Securities Law Blog

FTC Capital Markets Inc. (FTC), a midtown Manhattan based registered broker-dealer, and its Chairman Guillermo Clamens, also based in New York City, were found jointly liable for more than a $20 million judgment awarded to the Securities and Exchange Commission (SEC).

In May 2009, the SEC filed a civil injunction against FTC, Clamens, and FTC employee Lina Lopez for engaging in millions of dollars of unauthorized securities trading through the accounts of two FTC customers. The complaint alleges that the broker-dealer defrauded Citgo Petroleum Corp. and its parent company PDV Holdings Inc. Clamens, with the help of Lopez, purportedly knowingly prepared and sent the customers false account statements that omitted the unauthorized securities trades and falsely listed holdings exclusively in short-term, low risk, liquid investments of the type that the customers authorized FTC to make on its behalf.

The Commission claims that Clamens and Lopez defrauded FTC’s customers in part to conceal their prior fraudulent sale of $50 million in non-existent notes to a Venezuelan bank through an FTC affiliated entity and unregistered broker-dealer Emerging Markets. When the notes held by the Venezuelan bank came due in August 2008, Clamens allegedly misappropriated $50 million from FTC customers to fund the redemption.

The Ponzi-like scheme began to unravel around October 2008 when investors began requesting withdrawals from their accounts and there wasn’t enough cash to fulfill the requests.

Clamens and Lopez have also been charged criminally by federal prosecutors in the U.S. Attorney’s Office in Manhattan. Lopez pleaded guilty in October 2009 to conspiracy and securities fraud and awaits sentencing. Clamens has been ordered to pay $1.7 million in interest and penalties but is reported to remain at large.

The State of New Jersey agreed to settle claims of securities fraud filed by the Securities and Exchange Commission (SEC). In the first ever SEC order against a state for violations of the federal securities laws, New Jersey was charged with misrepresenting and failing to disclose to investors in municipal bond offerings that it was underfunding the state’s two largest pension plans.

The SEC alleges that the state misled investors to believe it was adequately funding the $34 billion Teachers’ Pension and Annuity Fund (TPAF) and the $28 billion Public Employees’ Retirement System (PERS). From August 2001 through August 2007, New Jersey allegedly sold more than $26 billion worth of municipal bonds in 79 offerings that helped mask the truth about New Jersey’s pension contributions.

The SEC’s order found that New Jersey made material misrepresentations and omissions about the underfunding of TPAF and PERS in preliminary official statements, official statements, and continuing disclosures. New Jersey allegedly misrepresented or omitted information regarding legislation adopted in 2001 that impacted the benefits employees and retirees enrolled in TPAF and PERS, as well as the state’s use of Benefit Enhancement Funds as part of a five year plan to begin making contributions to the pension funds.

According to the SEC findings, New Jersey was aware of the underfunding and its potential effects. The state allegedly had no written policies about the review of bond offering documents, nor did it provide training to its employees about the state’s disclosure obligations.

New Jersey has neither admitted nor denied the SEC’s findings, and is required to cease and desist from committing any violations or future violations.

In 2008 the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA) and North American Securities Administrators Associate (NASAA) published a joint report to highlight proactive steps that some financial firms have adopted to better serve senior investors as they approach retirement.

On August 13, 2010 the SEC, FINRA and NASAA issued an addendum to that report summarizing additional compliance, supervisory and other practices being used by securities professionals.

The 2010 Addendum focuses on communicating effectively with senior investors; training and educating firm employees on senior-specific issues; establishing an internal process for escalating issues and taking next steps; obtaining information at account opening; ensuring appropriateness of investments; conducting senior-focused supervision, surveillance and compliance reviews.

“Securities regulators continue to bring solid enforcement cases to protect our seniors from investment fraud and abuse,” said NASAA President Denise Voigt Crawford. “Strong regulation coupled with effective industry compliance, supervision and innovative senior-specific practices are essential toward ensuring that our growing population of senior investors is being treated fairly and responsibly by the financial services industry.”

According to the SEC, as a result of the economic downturn, older investors are dealing with smaller nest eggs. The industry regulator estimated that total retirement assets decreased by $4.5 trillion from 2007 to the first quarter of 2009.

Laurence M. Brown is being charged for the second time for violating federal securities laws in connection with another offering fraud. The Securities Exchange Commission (SEC) charged Brown and fellow certified public accountant (CPA) Ronald Mangini with fraud for allegedly selling phony securities to investors and pocketing the money.

The two Westchester County residents allegedly sold investors fake promissory notes and common stock in Infinity Reserves-Tennessee Inc., an inoperative company owned by a client of their accounting firm. The duo took the company name and represented themselves as senior officers with authority to sell the securities.

As early as 2008, Brown and Mangini began selling the securities to clients of their accounting practice and other investors, according to the SEC’s complaint filed in federal court in Manhattan.

The SEC claims Brown and Mangini promoted Infinity Reserves as being a profitable company operating a gas pipeline in Tennessee. They proclaimed to have a “captive market in its area and a stable minimum rate of production with quality gas that could be sold well above market prices.” The alleged fake notes promised investors a 10 percent annual return that would be paid semiannually on the principal amount of the investment.

According to the SEC complaint, Infinity Reserves owns a gas gathering and trunk pipeline system located in Tennessee that has not operated for more than a decade. The offering document put together by Brown and Mangini allegedly portrayed the investment as interests in an active system.

The pair reportedly raised more than $2.1 million from investors, returning approximately $136,000 to certain investors in the form of interest payments. In typical Ponzi scheme fashion, at least $1.6 million of investor funds were allegedly transferred to personal bank accounts controlled by Brown, Mangini, or family members, who are being named as relief defendants.

The SEC charged the CPAs with violations of the anti-fraud provisions of the federal securities laws, and seeks permanent injunctions, disgorgement of the defendants’ and of relief defendants’ ill-gotten gains plus prejudgment interest, and financial penalties.

For the past 21 years investment advisors registered with the SEC have been required to provide clients with a brochure explaining the adviser’s qualifications, investment strategies, and business practices. Recently the Securities and Exchange Commission (SEC) adopted new rules regarding the information that registered investment advisers must provide to their clients and prospective clients.

The brochure is comprised of the second part of the investment advisors SEC registration form, known as Form ADV Part 2.

According to SEC Chairman Mary L. Schapiro, the amendments to Part 2 “will help transform the brochure into a plain English narrative that is well-suited to serve investors’ needs.”

The changes will add depth to the descriptions of investment advisers’ explanations of advisory services, fees, methods of risk analysis, disciplinary history, code of ethics, and brokerage practices.

One of the biggest changes is the disclosure of conflicts of interests, which will be followed by an explanation of how the investment adviser addresses those conflicts. This change is notable for advisers or an affiliate who might have a material financial interest in a client account for which it makes recommendations to clients, or buys or sells. “The investment advisor must also disclose whether it or an affiliate invests (or is allowed to invest) in the same securities that it recommends to clients or in related securities, such as options or other derivatives.” In addition, an investment adviser that “trades in the recommended securities at or around the same time as the client has to explain the specific conflicts of interest.”

Other conflicts of interest outlined on the brochure will include performance-based fees that an investment adviser may receive from some accounts and not others, as well as soft dollar practices, client referrals, directed brokerage and trade aggregation.

The current format of the brochure is made up of advisers’ responses to a series of multiple choice and fill-in-the-blank questions, which in some cases does not allow investment advisors to bet describe their business or conflicts.