SEC Issues Pump & Dump Stock Scam Warning

June 13, 2013 By Jay Eng

The SEC issued an interesting alert concerning pump and dump stock emails today:

Pump-and-dump promoters frequently claim to have “inside” information about an impending development. Others may say they use an “infallible” system that uses a combination of economic and stock market data to pick stocks. These scams are the inbox equivalent of a boiler room sales operation, hounding investors with potentially false information about a company.

The fraudsters behind these scams stand to gain by selling their shares after the stock price is “pumped” up by the buying frenzy they create through the mass e-mail push. Once these fraudsters “dump” their shares by selling them and stop hyping the stock, investors lose their money or are left with worthless or near worthless stock.

 

Investment News Reports That Arbitration Awards In Favor of Customers in Tenant-in-Common Exchange Sales Hold Steady

June 9, 2013 By Jay Eng

The Investment News is reporting that arbitration awards in favor of brokerage firm customers concerning sales of tenant-in-common investments are holding steady.  According to the article:

The number of arbitration awards won by investors against brokerage firms stemming from the sale of tenant-in-common investments has held steady over the past two years, but with the potential for two large awards looming on the horizon, independent broker-dealers clearly are still dealing with the fallout of real estate securities that went south during the collapse of the real estate bubble.

***

TIC exchanges were a popular investment, sold primarily through independent broker-dealers, before and during the run-up to the credit crisis and involved tax-deferred swaps of property ownership interests, with the promise to investors of income generated from the ownership stake in the new property.

After the real estate bubble burst in 2007-08, many TIC investors saw their properties fall in value. Many investors’ current claims stem from the days of the collapse but are only now coming to arbitration because of a combination of factors, attorneys and experts said. Those include a drawn-out process of the decline in value of a commercial property, including the potential for foreclosure, as well as investors’ hopes for a rebound in the value of some properties.

See the article here.

Special Risks with Trading on Margin

June 9, 2013 By Jay Eng

FINRA has issued an investor alert concerning investments purchased “on margin.”  A “margin” account allows an investor to borrow money from a brokerage account to purchase additional securities.  This loan to purchase additional securities is not free as the investor must repay the amount borrowed with interest.  Margin loans can be “highly” profitable for brokerage firms and brokers.  FINRA’s investor alert details special risks associated with trading on margin:

If the equity in your account falls below the maintenance margin requirements under the law—or the firm’s higher “house” requirements—your firm can sell the securities in your accounts to cover the margin deficiency. You will also be responsible for any short fall in the accounts after such a sale.

Some investors mistakenly believe that a firm must contact them first for a margin call to be valid. This is not the case. Most firms will attempt to notify their customers of margin calls, but they are not required to do so. Even if you’re contacted and provided with a specific date to meet a margin call, your firm may decide to sell some or all of your securities before that date without any further notice to you. For example, your firm may take this action because the market value of your securities has continued to decline in value.

There is no provision in the margin rules that gives you the right to control liquidation decisions. Your firm may decide to sell any of the securities that are collateral for your margin loan to protect its interests.

These changes in firm policy often take effect immediately and may cause a house call. If you don’t satisfy this call, your firm may liquidate or sell securities in your accounts.

While an extension of time to meet a margin call may be available to you under certain conditions, you do not have a right to the extension.

A decline in the value of the securities you purchased on margin may require you to provide additional money to your firm to avoid the forced sale of those securities or other securities in your accounts.

See FINRA’s investor alert here.

Don’t Blame the Assistant: Court Denies Late Request for Exclusion (Opt-Out) from Class Action in Bank of America Securities Lawsuit

June 6, 2013 By Jay Eng

A District Court Judge in the Southern District of New York has denied the request of KERS & Co. (“KERS”) to permit it to opt-out of the Bank of America Securities Litigation, Case No. 09-MD-2058.  According to the Court’s Order, the request for exclusion came 11 months after the date set by the Court for putative class members to request exclusion from the class action.

In its order the Court found that KERS had received notice and was aware of the opt-out procedure.  However, the claims administrator had no record of receiving a timely request for exclusion from KERS.  After reviewing the record, including affidavits from KERS, the Court found that “KERS has not satisfied its burden of coming forward with evidence establishing that  it communicated an intent to opt out of the class.”  Additionally, the Court found that KERS failed to establish that the failure to timely file a request for exclusion was the product of excusable neglect stating in relevant part as follows:

[The law firm] primarily blames an administrative assistant’s purported filing mishaps, even though its attorneys apparently showed minimal interest in taking corrective action or even following up on numerous red flags. [The law firm] places additional blame on opposing parties for not more diligently pressing [the law firm] on its failure to file the opt-out request. KERS and [the law firm] have not come forward with any meaningful explanation for the lengthy delay in acting, which was entirely within their control as was the failure to meet the original deadline. As noted, the Second Circuit has stated that the reason for the missing he neglected deadline is the most important factor in considering excusable neglect, and “that the equities will rarely if ever favor a party who fails to follow the clear dictates of a court rule ….” Silvanich, 333 F.3d at 366; see also In re Painewebber, 147 F.3d at 135-36 (movant’s hospitalization does not establish excusable neglect for subsequent nine-month delay in remedy failure to meet opt-out deadline).  For the foregoing reasons, KERS has not established excusable neglect for its failure to timely seek exclusion from the class.

See the Order here.

SEC Approves Revision to the Definition of “Public Arbitrator” in FINRA’s Customer Code of Arbitration

June 5, 2013 By Jay Eng

FINRA has issued Regulatory Notice 13-21 announcing that the Securities and Exchange Commission (“SEC”) has approved amendments to FINRA’s Code of Arbitration concerning the definition of “public arbitrators.”  FINRA classifies arbitrators as either “non-public” or “public.”  Non-public arbitrators are affiliated with the securities industry either through their current or former employment in the securities industry or by providing professional services to those in the securities industry.  Public arbitrators do not have any significant affiliation with the securities industry.

Under the revised definition, persons associated with, including registered through, a mutual fund or hedge fund cannot serve as “public” arbitrators.  Also, there is now a two-year “cooling off” period before certain non-public arbitrators may be reclassified as public.  Revised Rule 12100 of the Customer Code of Arbitration provides:

(u) Public Arbitrator

The term “public arbitrator” means a person who is otherwise qualified to serve as an arbitrator and:

(1) is not engaged in the conduct or activities described in paragraphs (p)(1)–(4);

(2) was not engaged in the conduct or activities described in paragraphs (p)(1)–(4) for a total of 20 years or more;

(3) is not an investment adviser, or associated with, including registered through, a mutual fund or hedge fund;

(4) is not an attorney, accountant, or other professional whose firm derived 10 percent or more of its annual revenue in the past two years from any persons or entities listed in paragraphs (p)(1)–(4);

(5) is not an attorney, accountant, or other professional whose firm derived $50,000 or more in annual revenue in the past two years from professional services rendered to any persons or entities listed in paragraph (p)(1) relating to any customer disputes concerning an investment account or transaction, including but not limited to, law firm fees, accounting firm fees, and consulting fees;

(6) is not employed by, and is not the spouse or an immediate family member of a person who is employed by, an entity that directly or indirectly controls, is controlled by, or is under common control with, any partnership, corporation, or other organization that is engaged in the securities business;

(7) is not a director or officer of, and is not the spouse or an immediate family member of a person who is a director or officer of, an entity that directly or indirectly controls, is controlled by, or is under common control with, any partnership, corporation, or other organization that is engaged in the securities business; and

(8) is not the spouse or an immediate family member of a person who is engaged in the conduct or activities described in paragraphs (p)(1)–(4). For purposes of this rule, the term immediate family member means:

(A) a person’s parent, stepparent, child, or stepchild;

(B) a member of a person’s household;

(C) an individual to whom a person provides financial support of more than 50 percent of his or her annual income; or

(D) a person who is claimed as a dependent for federal income tax purposes.

A person whom FINRA would not designate as a public arbitrator because of an affiliation under subparagraphs (3)-(7) shall not be designated as a public arbitrator for two calendar years after ending the affiliation.

For purposes of this rule, the term “revenue” shall not include mediation fees received by mediators who are also arbitrators, provided that the mediator acts in the capacity of a mediator and does not represent a party in the mediation.

(Revisions emphasized).  These revisions take effect July 1, 2013.

Banc of America and Wells Fargo Fined in Connection with Sales of Floating-Rate Bank Loan Funds

June 4, 2013 By Jay Eng

Today, FINRA issued a press release announcing that it had ordered Merrill Lynch, Pierce, Fenner & Smith Incorporated, as successor for Banc of America Investment Services, Inc., to pay a fine of $900,000 and to reimburse approximately $1.1 million in losses to 214 customers in connection with “unsuitable sales of sale of floating-rate bank loan funds.”  Wells Fargo Advisors, LLC, as successor for Wells Fargo Investments, LLC, was also ordered to pay a fine of $1.25 million and to reimburse approximately $2 million in losses to 239 customer.  Floating-rate bank loan funds are mutual funds that “generally invest in a portfolio of secured senior loans made to entities whose credit quality is rated below investment-grade. The funds are subject to significant credit risks and can also be illiquid.”

According to the press release:

FINRA found that Wells Fargo and Banc of America brokers recommended concentrated purchases of floating-rate bank loan funds to customers whose risk tolerance, investment objectives, and financial conditions were inconsistent with the risks and features of floating-rate loan funds. The customers were seeking to preserve principal, or had conservative risk tolerances, and brokers made recommendations to purchase floating-rate loan funds without having reasonable grounds to believe that the purchases were suitable for the customers. FINRA also found that the firms failed to train their sales forces regarding the unique risks and characteristics of the funds, and failed to reasonably supervise the sales of floating-rate bank loan funds.

(Emphasis added).  Wells Fargo and Banc of America neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

In October of 2012, FINRA Chairman Richard G. Ketchum spoke on the the risks concerning floating-rate bank loan funds:

Another product that has become popular with retail investors is floating rate loan funds or “levered loan” funds. These levered loan mutual funds and closed-end funds, which invest in floating-rate loans extended by financial institutions to companies of lower credit quality, are sometimes marketed inappropriately. We have seen instances where these funds have been sold with inadequate disclosures about the funds’ credit quality. In some instances the funds have been misrepresented as high-yielding, money market-like instruments.

(Emphasis added).

 

SEC Suspends Trading of Sixty-One Companies Over Concerns About the Accuracy and Adequacy of Publicly Disseminated Information Pursuant to § 12(k)

June 4, 2013 By Jay Eng

On June 3, 2013, the Securities and Exchange Commission (“SEC”), pursuant to Section 12(k) of the Securities Exchange Act of 1934, temporarily suspended trading in the securities of a number of OTC issues “because of questions that have been raised about the accuracy and adequacy of publicly disseminated information concerning the companies’ operating status, if any.” Operation “Shell Expel” has been an ongoing project of the SEC which included the suspension of 379 companies in 2012.  In the press release, the SEC stated that

In this latest review of microcap stocks nationwide using enhanced intelligence technology in the Enforcement Division’s Office of Market Intelligence, the SEC identified these clearly dormant shell companies in at least 17 states and one foreign country. By suspending trading in these companies, they’re obligated to provide updated financial information to prove they’re still operational, essentially rendering them useless to scam artists now that they are no longer flying under the radar.
***
Pump-and-dump schemes are among the most common types of fraud involving empty shell companies. Perpetrators will tout a thinly-traded microcap stock through false and misleading statements about the company to the marketplace. They purchase the stock at a low price before pumping the stock price higher by creating the appearance of market activity and drawing investor interest. They dump the stock for significant profit by selling it into the market at the higher price once investors have bought in.

(Emphasis added).

The companies identified in the SEC’s release were as follows:

Company Ticker
1. 3CI Complete Compliance Corp. TCCC
2. AHPC Holdings, Inc. GLOV
3. American Utilicraft Corp. AMUC
4. Austin Farms Inc. AUFR
5. BancPro, Inc. BCPO
6. Baxley Federal Savings Bank BAXF
7. CBR Brewing Co., Inc. CBRAF
8. Centerpoint Bank (Bedford, NH) CPOB
9. China Renyuan International, Inc. CRNY
10. Compass Plastics & Technologies, Inc. CPTI
11. Devonshire Consolidated, Inc. DVNO
12. Edge Business Services Corp. EGBS
13. Egghead.com, Inc. EGHDQ
14. Environmental Corp. of America ECAM
15. Environmental Fiber Technologies, Inc. EVFB
16. Extreme Motorsports of California, Inc. EMOC
17. Fidelity First Financial Corp. FFIRD
18. Fortune Market Media, Inc. FTMK
19. Franklin Ophthalmic Instruments Co., Inc. FKLN
20. Futurebiotics, Inc. VITK
21. Geneva Financial Corp. GNVN
22. Globalnet Systems Ltd. ISDN
23. Icy Splash Food & Beverage, Inc. IFBV
24. Imaging Center Inc. (The) TIGC
25. InAmerica, Inc. INAX
26. IndieMV Media Group, Inc. IDMV
27. Integrated Bio Energy Resources, Inc. IBIE
28. Interactive Brand Development, Inc. IBDI
29. ISI Technology Corp. ISYI
30. Isomet Corp. IOMT
31. Matinee Media Corp. MNEM
32. MediaBay, Inc. MBAY
33. Metricom, Inc. MCOMQ
34. Midnight Holdings Group, Inc. MHGI
35. Municipal Insurance Co. of America MPAL
36. Myriad Entertainment & Resorts, Inc. MYRA
37. Oxford Capital Corp. OXFO
38. PanAmerican BanCorp PABN
39. Pennsylvania Warehousing & Safe Deposit Co. PAWH
40. Pipejoin Technologies, Inc. PPJN
41. Pogo! Products, Ltd. PGOI
42. PopMail.com, Inc. POPM
43. Premium Energy Corp. PPTL
44. Relax Investments, Ltd. RLXI
45. Riptide Worldwide, Inc. RTWW
46. Rocket City Enterprises, Inc. RCTY
47. Rocketinfo, Inc. RKTI
48. Ronco Corp. RNCP
49. Silver Star Energy, Inc. SVSE
50. Sound Health Solutions, Inc. SHSO
51. Sovereign Exploration Associates International, Inc. SVXA
52. Sports Concepts, Inc. SCPT
53. Sports Media, Inc. SPTS
54. TMT Capital Corp. TMTP
55. UniMark Group, Inc. (The) UNMG
56. Verdant Brands, Inc. VERD
57. Viking Power Services, Inc. VKPW
58. Vinings Investment Properties Trust VIPPS
59. Washington Life Insurance Co. of America WLIA
60. Wi-Tron, Inc. WTRO
61. Zone Mining Ltd. ZMNL

See SEC Release No. 69678 (June 3, 2013) and the Order of Suspension of Trading.

Florida Man Charged With Perjury and Obstruction for Providing False Testimony to SEC

June 4, 2013 By Jay Eng

According to a press release by the United States Attorney for the Southern District of Florida, a Fort Lauderdale man was charged with obstruction and perjury in connection with a Securities and Exchange Commission (“SEC”) investigation concerning the violation of federal securities laws.

As part of the investigation, the SEC attempted to identify the target’s assets and bank accounts attributable.  In response to an SEC inquiry, the target allegedly completed and provided to the SEC, a “Background Questionnaire” form purporting to list bank accounts and other assets attributable to him. However, before completing the questionnaire, the target transferred $100,000 from an account that was disclosed on the form, to a separate account that he controlled.  The Government alleges that the target willfully failed to disclose the existence of the funds or the bank account holding the funds, to the SEC and provided false sworn testimony about his assets and accounts to the SEC at its Southeast Regional Offices, in Miami, Florida.

See the U.S. Attorney’s release here.

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