RECENT SECURITIES INVESTIGATIONS
On June 28, 2018, The Financial Industry Regulatory Authority Inc. barred Kyusun Kim, formerly a broker with Independent Financial Group, for making unsuitable recommendations that resulted in elderly clients buying illiquid alternative investments.Finra said between 2008 and 2015, Mr. Kim made unsuitable recommendations to several senior customers that they concentrate their retirement assets and liquid net worth in speculative and illiquid alternative securities.
On May 20, 2018 Merrill Lynch agreed to settle SEC charges related to the undisclosed routing of customer orders to external liquidity providers and partners (collectively, “ELPs”) for execution.According to the SEC Order, Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”) reprogrammed its systems, altered reports and invoices, and inaccurately responded to customer communications concerning the execution venue of certain customer orders. The SEC Order states that between 2008 and 2013, Merrill Lynch engaged in a practice referred to as “masking,” in which it did not disclose to customers that their orders were being executed at ELPs and not at Merrill Lynch. The practice ended in May 2013 on a prospective basis. The Order states that Merrill Lynch did not disclose the prior practices to its customers but continued to use its systems to conceal the earlier wrongdoing.
The SEC concluded that by this masking practice, the broker-dealer deprived customers of useful information or were contrary to customer direction. Specifically, certain customers had requested that their orders not be sent to ELPs, and others expressed concern that the practice made them susceptible to information leaks. Other customers purportedly made choices about their broker-dealer relationships and routing decisions based on the false execution venue information. In the settlement, Merrill Lynch agreed to pay a $42 million penalty and admit wrongdoing.
On March 20, 2018, The Securities and Exchange Commission has levied charges against Electronic Transaction Clearing, a registered broker-dealer headquartered in Los Angeles for putting its customers’ securities at risk in order to fund its own operations.Among other things, the SEC found that the firm violated the customer protection rule, which is intended to safeguard customers’ cash and securities assets in the event of a broker-dealer’s insolvency. The rule requires broker-dealers to maintain physical possession or control of customers’ fully paid and excess margin securities. According to the SEC’s order, Electronic Transaction Clearing allegedly transferred almost $8 million of fully paid securities belonging to cash customers to an account at another clearing firm to meet margin requirements on borrowed funds, and the firm used more than $17 million of securities of two customers to borrow funds without consent.
The SEC also found that Electronic Transaction Clearing improperly commingled customers’ securities and allowed a customer’s excess margin securities to be loaned out by the other clearing firm.The SEC has brought several recent cases charging violations of the customer protection rule, which establishes critical protections to ensure that investors’ securities are kept safe by broker-dealers. Without admitting or denying the findings, the broker-dealer agreed to pay an $80,000 penalty, to cease and desist from committing similar violations in the future, and to be censured. The SEC noted that Electronic Transaction Clearing cooperated with its investigation and took remedial steps to prevent future violations.
In November 2017, Woodbridge, a Southern California-based real estate group, which got its start in Boca Raton, filed for Chapter 11 bankruptcy protection in Delaware. Just before Christmas, the Securities and Exchange Commission, which had investigated the company for a year, followed up in Miami federal court with a complaint that Woodbridge was a $1.22 billion Ponzi scheme. As of December. 30,2017 there were approximately 700 Florida investors who bought notes worth an estimated $114 million, according a court filing by Fort Lauderdale forensic accountant Soneet Kapila, who was hired by the SEC to analyze Woodbridge’s finances. In a lawsuit that names Shapiro, the Woodbridge Group of Companies, some 275 related funds and companies, and a trust controlled by Shapiro, the SEC alleged that since 2012, Shapiro ran “a massive Ponzi scheme” that raised more than $1.22 billion from over “8,400 unsuspecting investors nationwide through fraudulent unregistered securities offerings.” The commission also alleged Shapiro diverted more than $21 million for his personal use.The SEC in Miami pushed for a receiver to oversee the Woodbridge businesses and the return of money to investors. And it obtained an asset freeze order from a Miami federal judge.