TWO CITIGROUP AFFILIATES WILL PAY 180 MILLION TO SETTLE FRAUD CHARGES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Citigroup Affiliates to Pay $180 Million to Settle Hedge Fund Fraud Charges

08/17/2015 10:35 AM EDT

The Securities and Exchange Commission today announced that two Citigroup affiliates have agreed to pay nearly $180 million to settle charges that they defrauded investors in two hedge funds by claiming they were safe, low-risk, and suitable for traditional bond investors.  The funds later crumbled and eventually collapsed during the financial crisis.

Citigroup Global Markets Inc. (CGMI) and Citigroup Alternative Investments LLC (CAI) agreed to bear all costs of distributing the $180 million in settlement funds to harmed investors.

An SEC investigation found that the Citigroup affiliates made false and misleading representations to investors in the ASTA/MAT fund and the Falcon fund, which collectively raised nearly $3 billion in capital from approximately 4,000 investors before collapsing.  In talking with investors, they did not disclose the very real risks of the funds.  Even as the funds began to collapse and CAI accepted nearly $110 million in additional investments, the Citigroup affiliates did not disclose the dire condition of the funds and continued to assure investors that they were low-risk, well-capitalized investments with adequate liquidity.  Many of the misleading representations made by Citigroup employees were at odds with disclosures made in marketing documents and written materials provided to investors.

“Firms cannot insulate themselves from liability for their employees’ misrepresentations by invoking the fine print contained in written disclosures,” said Andrew Ceresney, Director of the SEC’s Enforcement Division.  “Advisers at these Citigroup affiliates were supposed to be looking out for investors’ best interests, but falsely assured them they were making safe investments even when the funds were on the brink of disaster.”

According to the SEC’s order instituting a settled administrative proceeding:

The ASTA/MAT fund was a municipal arbitrage fund that purchased municipal bonds and used a Treasury or LIBOR swap to hedge interest rate risks.
The Falcon fund was a multi-strategy fund that invested in ASTA/MAT and other fixed income strategies, such as CDOs, CLOs, and asset-backed securities.
The funds, both highly leveraged, were sold exclusively to advisory clients of Citigroup Private Bank or Smith Barney by financial advisers associated with CGMI.  Both funds were managed by CAI.

Investors in these funds effectively paid advisory fees for two tiers of investment advice: first from the financial advisers of CGMI and secondly from the fund manager, CAI.

Neither Falcon nor ASTA/MAT was a low-risk investment akin to a bond alternative as investors were repeatedly told.

CGMI and CAI failed to control the misrepresentations made to investors as their employees misleadingly minimized the significant risk of loss resulting from the funds’ investment strategy and use of leverage among other things.
CAI failed to adopt and implement policies and procedures that prevented the financial advisers and fund manager from making contradictory and false representations.

CGMI and CAI consented to the SEC order without admitting or denying the findings that both firms willfully violated Sections 17(a)(2) and (3) of the Securities Act of 1933, GCMI willfully violated Section 206(2) of the Investment Advisers Act of 1940, and CAI willfully violated Section 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8.  Both firms agreed to be censured and must cease and desist from committing future violations of these provisions.

The SEC’s investigation has been conducted by Olivia Zach, Kerri Palen, David Stoelting, and Celeste Chase of the New York Regional Office, and supervised by Sanjay Wadhwa.

$50,000 FINE IMPOSED ON FORMER BROKER, SALES AGENT FOR UNLAWFUL PROMOTION/SALE OF SECURITIES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23315 / August 12, 2015

Securities and Exchange Commission v. Inofin, Inc., Michael J. Cuomo, Kevin J. Mann, Sr., Melissa George, Thomas Kevin Keough, David Affeldt, and Nancy Keough, Civil Action No. 1:11-CV-10633 (D. Mass., Complaint Filed April 14, 2011)

Court Imposes $50,000 Civil Penalty On Former Broker and Sales Agent of Massachusetts Company

The Securities and Exchange Commission announced today that the U.S. District Court for the District of Massachusetts has imposed a $50,000 civil penalty against Thomas Kevin Keough ("Kevin Keough") for his role in the unlawful promotion and sale of unregistered securities issued by Inofin, Inc., a subprime auto-financing company. Previously, the Court had entered judgment ordering Kevin Keough (and his wife) to pay a total of over $350,000 in disgorgement of ill-gotten gains.

Kevin Keough was a defendant in a lawsuit brought by the Commission against Inofin, its former executives, and its sales agents alleging they illegally raised at least $110 million from hundreds of individual investors through the sale of unregistered Inofin notes and that Inofin and its executives lied about the company's financial performance and how Inofin was using its investors' money. The Commission alleged that Kevin Keough unlawfully earned commissions by promoting and selling Inofin's unregistered securities and that he concealed his activities from his broker-dealer employers by directing Inofin pay his illegal commissions to his wife, Nancy, who was named as a relief defendant in the Commission's action for the purpose of recovering these funds from her.

In February 2015, Keough agreed to the entry of a consent judgment in partial settlement of the claims against him. Entered by the Court on February 20, 2015, the consent judgment ordered Keough to disgorge $368,430 in illegal commissions, to pay an additional $44,500 in interest and permanently enjoined him from violating Section 15(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Sections 5(a) and 5(c) of the Securities Act of 1933 ("Securities Act"). In a related action, the Commission issued an Order on March 3, 2015, barring Kevin Keough from certain parts of the securities industry, with the right to apply for reentry to the industry after three years.

As part of the February 2015 consent judgment, the Commission and Kevin Keough agreed that the Court should decide whether to impose a civil penalty on him. After briefing and presentation of the evidence by both sides, the Court ruled on August 5, 2015 that Kevin Keough should pay a civil penalty in the amount of $50,000. As a result, on August 12, 2015, the Court supplemented its judgment to impose the additional $50,000 civil penalty upon Kevin Keough.

The Commission previously obtained final judgments by consent against Inofin's former executives Michael J. Cuomo of Plymouth, Massachusetts, Kevin Mann, Sr. of Marshfield, Massachusetts and Melissa George of Duxbury, Massachusetts and against another Inofin sales agent, David Affeldt of Potomac, Maryland. The judgments ordered Cuomo, George, Mann, and Affeldt to pay disgorgement and civil penalties and permanently enjoined them from violating the Exchange Act and the Securities Act. The SEC's action remains pending against bankrupt Inofin.

SEC FILES CASE AGAINST FORMER BANK OFFICIAL

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23316 / August 13, 2015

Securities and Exchange Commission v. Cedric Cañas Maillard, Civil Action No. 15-cv-6380 (S.D.N.Y.)

SEC Files Case Against Former Banco Santander Official for Insider Trading

The Securities and Exchange Commission today filed insider trading charges against a former high-ranking executive at Madrid-based Banco Santander, S.A. for trading based on material, nonpublic information about a proposed acquisition for which the Spanish investment bank was acting as an advisor and underwriter.

The SEC's complaint alleges that Cedric Cañas Maillard, a Spanish citizen and former executive advisor to Banco Santander's CEO, learned confidentially that the investment bank had been asked by one of the world's largest mining companies, BHP Billiton, to advise and help underwrite its proposed acquisition of Potash Corporation of Saskatchewan, one of the world's largest producers of fertilizer minerals. The SEC alleges that Cañas coordinated with a close friend to purchase Potash call options in a Switzerland-based brokerage account, of which Cañas was the sole beneficial owner, on August 16, 2010-the day before Potash announced that it had rejected BHP's acquisition bid. Potash stock rose more than 27% after that announcement, and Cañas sold the Potash call options three days after he purchased them for illicit net profits of $278,156.97, a gain of more than 1,400%.

The SEC previously charged Cañas with committing insider trading before the same announcement by trading Contracts-for-Difference (CFDs). After Cañas settled the prior case, the Commission staff continued to investigate other suspicious Potash trades in foreign accounts. Commission staff obtained evidence a few weeks ago revealing that Cañas was the sole beneficial owner of the Switzerland-based account that purchased options before the announcement. The SEC complaint alleges that Cañas coordinated with a friend to purchase Potash call options in that account before the public announcement of BHP's acquisition bid. Cañas and his friend rushed to fund the account and place the trades days prior to the announcement. The complaint, filed in U.S. District Court for the Southern District of New York, alleges that Cañas violated Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3, and seeks disgorgement of ill-gotten gains with prejudgment interest and financial penalties.

The SEC's prior complaint alleged that Cañas traded CFDs equivalent to 30,000 shares and tipped his friend, Julio Marín Ugedo, in advance of the Potash announcement. To settle that action, Cañas consented, without admitting or denying the allegations, to a judgment permanently enjoining him from violating Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and ordering him to pay disgorgement of $960,806 and a civil penalty of $960,806. Pursuant to the Consent that Cañas signed in that action, the settlement resolved only the claims related to the specific trades identified in that complaint.

The SEC's investigation has been conducted jointly by staff in the Enforcement Division's Market Abuse Unit, the Chicago Regional Office, and the Denver Regional Office, including Kathryn A. Pyszka, Frank D. Goldman, and R. Kevin Barrett. The case was supervised by Robert Cohen and Joseph Sansone, acting co-chiefs of the Market Abuse Unit, and Timothy Warren, Associate Director of the Chicago Regional Office. The litigation is being handled by Ms. Pyszka and Mr. Goldman. The SEC appreciates the assistance of the Swiss Financial Market Supervisory Authority and the Spanish Comisión Nacional del Mercado de Valores.

SEC ANNOUNCES SETTLEMENT OF FRAUD CHARGES WITH OWNERS OF RESIDENTIAL, COMMERCIAL REAL ESTATE COMPANY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

08/13/2015 11:30 AM EDT

The Securities and Exchange Commission today announced that three Maryland men have agreed to settle charges that they defrauded investors in a company that owns and operates residential and commercial real estate.  Boston-based Signator Investors Inc. and one of its supervisors agreed to settle separate charges that they failed to supervise two of the men who worked in Signator’s Maryland office.

The SEC alleges that James R. Glover orchestrated the fraud by enticing family, friends, and fellow church members to become his clients at Signator and invest in Colonial Tidewater Realty Income Partners, which he co-managed.  Most of Glover’s clients were financially unsophisticated and relied on him for investment guidance.  Some even described him as “another dad” or “part of the family.”

“Glover lied to unsuspecting members of his close-knit religious community and preyed upon the trust they placed in him as their registered representative,” said Sharon B. Binger, Director of the SEC’s Philadelphia Regional Office.

According to the SEC’s complaint filed in federal court in Baltimore against Colonial Tidewater, Glover, and Colonial Tidewater’s co-manager Sherman T. Hill:
Glover steered approximately 125 clients to purchase partnership units in Colonial Tidewater.

Glover and Hill provided false and misleading written statements about Colonial Tidewater’s value and financial condition.

Glover lied to investors about the liquidity of Colonial Tidewater’s investments and the expected returns.

Glover and Cory D. Williams, his business partner in Signator’s Maryland office, did not inform clients that they received undisclosed commissions from Colonial Tidewater when clients invested in the company, thus failing to disclose conflicts of interest.

Glover misappropriated hundreds of thousands of dollars of investor funds.
According to an SEC order instituting a settled administrative proceeding against Signator and Gregory J. Mitchell, who was a supervisor in Signator’s Maryland office:

Signator and Mitchell failed to identify and prevent the alleged fraud conducted by Glover and Williams.

Signator failed to have reasonable policies and procedures governing consolidated reports, which could be used to combine all of a client’s financial holdings in a single report.  

Glover, without Signator’s knowledge, inserted clients’ Colonial Tidewater holdings into the consolidated reports to create the false impression that Colonial Tidewater was a Signator-approved investment when it was never authorized for sale by Signator representatives.

Rather than following Signator’s policies and procedures, Mitchell routinely allowed Glover and Williams to select client files for his review or he provided them a pre-selected list of names of client files to be reviewed, enabling them to remove all references to Colonial Tidewater investments before Mitchell reviewed the records.

“Signator and Mitchell failed to conduct the thorough reviews necessary to catch Glover and Williams in the act of defrauding investors,” said Ms. Binger.

Colonial Tidewater, Glover, and Hill agreed to settle the SEC’s charges without admitting or denying the allegations, and consented to the appointment of a receiver to take control of Colonial Tidewater.  Under settlements that are subject to court approval, Colonial Tidewater would be required to pay $527,844 in disgorgement, $66,542 in prejudgment interest, and a $725,000 penalty.  Glover agreed to be barred from the securities industry and pay $839,128 in disgorgement, $64,977 in prejudgment interest, and a $450,000 penalty.  Hill agreed to pay a $75,000 penalty.

In a separate SEC order, Williams agreed to settle charges that he violated provisions of the Investment Advisers Act.  Without admitting or denying the SEC’s findings, he agreed to be barred from the securities industry and pay $94,191 in disgorgement, $9,854 in prejudgment interest, and a $94,191 penalty.

Signator and Mitchell agreed to pay penalties of $450,000 and $15,000 respectively without admitting or denying the SEC’s findings.  Signator agreed to be censured and Mitchell agreed to be suspended from acting in a supervisory capacity for one year.

Funds collected from all the parties will go into a Fair Fund for injured investors.

The SEC’s investigation was conducted by Suzanne C. Abt, Assunta Vivolo, Scott A. Thompson, and Kelly L. Gibson in the Philadelphia Regional Office and supervised by G. Jeffrey Boujoukos.  The litigation will be handled by Christopher R. Kelly and David L. Axelrod.  The investigation followed an examination conducted by James O’Leary and Aidan Busch of the Philadelphia office under the supervision of Frank A. Thomas.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

SEC ANNOUNCES EDWARD JONES SETTLES CHARGES REGARDING OVERCHARGING CUSTOMERS IN MUNI BOND SALES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

08/13/2015 09:05 AM EDT

The Securities and Exchange Commission today announced that St. Louis-based brokerage firm Edward Jones and the former head of its municipal underwriting desk have agreed to settle charges that they overcharged customers in new municipal bonds sales.  It’s the SEC’s first case against an underwriter for pricing-related fraud in the primary market for municipal securities.  The firm also was charged with separate misconduct related to supervisory failures in its review of certain secondary market municipal bond trades.

Municipal bond underwriters are required to offer new bonds to their customers at what is known as the “initial offering price,” which is negotiated with the issuer of the bonds.  An SEC investigation found that instead of offering bonds to customers at the initial offering price, Edward Jones and Stina R. Wishman took new bonds into Edward Jones’ own inventory and improperly offered them to customers at higher prices.  In other instances, Edward Jones entirely refrained from offering the bonds to its customers until after trading commenced in the secondary market, and then offered the bonds at prices higher than the initial offering prices.  The firm’s customers paid at least $4.6 million more than they should have for new bonds.  In one instance, the misconduct resulted in an adverse federal tax determination for an issuer and put it at risk of losing valuable federal tax subsidies.

Edward Jones agreed to settle the case by paying more than $20 million, which includes nearly $5.2 million in disgorgement and prejudgment interest that will be distributed to current and former customers who were overcharged for the bonds.  Wishman agreed to pay $15,000 and will be barred from working in the securities industry for at least two years.

“Edward Jones undermined the integrity of the bond underwriting process by overcharging retail customers by at least $4.6 million and by misleading municipal issuers,” said Andrew J. Ceresney, Director of the SEC Enforcement Division.  “This enforcement action, which is the first of its kind, reflects our commitment to addressing abuses in all areas of the municipal bond market.”

According to the SEC’s order instituting a settled administrative proceeding against Edward Jones, the firm’s supervisory failures related to dealer markups on secondary market trades that involved the firm purchasing municipal bonds from customers, placing them into its inventory, and selling them to other customers often within the same day.  Because of the short holding periods, the firm faced little risk as a principal and almost never experienced losses on these intraday trades.  The SEC’s investigation found that Edward Jones’ supervisory system was not designed to monitor whether the markups it charged customers for certain trades were reasonable.

“Because current rules do not require dealers to disclose markups on municipal bonds, investors receive very little information about their dealer’s compensation in municipal bond trades,” said LeeAnn Ghazil Gaunt, Chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit.  “It is therefore important that firms have adequate supervisory systems to ensure that they are complying with their fair pricing obligations.”

Edward Jones consented to the SEC order without admitting or denying the findings that the firm willfully violated Sections 17(a)(2) and (3) of the Securities Act of 1933, Section 15B(c)(1) of the Securities Exchange Act of 1934, and Rules G-17, G-11(b) and (d), G-27, and G-30(a) of the Municipal Securities Rulemaking Board (MSRB).  The firm also failed reasonably to supervise within the meaning of Section 15(b)(4)(E) of the Exchange Act.  Edward Jones undertook a number of remedial efforts and now discloses the percentage and dollar amount of markups on all fixed income retail order trade confirmations in principal transactions.

Wishman consented to a separate SEC order without admitting or denying the findings that she willfully violated Sections 17(a)(3) of the Securities Act, MSRB Rules G-17, G-11(b) and (d), and G-30(a).  She also was a cause of Edward Jones’ violations of Section 17(a)(2) of the Securities Act and Section 15B(c)(1) of the Exchange Act.

The SEC’s investigation, which is continuing, has been conducted by Municipal Securities and Public Pensions Unit members Kevin Guerrero, Ivonia K. Slade, Eric A. Celauro, Sally J. Hewitt, and Brian D. Fagel along with Joseph O. Chimienti, Jonathan Wilcox, and the unit’s deputy chief Mark R. Zehner.  Providing assistance were members of the SEC’s National Exam Program, including Michael Fioribello, Paul N. Mensheha, and Stephen Vilim.


Statement on Edward D. Jones Enforcement Action

Commissioners Luis A. Aguilar, Daniel M. Gallagher, Kara M. Stein and Michael S. Piwowar
Aug. 13, 2015

The Commission’s recent enforcement action against Edward D. Jones involving the offer and sale of municipal bonds to retail investors highlights the need for clear rules requiring the disclosure of mark-ups and mark-downs.[1] We encourage the Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB) to complete rules mandating transparency of mark-ups and mark-downs, even in riskless principal trades. If not, we believe the Commission should propose rules to address this important issue.


[1] See In the Matter of Edward D. Jones & Co., L.P., Exch. Act Rel. No. 75688 (Aug. 13, 2015) available at http://www.sec.gov/litigation/admin/2015/33-9889.pdf.

SEC ANNOUNCES FORMER SOFTWARE EXEC TO SETTLE BRIBERY CHARGES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

08/12/2015 03:45 PM EDT

The Securities and Exchange Commission today announced that a former executive at a worldwide software manufacturer has agreed to settle charges that he violated the Foreign Corrupt Practices Act (FCPA) by bribing Panamanian government officials through an intermediary to procure software license sales.

An SEC investigation found that Vicente E. Garcia, the former vice president of global and strategic accounts for SAP SE, orchestrated a scheme to pay $145,000 in bribes to one government official and promised to pay two others in order to obtain four contracts to sell SAP software to the Panamanian government.  He essentially caused SAP, which is headquartered in Germany and executes most of its sales through a network of worldwide corporate partners, to sell software to a partner in Panama at discounts of up to 82 percent.  The excessive discounts enabled the partner to create a slush fund from its excessive earnings on the other end of the sales and tap that money to pay the bribes to Panamanian government officials so SAP could sell the software.  Garcia, who lives in Miami, also received kickbacks from the slush fund into his bank account.

In a parallel action, the U.S. Department of Justice today announced a criminal action against Garcia.

“Garcia attempted to avoid detection by arranging large, illegitimate discounts to a corporate partner in order to generate a cash pot to bribe government officials and win business for SAP,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit.

According to the SEC’s order instituting a settled administrative proceeding:

The scheme lasted from 2009 to 2013.

Garcia circumvented SAP’s internal controls by submitting various approval forms to SAP that falsified the reasons for the excessive discounts to the local partner.

Garcia used his SAP e-mail account and his personal e-mail account to communicate details of the bribery scheme and even identify the government officials and intended monetary amounts.

In an e-mail to one government official, Garcia attached a letter on SAP letterhead detailing fictional meetings in Mexico as requested by the official in order to justify a trip there on false pretenses.  The next day, Garcia sent a subsequent e-mail asking, “Any news …?  Was the document OK for him?  Can you ask him to finalize a deal for us in Feb-March, I need between $5 and $10 million.”

The SEC’s order finds that Garcia violated the anti-bribery and internal controls provisions of the Securities Exchange Act of 1934.  Garcia consented to the entry of the cease-and-desist order and agreed to pay disgorgement of $85,965, which is the total amount of kickbacks he received, plus prejudgment interest of $6,430 for a total of $92,395.

The SEC’s continuing investigation is being conducted by Ansu Banerjee and supervised by Alka Patel.  The SEC appreciates the assistance of the U.S. Department of Justice, U.S. Attorney’s Office for the Northern District of California, and Federal Bureau of Investigation.