INVESTMENT ADVISER TO PAY OVER $1 MILLION TO ONCLUDE FRAUD CASES WITH SEC

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23273 / June 1, 2015

Securities and Exchange Commission v. Sage Advisory Group, LLC and Benjamin Lee Grant, Civil Action No. 10-cv-11665 (D. Mass. September 29, 2010)

Securities and Exchange Commission v. John A. Grant, Sage Advisory Group, LLC and Benjamin Lee Grant, Civil Action No. 11-cv-11538 (D. Mass. September 1, 2011)

Court Orders Massachusetts Investment Adviser to Pay Over $1 Million to Conclude Two SEC Fraud Cases

The Securities and Exchange Commission announced that, on May 29, 2015, the Honorable George A. O'Toole Jr. of the United States District Court for the District of Massachusetts entered final judgments against the one-time registered investment adviser Sage Advisory Group, LLC, and its principal, Benjamin Lee Grant ("Lee Grant"), both of Boston, MA, in two fraud cases filed by the SEC. A federal court jury previously found Sage and Lee Grant liable for fraud in the first case, and Sage and Lee Grant recently admitted liability for fraud in the second case. Among other relief, the final judgments impose permanent injunctions against future violations of certain antifraud provisions of the federal securities laws and order Sage and Lee Grant to pay a total of $1,051,038.

In the first case, filed on September 29, 2010, the Commission alleged that Lee Grant had fraudulently led his brokerage customers to transfer their assets to Sage, his new advisory firm. Prior to October 2005, Lee Grant was a registered representative of broker-dealer Wedbush Morgan Securities and had customer accounts representing approximately $100 million in assets, virtually all of which were managed by California-based investment adviser First Wilshire Securities Management. According to the complaint, Lee Grant resigned from Wedbush in September 2005 so that he could operate Sage, his own newly-minted investment advisory firm. Lee Grant made false and misleading statements to his former brokerage customers. Among other things, Lee Grant misled customers by telling them that the changes in their accounts were being done at the suggestion of First Wilshire and that First Wilshire was not willing to continue managing the customers' assets if they stayed with Wedbush. Lee Grant also told customers that the "wrap fee" program being offered by Sage offered potential savings, based on historical commission costs - without disclosing that a new arrangement with a discount broker would produce substantial savings to the benefit of Sage, not the customers, under the "wrap fee." To rush his customers to sign up as advisory clients with Sage, Lee Grant falsely suggested that they might suffer disruption in First Wilshire's management of their assets unless they signed and returned the new advisory and custodial account documents as soon as possible.

Following trial, on August 13, 2014, a federal district court jury found both Sage and Lee Grant liable for fraud under the Investment Advisers Act of 1940, among other charges.

In the second case, filed on September 1, 2011, the Commission alleged that Sage and Lee Grant separately violated the antifraud provisions of the Investment Advisers Act, as did Lee Grant's father, Jack Grant. The Commission's complaint alleged that Jack Grant violated a Commission bar from association with investment advisers by associating with Sage and by acting as an investment adviser himself. The Commission bar had been based on a 1988 Commission enforcement action against Jack Grant alleging that he sold $5,500,000 of unregistered securities and misappropriated investors' funds. The Commission alleged in its September 2011 complaint that, notwithstanding his agreement to accept a Commission bar to settle the 1988 action, Jack Grant did not remove himself from the securities business and instead continued to provide investment advice to individuals and small businesses. The Commission's complaint alleged that he retooled his service as the Law Offices of Jack Grant and used his son, Lee Grant, to help implement his investment advice. The complaint further alleged that Jack Grant, Lee Grant, and Sage failed to inform their advisory clients that Jack Grant was barred from associating with investment advisers. In May 2013, the court entered a final judgment against Jack Grant on a settled basis, ordering Jack Grant to pay a total of $201,392.27, among other relief.

The final judgments entered against Sage and Lee Grant on May 29, 2015 conclude the cases and were entered with Sage's and Lee Grant's consent. The final judgment in the first case acknowledges the jury's liability finding, imposes permanent injunctions against future violations of Sections 206(1), 206(2), 206(4), and 204A of the Investment Advisers Act and Rules 204A-1 and 206(4)-7 thereunder, orders Sage and Lee Grant to pay on a joint and several basis $500,000 in disgorgement and $51,038 in prejudgment interest, and orders Lee Grant to pay an additional $350,000 civil penalty. The final judgment in the second case imposes additional permanent injunctions against future violations of Sections 206(1), 206(2), and 207 of the Investment Advisers Act and orders Lee Grant to pay an additional $150,000 civil penalty. As part of their consent in the second case, Sage and Lee Grant acknowledged that their conduct violated the federal securities laws and admitted the underlying facts establishing the violations.

Lee Grant also consented to the Commission's entry in follow-on administrative proceedings of a permanent bar, pursuant to Section 203(f) of the Investment Advisers Act, prohibiting him from association with any broker, dealer, or investment adviser, among other entities. The Commission entered the administrative order on June 1, 2015.

For further information on the first case, see Litigation Release No. 21672 (September 29, 2010) (SEC Charges Massachusetts-Based Investment Adviser with Fraud); and Litigation Release 23066 (August 13, 2014) (Jury Returns Verdict Against Massachusetts Investment Adviser in SEC Fraud Case).

For further information on the second case, see Litigation Release No. 22081 (September 1, 2011) (SEC Charges Massachusetts-Based Attorney for Violating an Investment Adviser Bar and his Son for Failing to Disclose his Father's Bar to Advisory Clients); and Litigation Release No. 22708 (May 30, 2013) (SEC Obtains Final Judgment and Issues Administrative Orders against John A. ("Jack") Grant).

SEC CHARGES FORMER BROKER-DEALER CEO WITH DECEIVING CUSTOMERS WITH HIDDEN TRANSACTION FEES

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged the former chief executive officer of a broker-dealer subsidiary of ConvergEx Group LLC for deceiving brokerage customers with hidden fees to buy and sell securities. 

The SEC’s complaint alleges that the former CEO, Anthony G. Blumberg, engaged in a scheme that entailed concealing the practice of routing orders to an offshore affiliate in Bermuda to add mark-ups or mark-downs.  The hidden fees known as “trading profits” or “TP” were in addition to and often much higher than the commissions paid by customers to have their orders executed. 

The charges against Blumberg follow those announced in December by the SEC against three ConvergEx subsidiaries that agreed to pay more than $107 million and admit wrongdoing to settle the matter.  Two former employees also settled charges with the SEC. 

According to the SEC’s complaint filed against Blumberg in federal court in Newark, N.J., one university customer paid about $93,000 in disclosed commissions and about $543,000 in undisclosed TP.  In another case, $1.6 million in fees allegedly went undetected.  The SEC alleges that Blumberg engaged in deceptive practices to conceal the additional fees, and he encouraged traders under his management to do the same.

“We will continue to hold individuals accountable, including senior officials at broker-dealers, when they engage in fraudulent schemes to mislead customers,” said Andrew Ceresney, director of the SEC’s Division of Enforcement.

The U.S. Department of Justice today announced parallel criminal charges against Blumberg.  In the prior parallel criminal proceeding announced in December, ConvergEx Group and its Bermuda broker-dealer agreed to pay $43.8 million, and the two former employees named in the SEC case pleaded guilty in the criminal case.

ConvergEx has since shut down trading operations at the Bermuda broker-dealer subsidiary ConvergEx Global Markets Limited.  Blumberg was CEO of ConvergEx Global Markets Limited and ConvergEx Global Markets, which included a unit of U.S. broker G-Trade Services LLC.

The SEC’s complaint alleges that Blumberg directed employees to suspend the taking of TP when customers were monitoring execution prices.  Blumberg made false and misleading statements to a brokerage customer and authorized employees to falsify trading data for customers who inquired about the details of their securities transactions.

“During his tenure, Blumberg directed a culture of deception and greed that systematically harmed investors,” said Stephen L. Cohen, an associate director in the SEC’s Division of Enforcement.  “He had the power to put an end to this fraud, but instead used his power to encourage and perpetuate it.”

The SEC’s complaint alleges that Blumberg violated the antifraud provisions of the federal securities laws and an SEC antifraud rule.  The complaint further alleges liability as a control person and aiding and abetting violations by certain ConvergEx subsidiaries and former employees.  The SEC is seeking disgorgement of any ill-gotten gains with interest, a financial penalty, and permanent injunctive relief.

The SEC’s investigation, which is continuing, has been conducted by Sarah L. Allgeier, Richard E. Johnston, and Thomas D. Manganello under the supervision of Jennifer S. Leete.  The litigation will be led by Cheryl L. Crumpton and Kyle M. DeYoung.  The SEC appreciates the assistance of the Fraud Section of the U.S. Department of Justice’s Criminal Division, the Federal Bureau of Investigation, and the U.S. Postal Inspection Service.

TWO BROKERS CHARGED WITH INSIDER TRADING REGARDING THE ACQUISITION OF SPSS INC., BY IBM CORPORATION

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C., Nov. 29, 2012 — The Securities and Exchange Commission today charged two retail brokers who formerly worked at a Connecticut-based broker-dealer with insider trading on nonpublic information ahead of IBM Corporation’s acquisition of SPSS Inc.

The SEC alleges that Thomas C. Conradt learned confidential details about the merger from his roommate, a research analyst who got the information from an attorney working on the transaction who discussed it in confidence. Conradt purchased SPSS securities and subsequently tipped his friend and fellow broker David J. Weishaus, who also traded. The insider trading yielded more than $1 million in illicit profits. The SEC’s investigation uncovered instant messages between Conradt and Weishaus where they openly discussed their illegal activity. The SEC’s investigation is continuing.

"When licensed professionals who are privileged to work in the securities industry violate legal duties and enrich themselves at investors’ expense, it undermines public confidence in the integrity of the markets," said Daniel M. Hawke, Director of the SEC’s Philadelphia Regional Office. "As industry professionals, Conradt and Weishaus clearly understood that what they were doing was wrong, but did so anyway while knowing the consequences they would face if caught."

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Conradt and Weishaus, who live in Denver and Baltimore respectively.

According to the SEC’s complaint filed in federal court in Manhattan, the scheme occurred in 2009. Conradt revealed in instant messages that he received the information from the research analyst and warned Weishaus that they needed to "keep this in the family." Weishaus agreed, typing "i don't want to go to jail." They went on to discuss other people who have been prosecuted for insider trading. In another series of instant messages, Conradt bragged that he was "makin everyone rich" by sharing the nonpublic information. Weishaus later noted, "this is gonna be sweet."

The SEC alleges that the research analyst’s attorney friend sought moral support, reassurance, and advice when he privately told the research analyst about his new assignment at work on the SPSS acquisition by IBM. In describing the magnitude of the assignment, the lawyer disclosed material, nonpublic information about the proposed transaction, including the anticipated transaction price and the identities of the acquiring and target companies. The associate expected the research analyst to maintain this information in confidence and refrain from trading on this information or disclosing it to others.

The SEC alleges that Conradt, Weishaus, and other downstream tippees purchased common stock and call options in SPSS. A call option is a security that derives its value from the underlying common stock of the issuer and gives the purchaser the right to buy the underlying stock at a specific price within a specified period of time. Typically, investors will purchase call options when they believe the stock of the underlying securities is going up. Conradt, Weishaus, and other downstream tippees invested so heavily in SPSS securities that the investments accounted for 76 percent to 100 percent of their various brokerage accounts. Conradt and Weishaus both hold law degrees. Conradt is admitted to practice law in Maryland, and he passed the Colorado bar examination administered in February 2012.

The SEC alleges that Conradt and Weishaus violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest and financial penalties, and a permanent injunction against the brokers.

The SEC’s investigation is being conducted by Mary P. Hansen, A. Kristina Littman and John S. Rymas, in the SEC’s Philadelphia Regional Office. G. Jeffrey Boujoukos and Catherine E. Pappas in the Philadelphia office are handling the litigation. The SEC acknowledges the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.

ELECTRONIC STOCK EXCHANGES AND BROKER-DEALER ARE SANCTIONED BY THE SEC

The following is an excerpt from the SEC website: “Washington, D.C., Oct. 13, 2011 — The Securities and Exchange Commission today sanctioned two electronic stock exchanges and a broker-dealer owned by Direct Edge Holdings LLC for violations of U.S. securities laws arising out of weak internal controls that resulted in millions of dollars in trading losses and a systems outage. EDGA Exchange Inc., EDGX Exchange Inc., and their affiliated routing broker Direct Edge ECN LLC – all based in Jersey City, N.J. — agreed to settle cease-and-desist and administrative proceedings without admitting or denying the Commission’s findings. The exchanges and the routing broker, known as DE Route, cooperated with the SEC’s investigation and agreed to be censured and undertake remedial measures, many of which are underway, to correct the deficiencies that led to the systems problems and the violations at the all-electronic exchanges. The SEC’s Division of Enforcement, Division of Trading and Markets, and Office of Compliance Inspections and Examinations coordinated efforts and conducted the investigation jointly. “Direct Edge was required to police not only its members’ conduct, but its own conduct as well,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Despite those responsibilities, it violated the principal obligations of self-regulatory organizations and national securities exchanges to put the public interest first by ensuring the strength and security of their systems, complying with their own Commission-approved rules, providing for adequate backup and failover systems, and preventing or responding appropriately to significant system outages and failures. The SEC will continue to closely coordinate its oversight, inspection and enforcement activities to ensure that self-regulatory organizations demonstrate the robust compliance necessary to protect investors.” Carlo di Florio, Director of the SEC’s Office of Compliance Inspections and Examinations, added, “Direct Edge has agreed to substantial remedial undertakings that, when fully implemented, will significantly enhance the governance, risk management and compliance culture of these entities as well as information technology systems and controls.” According to the SEC’s order instituting administrative proceedings, in the first incident on Nov. 8, 2010, untested computer code changes resulted in EDGA and EDGX overfilling orders submitted by three members. The unwanted trades involved an estimated 27 million shares in about 1,000 stocks, totaling roughly $773 million. At the exchanges’ instruction, one member traded out of the overfilled shares and submitted a claim to the exchanges for $105,000 of losses. When the other members refused to do likewise, the exchanges assumed and traded out of the overfilled shares through the routing broker’s error account, in violation of their own rules. The Commission also found that in resolving the overfilled trades, which cost the exchanges about $2.1 million, DE Route violated rules on short selling, which involves sales of borrowed shares. DE Route failed to mark the orders as short or mismarked them as long, and failed to locate or document the availability of shares to borrow before selling them short, violating the SEC’s Regulation SHO. According to the SEC’s order, in the second incident on April 13, 2011, an EDGX database administrator inadvertently disabled database connections, disrupting the exchange’s ability to process incoming orders, modifications, and cancellations, and leading several EDGX members to file claims for more than $668,000 in losses. EDGX received internal alerts immediately and got external notifications soon after, including from members seeking to cancel unfilled trades and from numerous trading centers that were bypassing EDGX because it wasn’t responding immediately to incoming orders. EDGX waited approximately 24 minutes after the outage to remove its quotations from public market data, and violated the SEC’s Regulation NMS by failing to immediately identify its quotations as manual quotations. Based on the incidents, the Commission found that EDGA violated Sections 19(b) and 19(g) of the Exchange Act, EDGX violated Sections 19(b) and 19(g) of the Exchange Act and Rule 602(a)(3) thereunder, and DE Route caused violations of Section 19(g) of the Exchange Act and violated Rules 200(g) and 203(b) thereunder. All three consented to an order censuring them and requiring them to cease and desist from further violations of U.S. securities laws and to take remedial efforts to strengthen their information technology systems and controls and compliance procedures. After the incidents, the exchanges and DE Route voluntarily began to put substantial remedial measures in place. A comprehensive remediation plan submitted by the exchanges to the SEC staff requires the exchanges to: Enhance their policies and procedures for systems development and maintenance. Implement an enterprise risk management framework and information security program, including the hiring of an information security director, and enhancing their information technology control framework and underlying controls. Hire a corporate training director to train employees about U.S. securities laws and the exchanges’ policies and procedures. Retain outside counsel to review the circumstances leading to the two systems incidents at the exchanges. Hire a chief compliance officer whose responsibilities include implementing policies and procedures reasonably designed to ensure that respondents fulfill their regulatory and compliance obligations. EDGA, EDGX and DE Route also agreed to spend sufficient funds to put the remediation plan into effect, including the retention of outside counsel or other outside professionals.”