This is a photo of the National Register of Historic Places listing with reference number 7000063
Friday, June 5, 2015
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
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).
Thursday, June 4, 2015
SEC CHAIRMAN WHITE'S REMARKS BEFORE ADVISORY COMMITTEE ON SMALL AND EMERGING COMPANIES
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Opening Remarks of SEC Chair Mary Jo White before the SEC Advisory Committee on Small and Emerging Companies
Chair Mary Jo White
June 3, 2015
Good morning. Thank you all for being here. Steve, Chris, and all committee members, I appreciate the full agenda you have today, and I will be brief in my update and comments so that you can get to the business at hand.
I am pleased to note that since your last meeting, the Commission in March adopted Regulation A+. I know this Committee was eager for that rule to be finalized, as were we. I believe the rule we adopted will provide an additional and effective path to raising capital that also provides strong investor protections. I look forward to seeing companies put the rules to good use to raise capital.
On other fronts, we continue to advance the completion of our other rulemaking mandates under the JOBS Act and the Dodd-Frank Act, and as we have discussed before, it is one of my priorities to complete the crowdfunding rulemaking this year, which is our last significant JOBS Act rulemaking. Crowdfunding in its various forms obviously remains a focus of many others, including this Committee, the states and in various countries around the world.
Indeed, more than 20 states have enacted some form of intrastate crowdfunding legislation or rules, and a number of others are considering similar initiatives. As states are seeking to expand the avenues in which issuers may conduct intrastate offerings, we have focused on the fact that some of our laws and rules were put into place years ago prior to widespread use of the internet and may present challenges to the states’ efforts.
For example, Securities Act Rule 147, which you will be discussing today, created a safe harbor that issuers often rely on for intrastate offerings. Rule 147 was adopted in 1974, and how an issuer might conduct an intrastate offering using the internet was not contemplated at that time. The staff in the Division of Corporation Finance is currently considering ways to improve the rule, by looking at, among other things, the conditions included in the rule for an offering to be considered intrastate. Securities Act Rule 504, an exemption that could be used to facilitate regional crowdfunding offerings for up to $1 million that are registered in one or more states, is another rule that may benefit from modernization and the staff is considering ways to do that. We look forward to having your input on these topics and to hearing your thoughts on whether there are aspects of these or other rules that could be usefully updated or changed.
It is also quite timely for this Committee to be taking up public company disclosure effectiveness. As you know, the staff in the Division of Corporation Finance is hard at work on our initiative to improve the effectiveness of the public company disclosure regime for investors and companies. The staff has sought input from a broad range of market participants and is in the process of developing recommendations for the Commission’s consideration. We welcome your thoughts in this area that I know is of particular interest to many of you.
I look forward to your input on the other topics on your agenda, including the Section 4(a)(1½) exemption, and the issues surrounding broker-dealer registration for those who identify or otherwise “find” potential investors in private placements. I am also glad to see a continuation of your consideration of venture exchanges as an avenue for secondary market liquidity.
I will stop here. As always, we very much appreciate the time and expertise you devote to this Committee. I wish you a very productive meeting.
Thank you.
Wednesday, June 3, 2015
CFTC COMMISSIONER GIANCARLO MAKES STATEMENT ON GOVERNMENT POLICIES AND FUTURES COMMISSION MERCHANTS
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Statement of Commissioner J. Christopher Giancarlo for the Market Risk Advisory Committee Meeting
June 1, 2015
Federal government policies are making America’s Futures Commission Merchants (FCMs) an endangered species. The most recent example is the storied commodities firm, Bache, founded in 1879, that is now being dismembered. A French bank is acquiring a portion of it, while thousands of its clients are being told to find new FCMs to serve their business needs.1
While not a household term, “FCMs” are the futures markets equivalent of stock brokers providing critical services for businesses that need to hedge against business and production risks. Today, because of a combination of mismanagement by a few, U.S. monetary policy and over-regulation, FCMs are consolidating at an alarming rate with dire consequences for America’s farmers, ranchers and manufacturers. Tomorrow, the Commodity Futures Trading Commission’s (CFTC) Market Risk Advisory Committee (MRAC), under the sponsorship of Commissioner Sharon Bowen, will hold a hearing to discuss the plight of American FCMs.
That hearing will undoubtedly recognize that there are far fewer FCMs than there used to be. The number of FCMs has dramatically fallen in the past 40 years: from over 400 in the late 1970s, to 154 before the 2008 financial crisis,2 and down to just 72 today.3 Of the 72 FCMs registered with the CFTC as of March 2015, 15 firms were dormant, leaving only 57 active firms serving customers.4 As the number of FCMs has dwindled, systemic risk has increased with the five largest firms accounting for more than 70 percent of the market.5 Meanwhile, customer assets held by all FCMs have grown from $169.5 billion in December 2007 to $245.7 billion in March 2015.6
Industry consolidation derives from several factors. Fraud and mismanagement caused spectacular failures of firms like Refco, MF Global and Peregrine Financial. The prolonged U.S. monetary policy of near zero percent interest rates has eliminated a key source of income for FCMs through reinvestment of customer money.7
Another threat to FCM survival comes from burdensome new regulations. The collapse of MF Global and Peregrine Financial prompted a series of new customer protection rules,8 some of which were undoubtedly needed. However, these new rules have impacted small FCMs more harshly than large ones. In addition, the CFTC’s new rules on ownership and control reporting greatly increased compliance and paperwork burdens for FCMs.9 The CFTC also further expanded FCM recordkeeping obligations to include the recording of all oral and written communications leading up to the execution of a transaction.10 The supplementary leverage ratio (SLR) rule issued last year by U.S. prudential regulators will make it more expensive for bank-owned FCMs to clear customer trades. That is because the SLR requires banks to hold more capital for every asset on their books, even margin held for clients on cleared trades of commodity futures, leading to diminished FCM income and increased client costs.
FCMs as an industry are spending millions of dollars for infrastructure, technology and compliance personnel to implement these complex regulations. Smaller FCMs that traditionally serve agricultural and small manufacturing interests must devote precious resources to comply with cumbersome rules more easily handled by large bank-affiliated competitors. FCMs are also overwhelmed by significantly increased demands for information from self-regulatory organizations and the CFTC. One FCM told me that it receives around 9,000 regulatory requests per year!
While many new rules contain plausible protections, regulators have lost sight of the increased costs for FCMs. Most of the rules have been imposed without a true analysis of the effect on FCMs and end-users.11 As a result, many small to medium-sized FCMs providing specialized services to everyday businesses are charging higher fees or leaving the industry because they cannot afford the additional infrastructure, technology and compliance costs imposed by the swelling regulations. Still, others have stopped clearing swaps for customers, which has the perverse effect of concentrating risk in fewer and fewer firms, a dangerous proposition in light of Dodd-Frank’s clearing mandate.
The Dodd-Frank Act was ostensibly about reforming “Wall Street.” Yet, again, the increased costs and burdens that directly or indirectly flow from the law have negatively impacted Main Street and America’s farmers, ranchers and manufacturers who need the services of the remaining small and medium-sized FCMs. Rules born out of the law are forcing America’s farmers, ranchers and manufacturers to pay higher fees for less choice in FCM services. With fewer firms serving a bigger market, risk is being more concentrated in large bank-affiliated firms, increasing the systemic risk that Dodd-Frank promised to reduce. Undoubtedly, heightened systemic risk arising from FCM consolidation is appropriate for consideration and analysis by MRAC.
If we are not careful, America’s rural producers will soon be left with few places to protect against business risk. The Midwest farmer who plants 1,000 acres of corn may have no choice but to go unhedged against market volatility. Sadly, it appears that the markets where “derivatives” were born are quickly losing their core service providers, possibly forever.
1 Christian Berthelsen and Tatyana Shumsky, SocGen Deal for Bache Illustrates Commodity-Trading Woe, The Wall Street Journal, May 26, 2015, available at http://www.wsj.com/articles/socgen-deal-for-bache-illustrates-commodity-trading-woe-1432681628.
2 CFTC, Selected FCM Financial Data as of December 31, 2007, http://www.cftc.gov/files/tm/fcm/fcmdata1207.pdf (last visited May 26, 2015) (excludes firms registered solely as retail foreign exchange dealers).
3 CFTC, Selected FCM Financial Data as of March 31, 2015, http://www.cftc.gov/ucm/groups/public/@financialdataforfcms/documents/file/fcmdata0315.pdf (last visited May 26, 2015) (excludes firms registered solely as retail foreign exchange dealers).
4 Id.
5 Joe Rennison, Nomura Exits Swaps Clearing for US and European Customers, Financial Times, May 12, 2015, available at http://www.ft.com/intl/cms/s/0/e1883676-f896-11e4-be00-00144feab7de.html#axzz3bSYWViZ4 (based on amount of customer collateral required according to CFTC data).
6 The March 2015 number includes $53.1 billion in cleared swaps customer assets that was not included in the December 2007 number. See supra note 2 and 3.
7 17 C.F.R. 1.25.
8 Enhancing Protections Afforded Customers and Customer Funds Held by Futures Commission Merchants and Derivatives Clearing Organizations, 78 FR 68506, 68510-12 (Nov. 14, 2013) (discussing recent customer protection initiatives).
9 Ownership and Control Reports, Forms 102/102S, 40/40S, and 71, 78 FR 69178 (Nov. 18, 2013).
10 17 C.F.R. 1.35. The rule applies to transactions in a commodity interest and related cash or forward transactions. Oral communications that lead solely to the execution of a related cash or forward transaction are excluded.
11 7 U.S.C. 19(1), CEA 15(a). Given the CFTC’s lax cost-benefit consideration requirements.
Tuesday, June 2, 2015
SEC CHARGES MERRILL LYNCH ENTITIES WITH USING INACCURATE DATA
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission today charged two Merrill Lynch entities with using inaccurate data in the course of executing short sale orders. Merrill Lynch agreed to admit wrongdoing, pay nearly $11 million, and retain an independent compliance consultant in order to settle the charges.
According to the SEC’s order instituting a settled administrative proceeding, Merrill Lynch and other broker-dealers are routinely asked by customers to “locate” stock for short selling, and firms prepare easy-to-borrow (ETB) lists comprised of stocks they have deemed readily accessible for the purpose of granting locates. At times during the course of a trading day, some securities that Merrill Lynch placed on its ETB list that morning became no longer easily available to borrow as determined by lending desk professionals tracking market events and other daily developments.
The SEC’s order finds that Merrill Lynch personnel appropriately ceased using the ETB list to source locates when availability of certain shares became restricted, but the firm’s execution platforms were programmed to continue processing short sale orders based on the ETB list. For example, while personnel received responses from lenders that a supply of a particular security was no longer available, Merrill Lynch’s systems continued to rely on the ETB list and execute short sales totaling thousands of shares of that security. It wasn’t until the platforms received the next day’s ETB list that they returned to utilizing accurate and present data. After the SEC started investigating, Merrill Lynch began implementing systems enhancements to correct the problem.
“Firms must comply with their short-selling obligations by making sure they do not rely on inaccurate ETB lists,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “When firm personnel determine that a security should no longer be considered easy to borrow, the firm’s systems need to incorporate that knowledge immediately.”
The SEC’s order further finds that for a period until 2012, a flaw in Merrill Lynch’s systems occasionally triggered the inadvertent use of day-old data when constructing ETB lists. The stale data caused some securities to be included on an ETB list when they should not have been.
Merrill Lynch admits violating Rule 203(b) of Regulation SHO of the Securities Exchange Act of 1934, and the SEC’s order requires the firm to cease and desist from committing or causing any future violations. Merrill Lynch agreed to pay a $9 million penalty, $1,566,245.67 in disgorgement, and $334,564.65 in prejudgment interest. The independent compliance consultant must conduct a comprehensive review of the firm’s policies, procedures, and practices for accepting short sale orders for execution, effecting short sales in reliance on the ETB list, and monitoring compliance.
The SEC’s investigation was conducted by Elzbieta Wraga, Adam Grace, and Daphne Downes in the New York office with substantial assistance from Nancy Brown and John Lehmann. The case was supervised by Sharon Binger.
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