Securities Law Blog

Boston-based father-son hedge fund managers and their firms were charged by the SEC with securities fraud for misleading investors about their investment strategy and past performance.

Gabriel and Marco Bitran operated their hedge funds through GMB Capital Management LLC and GMB Capital Partners LLC. Gabriel founded GMB Capital Management in 2005 for the stated purpose of managing hedge funds using quantitative models he developed based on his academic optimal pricing research to trade primarily ETFs, according to the SEC’s order. He and his son allegedly lured investors by boasting a lengthy track record of success based on actual trades using real money, even though the SEC states that the record was reportedly based on hypothetical situations. Investors were allegedly misled to believe their money was being invested according to the quantitative optimal pricing model. The SEC claims that in reality the GMB hedge funds were merely investing in other hedge funds without Gabriel’s involvement.

According to the SEC order, the Bitrans raised more than $500 million over a period of three years for eight hedge funds and various managed accounts while allegedly making these misrepresentations to investors. The Bitrans and GMB Management reportedly marketed the hedge funds by distributing performance track records showing double-digit annualized return without any down years to investors. Both funds experienced a series of losses at the end of 2008 and GMB eventually dissolved them. The GMB funds also allegedly suffered significant losses in hedge funds that had invested with Bernard Madoff.

During an SEC examination of GMB Capital Management, the firm allegedly produced a false document that was created solely for the purpose of responding to the SEC staff’s request for books and records that supported GMB’s performance claims. The document reportedly showed a real-time record of Gabriel Bitran’s trades since 1998, according to the SEC’s order.

The Bitrans agreed to settle the SEC’s charges for $4.8 million and agreed to be barred from the securities industry. The GMB entities and the Bitrans neither admitted nor denied the SEC’s findings in settling the charges.

David Lerner Associates, Inc. (DLA) was fined $2.3 million for marking up municipal bond and collateralized mortgage obligation (CMO) transactions and ordered to pay $1.4 million in restitution plus interest to affected customers. The FINRA Panel also fined head trader William Mason $200,000 and suspended him for six months from the securities industry.

The FINRA Panel found that from January 2005 through January 2007, DLA and Mason charged retail customers excessive markups in more than 1,500 municipal bonds and in more than 1,700 CMO transactions from January 2005 through August 2007. According to the Panel’s decision, the Long Island-based company charged markups on municipal bonds ranging from 3.01 percent to 5.78 percent and charged markups on CMOs ranging from 4.02 percent to 12.29 percent. The price was reportedly marked up without consideration for the amount of money involved in the transaction.

The Panel also found that DLA failed to establish and maintain adequate procedures to monitor the fairness of pricing for municipal bonds and CMOs. DLA also allegedly failed to have adequate procedures in place to ensure that it recorded the time that municipal bond orders were received from customers and failed to records the order receipt time.

In 2004 DLA received a Letter of Caution regarding FINRA’s concerns with its markup practices. DLA reportedly continued its unfair pricing practice after receiving a Wells Notice concerning the matter in July 2009.

New York Mets owners Fred Wilpon and Saul Katz have agreed to settle with Madoff trustee Irving Picard for $162 million. Mr. Picard in turn agreed to drop all claims that the men were “willfully blind” to signs that Mr. Madoff was carrying out a fraud. The agreement includes a provision that neither side can make disparaging remarks about each other.

Mr. Picard originally sought to recover the $300 million that was withdrawn prior to the liquidation of Madoff’s business. The lawsuit centered on a “red flag” raised by the chief investment officer for a hedge fund owned by Messrs. Katz and Wilpon, Noreen Harrington. Ms. Harrington stated in a deposition that in 2003 she told Mr. Katz that Mr. Madoff was either trading illegally or reporting fictitious profits. When her advice was ignored and she didn’t have proof of wrongdoing, Ms. Harrington resigned, according to her deposition. According to court documents, the Mets owners said they were never given any specific evidence that Mr. Madoff was running any kind of fraud.

As part of the settlement, the Mets owners won’t have to make a payment for three years. If they are able to recover on their $178 million claim against the bankruptcy estate, $162 million will go to the trustee and Messrs. Katz and Wilpon are responsible to pay the difference.

Brookstreet Securities Corp. and its former CEO Stanley C. Brooks have been ordered to pay a maximum penalty of $10 million in a securities fraud case. The SEC began its case against Brookstreet and Brooks in December 2009 alleging that the company sold risky mortgage-backed securities to customers with conservative investment goals from 2004 to 2007.

A statement issued by the SEC stated that Brookstreet and Brooks developed a program through which the firm’s registered representatives sold particularly risky and illiquid types of Collateralized Mortgage Obligations (CMOs) to more than one thousand seniors, retirees and others for whom the securities were unsuitable. The firm and Brooks continued to promote and sell the risky CMOs even after receiving numerous warnings that these were dangerous investments that could become worthless overnight, said the SEC.

The fraud caused severe investor losses and caused the firm to eventually collapse in June 2007 after failing to meet margin calls for the notes and then failing to meet net-capital requirements.

In addition to the $10 million penalty, U.S. District Judge for David O. Carter also ordered Brooks to pay $110,700 in disgorgement and prejudgment interest.

In its annual 10K filing with the SEC, State Street Corp. disclosed that New York’s attorney general and the U.S. Attorney’s Office in Manhattan have made inquiries into its foreign exchange business. The Boston-based company reported that its total revenue worldwide from foreign exchange services was approximately $331 million in 2011. That number has dropped significantly from $462 million in 2008.

State Street said in its filing that as a result of the heightened regulatory scrutiny, some clients or their investment managers have changed the way they handle indirect foreign exchange trades.

The nationwide probe into indirect foreign exchange practices focuses on the pricing of small transactions handled automatically by the custody banks on behalf of pension funds. In October 2009 State Street became the first bank to be sued for alleged overcharging in foreign exchange. The attorney general in California sued State Street on behalf of the state’s two largest pension plans for $56 million in alleged overcharges from 2001 to 2009.