Investor Bulletin: Broker’s Miscellaneous Fees

Investor Bulletin: Broker’s Miscellaneous Fees

FUND MANAGER SETTLES SEC INSIDER TRADING CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 23151 / December 8, 2014

Securities and Exchange Commission v. Reema D. Shah and Robert W. Kwok, Civil Action No. 12-CV-4030 (S.D.N.Y.) (ALC)

Former Ameriprise Fund Manager Settles SEC Insider Trading Case

The Securities and Exchange Commission announced today that on December 8, 2014, the Honorable Andrew L. Carter, Jr. of the United States District Court for the Southern District of New York entered a final judgment against Reema D. Shah in SEC v. Reema D. Shah and Robert W. Kwok, 12-CV-4030, an insider trading case the SEC filed on May 21, 2012. The SEC alleged that Shah, a former mutual fund and hedge fund portfolio manager at RiverSource Investments, LLC, an investment adviser subsidiary of Ameriprise Financial, Inc., illegally tipped and traded on material, nonpublic information concerning Yahoo! Inc. and Moldflow Corporation.

The SEC's complaint alleged that in July 2009, Robert W. Kwok, a former Senior Director of Business Management at Yahoo, tipped Shah material, nonpublic information concerning an upcoming announcement of an internet search engine partnership agreement between Yahoo and Microsoft Corporation. The SEC alleged that, based on Kwok's tip, Shah caused certain of the funds she helped manage, including the Seligman Communications and Information Fund, to purchase approximately 700,000 shares of Yahoo. The shares were later sold resulting in profits of $388,807. The SEC also alleged that in April 2008, Shah tipped Kwok material, nonpublic information concerning an upcoming acquisition of Moldflow by Autodesk, Inc., which had been misappropriated by an Autodesk insider and tipped to Shah. The SEC alleged that, based on this tip, Kwok purchased 1,500 shares of Moldflow in a personal account, which he sold after announcement of the acquisition, realizing profits of approximately $4,750. The Court previously entered a final judgment, by consent, against Kwok.

The final judgment against Shah, entered by consent, orders her to pay disgorgement of $388,807 plus prejudgment interest of $1,296, and permanently enjoins her from any future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. No penalty was imposed in light of Shah's sentence in a parallel criminal case and her cooperation. In the parallel criminal action, Shah previously pled guilty to securities fraud and conspiracy to commit securities fraud and recently was sentenced to two years of probation, and ordered to forfeit $11,751 and pay a $500,000 criminal fine. United States v. Reema Shah, 12 CR 0404 (S.D.N.Y.). In related administrative proceedings, Shah previously consented to a Commission Order barring her from association with any investment adviser, broker, dealer, municipal securities dealer or transfer agent. In the Matter of Reema D. Shah, File No. 3-15084 (Oct. 31, 2012).

SEC ANNOUNCES FRAUD CHARGES AGAINST INVESTMENT ADVISORY FIRM AND CO-OWNERS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

12/10/2014 01:30 PM EST

The Securities and Exchange Commission announced fraud charges against a Buffalo, N.Y.-based investment advisory firm and two co-owners accused of making false and misleading statements to clients when recommending investments in a risky hedge fund.  The hedge fund’s portfolio manager agreed to settle similar charges.

The SEC’s Enforcement Division alleges that Timothy S. Dembski and Walter F. Grenda Jr. steered their clients at Reliance Financial Advisors to invest in a hedge fund managed by Scott M. Stephan, whose experience in the securities industry was greatly exaggerated in offering materials they disseminated.  Dembski and Grenda allegedly knew that Stephan had virtually no hedge fund investing experience at all, and spent the majority of his career collecting on past-due car loans.  Nevertheless, highly speculative investments in the Prestige Wealth Management Fund were recommended to clients who were retired or nearing retirement and living on fixed incomes.  The trading strategy that was allegedly described to investors was fully automated by an algorithm purportedly sought by big banks.  The trading algorithm, however, did not work as intended and Stephan began placing trades manually, which led to the hedge fund’s eventual collapse.

“Investment advisers owe their clients a duty of complete candor when it comes to discussing investment options,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “In this case, Dembski and Grenda allegedly violated this fundamental duty by peddling a hedge fund investment that was more risky than depicted and misleading their clients about the portfolio manager’s experience.”

According to the order instituting a proceeding before an administrative law judge, Dembski’s clients invested approximately $4 million in Prestige Wealth Management Fund and Grenda’s clients invested approximately $8 million.  The hedge fund, which began trading in April 2011, did not generate the positive returns advertised, so Grenda withdrew his clients in October 2012.  The fund lost about 80 percent of its value when it collapsed a couple months later, leaving Dembski’s clients to lose the vast majority of their investments.

The SEC’s Enforcement Division further alleges that Grenda borrowed $175,000 from two clients in late 2009 and falsely told them that he would use it as a loan to grow his investment advisory business.  Grenda instead spent the money on personal expenses and debts.

The SEC’s Enforcement Division alleges that Dembski, Grenda, and Reliance Financial Advisors violated the antifraud provisions of the Investment Advisers Act of 1940, Securities Act of 1933, and Securities Exchange Act of 1934, and that Dembski and Grenda aided and abetted and caused violations of those same provisions by Reliance Financial and the general partner to the Prestige Wealth Management Fund.

In a separate order, Stephan agreed to settle findings that he violated the antifraud provisions of the Advisers Act, Securities Act, and Exchange Act, and aided and abetted and caused violations of those same provisions by the general partner to the Prestige Wealth Management Fund.  Without admitting or denying the allegations, Stephan agreed to be permanently barred from the securities industry.  Disgorgement and penalties will be determined at a later date.

The investigation by the SEC’s Enforcement Division was conducted by Tony Frouge, Alexander Janghorbani, Douglas Smith, and Steven G. Rawlings in the New York Regional Office, and the case was supervised by Sanjay Wadhwa.  The litigation will be led by Michael Birnbaum and Mr. Frouge.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

Statement on Jury's Verdict in Trial of BankAtlantic Bancorp, Inc. and Alan Levan

Statement on Jury's Verdict in Trial of BankAtlantic Bancorp, Inc. and Alan Levan

SEC ANNOUNCES GUILTY PLEA TO CRIMINAL CHARGES IN INSIDER TRADING CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23150 / December 5, 2014

USA v. John Patrick O'Neill, Case No. 1:14-cr-10317-WGY in the United States District Court for the District of Massachusetts

USA v. Robert H. Bray, Case No. 1:14-MJ-5119-JGD in the United States District Court for the District of Massachusetts

Securities and Exchange Commission v. J. Patrick O'Neill and Robert H. Bray, Civil Action No. 1:14-cv-13381 (District of Massachusetts, Complaint filed August 18, 2014)

Boston-Area Defendant in SEC Insider Trading Case Pleads Guilty to Criminal Charges

The Securities and Exchange Commission announced today that on December 4, 2014, J. Patrick O'Neill ("O'Neill") pled guilty to a criminal charge of conspiracy to commit securities fraud.

The Commission previously charged O'Neill and Robert H. Bray ("Bray") with insider trading in a civil action filed on August 18, 2014. The criminal charge is based on the same conduct underlying the SEC's action. The SEC's complaint alleged that O'Neill, a former senior vice president at Eastern Bank Corporation, learned through his job responsibilities that his employer was planning to acquire Wainwright Bank & Trust Company ("Wainwright"). According to the SEC's complaint, O'Neill tipped Bray, a friend and fellow golfer with whom he socialized at a local country club. In the two weeks preceding a public announcement about the planned acquisition, Bray sold his shares in other stocks to accumulate funds he used to purchase 31,000 shares of Wainwright. After the public announcement of the acquisition caused Wainwright's stock price to increase nearly 100 percent, Bray sold all of his shares during the next few months for nearly $300,000 in illicit profits.

O'Neill was initially charged by a criminal complaint and arrested in August 2014. On October 31, 2014, the United States Attorney's Office for the District of Massachusetts filed a criminal Information against O'Neill charging him with conspiracy to commit securities fraud. Bray was arrested by the Federal Bureau of Investigation on November 12, 2014 and charged by a criminal complaint with participating in the insider trading conspiracy.

The SEC's action, which is pending, seeks injunctions against each of the defendants from further violations of the charged provisions of the federal securities laws, disgorgement of ill-gotten gains, and civil penalties.

SEC BRINGS CHARGES AGAINST EXECUTIVES AT ASSISTED LIVING PROVIDER

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced fraud charges against two former top executives at a Wisconsin-based assisted living provider accused of listing fake occupants at some senior residences in order to meet the requirements of a lease to operate the facilities.

The SEC Enforcement Division alleges that then-CEO Laurie Bebo and then-CFO John Buono devised a scheme involving false disclosures and manipulation of internal books and records when it appeared likely that their company Assisted Living Concepts Inc. (ALC) would default on financial promises known as covenants in a lease agreement with a Chicago-based real estate investment trust called Ventas Inc., which owned the facilities.  The financial covenants required ALC to maintain minimum occupancy rates and coverage ratios while operating the facilities, and failure to meet the covenants constituted a default on the lease.  A default would have required ALC to pay the remaining rent amount due for the full term of the lease, which amounted to tens of millions of dollars at the time. 

The SEC Enforcement Division alleges that Bebo and Buono directed ALC accounting personnel calculating the occupancy rates and coverage ratios to include phony occupants in the calculations in order to meet the numbers required in the covenants.  The identities of the fake occupants were determined by Bebo and included her family members and friends as well as ALC current and former employees among others who did not reside at the senior residences.  One of the purported senior residents was just seven years old.  The SEC Enforcement Division alleges that without including these non-residents in the calculations, ALC would have missed the covenant requirements by significant margins for several consecutive quarters.  Bebo and Buono allegedly certified ALC’s annual and quarterly reports that fraudulently represented that the company was in compliance with the occupancy and coverage ratio covenants included in the lease.  Coverage ratio was defined in the lease as cash flow at the facilities divided by the rent payments owed by ALC to Ventas.

“Rather than come clean with their landlord and investors, these executives falsely portrayed family and friends as senior housing occupants and certified misleading company filings,” said Andrew J. Ceresney, Director of the SEC Enforcement Division.  “False filings threaten the integrity of financial reporting in our markets and will be pursued vigorously.”

According to the SEC’s order instituting litigated administrative proceedings, ALC was based in suburban Milwaukee and has since been sold to a private equity firm.  At the time of the alleged fraud that began in 2009 and continued into 2012, ALC operated more than 200 senior living residences in the U.S. comprising more than 9,000 units.  In early 2008, ALC began operating eight facilities owned by Ventas.  These facilities had a total of 540 units and were located in Alabama, Florida, Georgia, and South Carolina.  The SEC Enforcement Division alleges that while Bebo was a strong proponent of entering into the lease to operate these Ventas facilities, certain ALC officers and directors advocated against it due to disadvantageous provisions including the financial covenants related to occupancy and coverage ratios.  Bebo assured the directors that she was confident that ALC could meet the financial covenants. 

The SEC Enforcement Division alleges that less than a year after entering the Ventas lease, Bebo and Buono realized that a financial covenant default was likely.  Bebo initially devised a plan to include ALC workers who spent the night at a facility in the covenant calculations.  Bebo sought the advice of ALC’s general counsel who advised that ALC needed to fully disclose the practice to Ventas and obtain written approval for it to be permissible under the lease.  The SEC Enforcement Division alleges that ALC never obtained this approval to include employees in the covenant calculations and did not disclose the practice to Ventas. 

The SEC Enforcement Division alleges that occupancy at the facilities in early 2009 had declined to the point where ALC was violating certain financial covenants.  But rather than report the defaults to Ventas or ALC’s board of directors and shareholders, Bebo directed Buono and his staff to include additional non-residents in the covenant calculations.  The SEC Enforcement Division alleges that among those who were included as fake occupants at these senior residences were:

• Bebo’s family members including her parents and her husband.
• Bebo’s friends and their family members, including one friend’s seven-year-old nephew.
• ALC employees who worked at the facilities but lived nearby and did not stay overnight.
• ALC employees who did not stay at these facilities or travel to them.
• Former ALC employees who had been fired.
• Impending ALC employees who had not yet been officially hired.

The SEC Enforcement Division further alleges that some ALC employees who occasionally stayed at the facilities were included in the covenant calculations but beyond the periods when they actually stayed there.  Some ALC employees and other individuals were listed as occupants of multiple facilities during the same time period.  From the third quarter of 2009 to the fourth quarter of 2011, ALC allegedly included between 45 and 103 non-residents in the covenant calculations.  Bebo and Buono directed ALC personnel to record journal entries increasing revenue associated with the fabricated occupancy in the accounts for the leased facilities.  ALC made a corresponding journal entry decreasing revenue in a corporate revenue account to mask the fraud.  To establish the number of fake occupants to include in the covenant calculations, Bebo and Buono directed ALC personnel to reverse-engineer the requisite number of phony occupants needed to meet the covenants.  Shortly after the end of each quarter, ALC allegedly provided Ventas with covenant calculations including the fake occupants and the associated revenue, thus falsely showing that ALC was meeting the covenants.

The SEC Enforcement Division alleges that Bebo and Buono violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5(a), (b) and (c), 13a-14, 13b2-1 and 13b2-2.  The Enforcement Division further alleges that they caused and/or aided and abetted ALC’s violations of Sections 10(b), 13(a) 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5(a), (b) and (c), 12b-20, 13a-1 and 13a-13.  The case will be litigated before an administrative law judge.

The SEC Enforcement Division’s investigation, which is continuing, has been conducted by Scott Tandy, Jean Javorski, Tom Vincus, and C.J. Kerstetter of the Chicago Regional Office.  The SEC’s litigation will be led by Ben Hanauer and Eric Phillips.  The case is being supervised by Robert Burson.