SEC CHARGES FOR STOCKBROKER FOR ROLE IN PONZI SCHEME

 FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

07/01/2015 11:55 AM EDT

The Securities and Exchange Commission charged a former stockbroker in Pennsylvania with conducting a Ponzi scheme and stealing investor money to purchase a condominium in Florida and afford his own vacations and other luxuries.

The SEC alleges that Malcolm Segal fraudulently sold so-called certificates of deposits (CDs) to his brokerage customers by falsely claiming that he could get them higher interest rates of return on FDIC-insured CDs than otherwise available to the general public.  In some instances, Segal purchased CDs on behalf of investors but secretly redeemed them early and took the proceeds.  Other times, Segal did not purchase CDs at all despite telling customers he had.  He raised approximately $15.5 million from at least 50 investors.  Besides spending investor money on himself, Segal used it in Ponzi scheme fashion for purported interest payments and principal repayments to earlier investors.

The SEC further alleges that Segal eventually started stealing directly from his customers’ brokerage accounts in a last-ditch effort to keep funding the Ponzi payments.  He forged letters of authorization to facilitate the transfer of customer funds to accounts he controlled, notably forging the signature of one customer’s wife who had died before the date of the transfer.  The scheme collapsed in July 2014.

In a parallel action, the U.S. Attorney’s Office for the Eastern District of Pennsylvania today announced criminal charges against Segal.

“As alleged in our complaint, Segal duped investors by pretending to sell them safe investments while stealing their money for his own benefit and making Ponzi payments to earlier investors,”  said Sharon B. Binger, Director of the SEC’s Philadelphia Regional Office.  “Segal put his own greed above his obligations to customers and violated the law.”

The SEC’s complaint filed in federal court in Philadelphia charges Segal with violations of Section 17(a) of the Securities Act of 1933 as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The SEC seeks disgorgement plus prejudgment interest and penalties as well as a permanent injunction.

The SEC’s continuing investigation is being conducted by Michael F. McGraw and Brendan P. McGlynn in the Philadelphia Regional Office.  The SEC’s litigation will be led by David L. Axelrod and Michael J. Rinaldi, and the case is being supervised by G. Jeffrey Boujoukos.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Eastern District of Pennsylvania and the Federal Bureau of Investigation.

SEC SAYS DELOITTE & TOUCHE TO PAY $1 MILLION TO SETTLE ALLEGED AUDITOR INDEPENDENCE RULES VIOLATION

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

07/01/2015 01:35 PM EDT

The Securities and Exchange Commission today charged Deloitte & Touche LLP with violating auditor independence rules when its consulting affiliate maintained a business relationship with a trustee serving on the boards and audit committees of three funds it audited.  Deloitte agreed to pay more than $1 million to settle the charges.

The SEC charged the trustee Andrew C. Boynton with causing related reporting violations by the funds, and charged the funds’ administrator ALPS Fund Services with causing related compliance violations.  They also agreed to settle the charges.

Auditor independence rules require outside auditors to remain independent from their clients to ensure there is not even the appearance of a firm compromising its objectivity and impartiality when auditing financial statements.  According to the SEC’s order instituting a settled administrative proceeding, Deloitte violated the rules with respect to the appearance of independence by failing to follow its own policies and conduct an independence consultation prior to entering into a new business relationship with Boynton.  Deloitte failed to discover that the required initial independence consultation was not performed until nearly five years after the independence-impairing relationship had been established between Deloitte Consulting LLP and Boynton, who was paid consulting fees for his external client work.  Meanwhile, Deloitte represented in audit reports that it was independent of the three funds while Boynton simultaneously served on their boards and audit committees.

“The investing public depends on independent auditors like Deloitte to test the reliability of publicly-reported financial statements, and they have front-line responsibility for ensuring their own independence,” said Stephen L. Cohen, Associate Director of the SEC’s Division of Enforcement. “But they are not alone in safeguarding the audit process, and the other fiduciaries charged in this case failed to fulfill their roles and preserve investor confidence.”

According to the SEC’s order:

Deloitte Consulting acquired a proprietary brainstorming business methodology from Boynton in 2006 and collaborated with Boynton to implement it and serve both internal and external firm clients through 2011.

As a member of the three funds’ boards and audit committees, Boynton was required to complete annual trustee and officer (T&O) questionnaires designed in part to identify conflicts of interest.  Boynton did not identify his business relationship with Deloitte Consulting in response to a question calling for identification of his “principal occupation(s) and other positions.”  Relying on his understanding that Deloitte Consulting was a separate legal entity from Deloitte, Boynton also did not identify the business relationship in his responses to a question added to the questionnaire in 2009 inquiring whether he had any “direct or material indirect business relationship” with Deloitte.

ALPS contractually agreed to assist the funds in discharging their responsibilities yet failed to adopt sufficient written policies and procedures as required to prevent auditor independence violations. The funds’ audit committee charter addressed auditor independence generally, but the T&O questionnaires did not expressly cover business relationships with the auditor’s affiliates.  The funds also did not have sufficient written policies and procedures to prevent other types of auditor independence violations, nor did they provide sufficient training to assist board members in the discharge of their responsibilities related to auditor independence.

The SEC’s order censures Deloitte for violating the auditor independence standards of Rule 2-02(b) of Regulation S-X, and sanctioned Deloitte for causing the funds to violate Sections 20(a) and 30(a) of the Investment Company Act and Rule 20a-1 thereunder.  The order finds that Boynton was a cause of the same reporting violations and ALPS caused the funds’ related compliance violations under Rule 38a-1 of the Investment Company Act.  Each party agreed to cease and desist from future violations without admitting or denying the findings.  Deloitte agreed to pay disgorgement of audit fees in the amount of $497,438 plus prejudgment interest of $116,478 and a penalty of $500,000.  Boynton agreed to pay disgorgement of $30,000 plus prejudgment interest of $5,329 and a penalty of $25,000.  ALPS agreed to pay a $45,000 penalty.

The SEC’s investigation was conducted by James J. Bresnicky and Brian M. Privor, and supervised by J. Lee Buck II.

The Role of Chief Compliance Officers Must be Supported

The Role of Chief Compliance Officers Must be Supported

SEC.gov | Making Executive Compensation More Accountable – To Keep It, It Should Be Earned

SEC.gov | Making Executive Compensation More Accountable – To Keep It, It Should Be Earned

SEC CHARGES INVESTMENT ADVISORY FIRM, OWNER WITH "CHERRY-PICKING"

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
06/29/2015 01:10 PM EDT

The Securities and Exchange Commission announced fraud charges against a Wisconsin-based investment advisory firm and its owner accused of improperly allocating to his personal and business accounts certain options trades that appreciated in value during the course of a trading day while allocating to his clients other trades that depreciated in value.

The SEC Enforcement Division has engaged in a data-driven initiative to identify potentially fraudulent trade allocations known as “cherry-picking,” and this enforcement action is the first arising from that effort.  Working with economists in the agency’s Division of Economic and Risk Analysis, enforcement investigators analyze large volumes of investment advisers’ trade allocation data and identify instances where it appears an adviser is disproportionately allocating profitable trades to favored accounts.

The SEC Enforcement Division alleges that Mark P. Welhouse purchased options in an omnibus or master account for Welhouse & Associates Inc. and delayed allocation of the purchases to either his or his clients’ accounts until later in the day after he saw whether or not the securities appreciated in value.  Welhouse allegedly reaped $442,319 in ill-gotten gains by unfairly allocating options trades in an S&P 500 exchange-traded fund named SPY.  His personal trades in these options had an average first-day positive return of 6.28 percent while his clients’ trades in these options had an average first-day loss of 5.05 percent.

As described in the SEC order instituting administrative proceedings against Welhouse and his firm, SEC staff conducted a statistical analysis to determine whether Welhouse’s profitability in these accounts could have resulted from a coincidental or lucky combination of trades.  After running a simulation test one million times, the staff concluded it could not.

“Cherry-picking schemes can be extremely difficult to detect without an investor astutely noticing that something may be amiss and coming to us with a complaint about the adviser,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “We devised this initiative to identify specific custodians providing services to investment advisers and their clients and leverage their trading records and other data to efficiently target preferential trade allocations occurring outside the detection of even the most observant client.”

The SEC Enforcement Division alleges that Welhouse and his firm violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, Section 17(a) of the Securities Act of 1933, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.  The matter will be scheduled for a public hearing before an administrative law judge for proceedings to adjudicate the Enforcement Division’s allegations and determine what, if any, remedial actions are appropriate.

The SEC’s data-driven enforcement initiative to combat cherry-picking has been led by the Asset Management Unit and the regional offices in Boston and Los Angeles.  The investigation into Welhouse and his firm has been conducted by Robert Baker of the Asset Management Unit and Rachel Hershfang of the Boston Regional Office.  The Enforcement Division’s litigation will be led by Ms. Hershfang, Mr. Baker, and Cynthia Baran of the Asset Management Unit.

SEC CHARGES GOLDMAN, SACHS WITH ACCESS RULE VIOLATION

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
06/30/2015 12:15 PM EDT

The Securities and Exchange Commission today charged Goldman, Sachs & Co. with violating the market access rule in connection with a trading incident that resulted in erroneous executions of options contracts.

Goldman Sachs agreed to pay a $7 million penalty to settle the charges.

An SEC investigation found that Goldman Sachs did not have adequate safeguards to prevent the firm from erroneously sending approximately 16,000 mispriced options orders to various options exchanges in less than an hour on Aug. 20, 2013, after the firm implemented new electronic trading functionality designed to match internal options orders with client orders.  A software configuration error inadvertently converted the firm’s “contingent orders” for various options series into live orders and assigned them all a price of $1.  These orders were then sent to the options exchanges during pre-market trading, and approximately 1.5 million options contracts were executed within minutes after the opening of regular market trading.  Many of the executed trades were later canceled or received price adjustments pursuant to the options exchanges’ rules on clearly erroneous trades.

According to the SEC’s order instituting a settled administrative proceeding, Goldman Sachs further violated Securities Exchange Act Rule 15c3-5 by having deficient controls for preventing orders that would cause the firm to exceed its pre-set capital threshold.

“Firms that have market access need to have proper controls in place to prevent technological errors from impacting trading,” said Andrew Ceresney, Director of the SEC Enforcement Division.  “Goldman’s control environment was deficient in several ways, significantly disrupted the markets, and failed to meet the standard required of broker-dealers under the market access rule.”

Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit, added, “It is crucial for broker-dealers with market access to understand and control  the interaction of multiple electronic trading systems, not only to comply with Rule 15c3-5 but also to ensure the orderly operation of the markets as a whole.”

The SEC’s order made the following findings:

Goldman employed unreasonably wide price checks for its options orders during pre-market hours.  Had appropriate price bands been in place similar to those Goldman used during regular trading hours, thousands of the erroneous orders all priced at $1 would have been intercepted and not sent to exchanges.

On Aug. 20, 2013, a Goldman employee lifted several electronic circuit breaker blocks that automatically shut off outgoing options order messages once the rate of messages exceeded a certain level.

Goldman’s policies regarding these circuit breakers were not properly disseminated or fully understood by employees with responsibilities relating to the circuit breakers.

Goldman’s written policies relating to the implementation of software changes did not require several precautionary steps that, if taken, would likely have prevented the erroneous options incident.

In a separate failure that did not relate to the trading incident, Goldman did not maintain adequate controls designed to prevent the entry of orders that exceed the firm’s capital threshold.  The firm only computed its capital usage level every 30 minutes, did not have an automated mechanism to shut off orders in the event that the firm exceeded its capital threshold, and failed for several months to include a number of business units in the firm’s capital utilization calculation, thereby underestimating the firm’s trading risk.

Goldman consented to the SEC’s order without admitting or denying the findings.  In addition to paying the $7 million penalty, Goldman agreed to cease and desist from further violations of Section 15(c)(3) of the Exchange Act and Exchange Rule 15c3-5.

The SEC’s investigation was conducted by Market Abuse Unit staff Daniel Marcus, Charles Riely, and Matthew Koop and supervised by Mr. Hawke and the unit’s co-deputy chiefs Robert Cohen and Joseph Sansone.  Substantial assistance was provided by Rosanne Smith, Stephanie Morena, and Jennifer Conwell of the SEC’s National Exam Program and David Shillman, John Roeser, Richard Vorosmarti, and Carl Emigholz of the agency’s Division of Trading and Markets.