Securities Law Blog

The Securities and Exchange Commission recently charged E*Trade Clearing LLC and E*Trade Securities LLC (collectively, E*Trade) for failing to comply with an anti-money laundering rule that requires broker-dealers to verify the identities of their customers and document their procedures for doing so. The SEC's order finds that E*Trade failed to accurately document certain Customer Identification Program (CIP) practices and verify the identities of more than 65,000 of its customers as required by the USA PATRIOT Act and SEC rules. E*Trade agreed to settle the SEC's enforcement action without admitting or denying the allegations, and will pay $1 million in financial penalties.

"E*Trade is one of the largest online brokerage firms in the world, and a compliance lapse of this type has the potential to undermine the nation's anti-terrorism and anti-money laundering efforts," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement. "The penalty and undertakings imposed in today's enforcement action reflect the critical nature of anti-money laundering rules, and will provide greater assurance that future compliance will be seriously and continuously monitored."

The SEC Release can be found at : http://www.sec.gov/news/press/2008/2008-156.htm

For more information on this subject contact securities attorneys, Michaels, Ward & Rabinovitz, LLP.

The Securities and Exchange Commission recently charged New Hampshire-based Pax World Management Corp. with violating investment restrictions in socially responsible mutual funds that investors were told would not contain securities issued by companies involved with producing weapons, alcohol, tobacco or gambling products. Well, maybe the guns were made with recycled steel?

The SEC alleges that Pax World, the SEC-registered investment adviser to several socially responsible mutual funds, including the Pax World Growth Fund and Pax World High Yield Fund, purchased at least 10 securities that the Funds' socially responsible investing (SRI) restrictions prohibited them from buying - contrary to representations it made to investors and the boards of the Funds. Pax World agreed to settle the SEC's charges and was ordered to pay a penalty of $500,000.

For more information on this subject contact securities attorneys, Michaels, Ward & Rabinovitz, LLP.

UBS AG agreed to return more than $35 million it invested in auction-rate securities for 20 towns and public agencies in Massachusetts amid a state probe of how the debt was marketed. UBS misled the public officials by buying securities that weren't a ``permissible investment'' under the state's municipal finance law, according to Attorney General Martha Coakley. Authorities are still investigating whether the firm lied to the investors about the auction-rate obligations, which may result in penalties under the state's False Claims Act, Coakley said in a news release. Under the agreement with UBS, the 20 towns and agencies will avoid losses on the more than $35 million they invested, Coakley said. The Zurich-based investment bank on March 28 said it was cutting by 5 percent the value of auction-rate securities held for its customers to reflect the debt's diminished worth and illiquidity after the market for the bonds collapsed. ``UBS's action today will allow these entities to recover these frozen funds,'' Coakley said. Bank spokeswoman Karina Byrne said in a statement that the agreement applies ``only to the circumstances of this specific case under Massachusetts law.'' She declined to elaborate.

For more information on this subject contact securities attorneys, Michaels, Ward & Rabinovitz, LLP.

The North American Securities Administrators Association (NASAA) ( http://www.nasaa.org ) recently announced that several of its members have been conducting investigations involving auction-rate securities (ARS) and are coordinating their efforts to help investors who cannot access funds that their brokers placed in these complex investment products. NASAA President Karen Tyler said that state securities regulators have been responding to auction-rate securities-related complaints and have had investigations underway since late February. The investigations, which focus on broker sales practices and supervisory issues related to auction-rate securities, are being conducted by individual jurisdictions through a NASAA ARS Task Force. Bryan Lantagne, director of the Massachusetts Securities Division, chairs the task force, whose members include state securities regulators from Florida, Georgia, Illinois, Massachusetts, Missouri, New Hampshire, New Jersey, Texas and Washington. “Given the number and nature of the complaints and the damaging impact this latest manifestation of the credit crisis is having on Main Street investors, state securities regulators have structured a coordinated approach to moving forward with our investigations,” said Tyler, who is North Dakota’s securities commissioner. If regulators find violations, they will seek appropriate remedies, including a “much stronger commitment from Wall Street to provide their retail clients with an acceptable solution,” according to Tyler. “Our focus is to determine what conduct took place at the point of sale – what was potentially misrepresented and omitted – and our goal is securing for investors access to their cash as requested,” Tyler said. “If the product was represented to be a cash equivalent going in, it must be treated as a cash equivalent coming out.” According to Task Force Chair Lantagne, investors have reported to state securities regulators that they were unaware that their money was invested in auction-rate securities or were not advised about the liquidity risks of these instruments. “Based on these investor complaints, this appears to be a pervasive problem,” Lantagne added.

For more information on this subject contact securities attorneys, Michaels, Ward & Rabinovitz, LLP.

Nine state regulators are investigating the collapse of the auction-rate securities market and are coordinating their efforts through a task force, the North American Securities Administrators Association said. Regulators in Florida, Georgia, Illinois, Massachusetts, Missouri, New Hampshire, New Jersey, Texas and Washington are probing whether brokers misrepresented the auction-rate securities they sold to individual investors, according to the Washington- based group. ``If the product was represented as a cash equivalent going in, it must be treated as a cash equivalent coming out,'' said Karen Tyler, the president of the group and the securities commissioner in North Dakota. Massachusetts Secretary of State William Galvin on March 28 said his office is investigating the sale of auction-rate securities by UBS AG, Merrill Lynch & Co. and Bank of America Corp. after investors complained they were unable to liquidate bonds that the firms told them were equivalent to cash. A number of individual investors have also filed lawsuits against the Wall Street banks that sold auction-rate bonds. Investors and dealers began to abandon the $330 billion market in February on concern that creditworthiness of companies insuring the bonds was deteriorating because of losses they took guaranteeing debt backed by subprime mortgages. Thousands of auctions have failed, data compiled by Bloomberg show. When an auction fails because of lack of demand, rates are set at a ``penalty'' level determined at the initial bond offering and holders are stuck with the securities.

For more information on this subject contact securities attorneys, Michaels, Ward & Rabinovitz, LLP.