are subject to a mandatory disclosure requirement to investors.

July 11th, 2013|Dodd-Frank, Educational Series|

SEC announces new enforcement initiatives to combat fraud

The Securities and Exchange Commission, (the “SEC”) announced today three new initiatives that will build on its Division of Enforcement’s ongoing efforts to concentrate resources on high-risk areas, as follows:

The Financial Reporting and Audit Task Force will concentrate on expanding and strengthening the Division’s efforts to identify securities law violations relating to the preparation of financial statements, issuer reporting and disclosure, and audit failures. Its principal goal will be fraud detection and increased prosecution of violations involving false or misleading financial statements and disclosures.

The Microcap Fraud Task Force will investigate fraud in the issuance, marketing, and trading of microcap securities. These abuses frequently involve serial violators and organized syndicates that employ new media, especially websites and social media, to conduct fraudulent promotional campaigns and engage in manipulative trading strategies to amass ill-gotten gains, largely at the expense of less sophisticated investors. The task force’s principal goal will be to develop and implement long-term strategies for detecting and combating fraud especially by targeting “gatekeepers,” such as attorneys, auditors, broker-dealers, and transfer agents, and other significant participants, such as stock promoters and purveyors of shell companies.

The Center for Risk and Quantitative Analytics (CRQA) will support and coordinate the Division’s risk identification, risk assessment and data analytic activities by identifying risks and threats that could harm investors, and assist staff nationwide in conducting risk-based investigations and developing methods of monitoring for signs of possible wrongdoing. A central point of contact for risk-based initiatives nationwide, CRQA will serve as both an analytical hub and source of information about characteristics and patterns indicative of possible fraud or other illegality.

July 2nd, 2013|Educational Series, Fraud|

SEC gives conditional okay for company announcements on social media

Last month, the SEC issued a report that makes it clear that companies can use social media outlets such as Facebook and Twitter to announce key information in compliance with Regulation Fair Disclosure (“Regulation FD”) as long as investors have been alerted about which social media will be used to disseminate the information.

May 6th, 2013|Social Media|

SEC and CFTC issue final identity theft rules to protect investors

On April 10, 2013, the Securities and Exchange Commission (the “SEC”) and the Commodity Futures Trading Commission (the “CFTC”) issued joint Identity Theft Red Flags Rules requiring broker-dealers, mutual funds, investment advisers, and certain other entities to adopt programs to detect red flags and prevent identity theft. Notably, certain state laws may also require the adoption of similar guidelines.

Additionally, entities that retain service providers must ensure that the providers conduct their activities in accordance with reasonable policies and procedures designed to detect, prevent and mitigate the risk of identity theft. A financial institution may be found in violation of the Rules if it fails to exercise appropriate and effective oversight over the engagement.

May 6th, 2013|Criminal Activity|

Ponzi and pyramid schemes top SEC’s closed complaints list in fiscal year 2012

During fiscal year 2012, the SEC’s Office of Investor Education and Advocacy closed 29,291 files relating to complaints, questions, and other issues received from investors, a decrease of 4,341 files compared to FY 2011. Complaints related to Ponzi and pyramid schemes were up 1,328%. A footnote to the data states that “the vast majority of these complaints related to a particular highly publicized SEC enforcement action.” Complaints related to specific market events were up 565% which too had a footnote. In this case, the vast majority of the complaints related to a particular highly publicized initial public offering…

March 29th, 2013|Legislation|

13 Things to Know About Investing

The Securities & Exchange Commission (the “SEC”) recently released an educational bulletin to help investors make informed financial decisions and avoid common scams. Its 13 points include:

Check the investment professional’s background.
Details about experience and qualifications are available through the Investment Adviser Public Disclosure website and FINRA BrokerCheck.
Be mindful of fees associated with buying, owning, and selling an investment product.
Expenses vary from product to product, and even small differences in these costs can translate into large differences in earnings over time. An investment with high costs must perform better than a low-cost investment to generate the same returns.
Diversification can help reduce the overall risk of an investment portfolio.
By picking the right mix, you may be able to limit losses and reduce the fluctuations of investment returns without sacrificing too much in potential gains. Some investors find that it is easier to achieve diversification through ownership of mutual funds or exchange-traded funds rather than through ownership of individual stocks or bonds.
Paying off high-interest debt may be the best “investment” strategy.
Few investments pay off as well as, or with less risk than, eliminating high-interest debt on credit cards or other loans.
Promises of high returns, with little or no associated risk, are classic warning signs of fraud.
Every investment carries some degree of risk and the potential for greater returns comes with greater risk. Ignore the so-called “can’t miss” investment opportunities or those promising guaranteed returns or, better yet, report them to the SEC.
Any offer or sale of securities must be either registered with the SEC or exempt from registration.
Otherwise, it is illegal. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.
Do not invest in a company about which little or no information is publicly available.
Always check whether an offering is registered with the SEC by using the SEC’s EDGAR database or contacting the SEC’s toll-free investor assistance line at (800) 732-0330.
Investing heavily in shares of any individual stock can be risky.
In particular, think twice before investing heavily in shares of your employer’s stock. If the value declines significantly, or the company goes bankrupt, you may lose money and there’s a chance you might lose your job, too.
Active trading and some other common investing behaviors actually undermine investment performance.
According to researchers, other common investing mistakes include focusing on past performance, favoring investments from your own country, region, state or company, and holding on to losing investments for too long and selling winning investments too soon.
Con-artists are experts at the art of persuasion, often using a variety of influence tactics tailored to the vulnerabilities of their victims.
Common tactics include phantom riches (dangling the prospect of wealth, enticing with something you want but can’t have), source credibility (trying to build credibility by claiming to be with a reputable firm or to have a special credential or experience), social consensus (leading you to believe that other savvy investors have already invested), reciprocity (offering to do a small favor for you in return for a big favor) and scarcity (creating a false sense of urgency by claiming limited supply).
Some investments provide tax advantages.
For example, employer-sponsored retirement plans and individual retirement accounts generally provide tax advantages for retirement savings, and 529 college savings plans also offer tax benefits.
Mutual funds, like other investments, are not guaranteed or insured by the FDIC or any other government agency.
This is true even if you buy through a bank and the fund carries the bank’s name.
The key to avoiding investment fraud is using independent information to evaluate financial opportunities.
Many investors may have avoided trouble and losses if they had asked questions from the start and verified the answers with sources outside of their family, community, or group. Whether checking the background of an investment professional, researching an investment, or learning about new products or scams, unbiased information is a significant advantage for investing wisely.

February 13th, 2013|Educational Series, Fraud|

Whistleblower activity for SEC violations on the rise

The U.S. Senate reports that more than half of all uncovered frauds have originated from whistleblower tips. Since the SEC’s Office of the Whistleblower was launched in August 2011, officials have been dealing with close to 100 tips per day. And this number is expected to double in the coming years with Dodd-Frank’s provisions for monetary incentives and protection from retaliation.

While coming to grips with the complexities of Dodd-Frank, many companies and financial institutions are heightening their efforts to mitigate the potential liability from whistleblowing. Developing and evaluating existing risk management and compliance programs is now a priority. The programs established under the 2002 Sarbanes-Oxley Act may not be effective in this new regulatory environment, and may need to be modified or strengthened, with an emphasis on internal communications and investigations of possible violations. When determining if and how much leniency to grant an entity, the SEC notes that “the promptness with which entities voluntarily self-report their misconduct…is an important factor.”

According to a recent study published by the Association of Certified Fraud Examiners and the Institute of Internal Auditors, fraudulent acts by employees and outsiders rise during periods of economic stress. Crime experts say that fraud and other misconduct are committed primarily because of three factors, referred to as the Fraud Triangle, and involve financial pressure, opportunity, and rationalization. In these still challenging times, businesses of all types and sizes need to tighten their internal controls and be proactive in preventing wrongful acts. Allocating budgets for compliance programs which include compelling due diligence with a focus on background investigations, will provide a high return on the investment and ultimately protect the bottom line.

March 2nd, 2012|Dodd-Frank, Violations|

SEC charges green-product company with running a $26 million Ponzi scheme

The Securities and Exchange Commission (SEC) announced today that it obtained an emergency court order to halt a Ponzi scheme that promised investors high returns on water-filtering natural stone pavers but bilked them of approximately $26 million over a four-year period.

Filed in the U.S. District Court for the Southern District of New York, the SEC alleges in its complaint that between 2006 and 2010, convicted felon Eric Aronson and others defrauded about 140 individual investors in PermaPave Companies, a group of firms based on Long Island, NY, and controlled by Aronson. According to the complaint, the investors were told that PermaPave had a tremendous backlog of orders for pavers imported from Australia, which could be sold in the U.S. at a substantial mark-up, yielding monthly returns of 7.8% to 33%. But in reality, the complaint states, there was little demand for the product, and the cost of the pavers far exceeded the revenue from sales.

In their Ponzi scheme, Aronson and two other PermaPave executives, Vincent Buonauro Jr. and Robert Kondratick, used the new funds to make payments to earlier investors and then siphoned off much of the rest for themselves, buying luxury cars, gambling trips, and jewelry, according to the complaint. Aronson also allegedly used the investors’ money to make court-ordered restitution payments to victims of a previous scheme to which he pleaded guilty in 2000.

The complaint further states that when investors began demanding their money, Aronson accused them of committing a felony by lending the PermaPave Companies money at the interest rates he promised them, which he suddenly claimed were usurious. Aronson and his attorney, Fredric Aaron, then allegedly made false statements to persuade investors to convert their securities into ones that deferred payments for several years.

The SEC also charges that the defendants used some of the money raised through the Ponzi scheme to purchase a publicly traded company, Interlink-US-Network, Ltd. Several months later, the SEC said that Interlink issued a Form 8-K, signed by Kondratick, which falsely claimed that LED Capital Corp. had agreed to invest $6 million in Interlink. According to the complaint, LED Capital Corp. did not have $6 million and had no dealings with Interlink.

The U.S. Attorney’s Office for the Eastern District of New York, which conducted a parallel investigation, filed criminal charges against Aronson, Buonauro, and Kondratick.

October 10th, 2011|Green Technology|

This is the development site for Scherzer International and the information may not be up to date.Please visit our production website.

This is the development site for Scherzer International and the information may not be up to date.
Please visit our production website.