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Broker Should Have Disclosed Investment Product Red Flags

 

An unregistered broker agreed to pay $600,000 to settle charges that he sold third party investments without disclosing numerous red flags and negative facts to potential investors.  According to the SEC, the respondent painted an overly rosy picture of the investments (ultimately Ponzi schemes) and the sponsor by highlighting consistent rates of return and a personal business relationship.  However, the respondent did not disclose that the sponsor had previous issues with the SEC, multiple failed investments schemes, and financial problems.  The SEC argues that once the respondent described the investments in a positive way, he “was under a duty to make materially fair and complete disclosure rather than presenting only a one-sided and unbalanced view of the investment.”  The SEC charges the unregistered broker with violating the antifraud provisions of the Securities Act.

When selling investment products, you cannot merely disclose the good facts.  In this case, the respondent may not (or may) have known the investments were Ponzi schemes, but he did have enough facts to suspect and should have warned potential investors. 

Broker/Custodian Should Have Filed SARs to Report Advisers Act Violations

A large custodian/clearing firm agreed to pay $2.8 Million to settle charges that it failed to file Suspicious Activity Reports about the conduct of dozens of terminated advisors that the SEC claims violated the Advisers Act.  The SEC asserts that the Bank Secrecy Act required the custodian/clearing firm to file SARs when it suspected that advisers using its platform engaged in questionable fund transfers, charged excessive management fees, operated a cherry-picking scheme, or logged in as the client.  According to the SEC, such unlawful activities fall within the SAR rules because they had no lawful business purpose or facilitated criminal activity.

OUR TAKE: The SEC is leveraging the Bank Secrecy Act, adopted to combat money laundering, to require broker/custodians to police advisers on their platforms for violations of the Advisers Act.  It’s a novel legal theory to further the regulator’s enforcement goal of requiring large securities markets participants to serve in a gatekeeping role for the industry

Broker and His Client Charged in IPO Kickback Scheme

The SEC has charged a broker and his customer for conspiring to conceal alleged kickbacks in exchange for preferred IPO and secondary offering allocations.  According to the SEC, the defendants agreed that the customer would kick back 24% of his trading profits.  The defendants attempted to conceal the scheme by laundering the payments through multiple bank withdrawals of less than $10,000.  The SEC maintains that the broker and the client repeatedly lied on compliance certifications about conflicts of interest and payments, which were required by the firms’ policies and procedures that specifically prohibited any type of conflict, allocation or payment scheme.

OUR TAKE: The SEC properly targets the persons that benefited from the scheme, rather than the firms that had adopted relevant policies and procedures and required specific certifications.  It is also noteworthy that the SEC charged the enriched client and not just the broker.  We believe this case shows the SEC’s continued focus on holding individuals, and not just organizations, accountable for bad behavior.

https://www.sec.gov/litigation/complaints/2017/comp-pr2017-234.pdf