Securities Law Blog

It’s about time, don’t you think? On August 28th, the Justice Department released new corporate prosecution guidelines that, among other things, instruct prosecutors not to consider a corporation's advancement of attorneys' fees to employees when evaluating cooperativeness. The guidelines also make clear that the mere participation in a joint defense agreement will not render a corporation ineligible for cooperation credit. In addition, the new guidance provides that prosecutors may not consider whether a corporation has sanctioned or retained culpable employees in evaluating whether to assign cooperation credit to the corporation. The revised guidelines further state that credit for cooperation will not depend on the corporation's waiver of attorney-client privilege or work product protection, but rather on the disclosure of relevant facts. Corporations that disclose relevant facts may receive due credit for cooperation, regardless of whether they waive attorney-client privilege or work product protection in the process.I have been railing about this unfair practice and even did it in print in the ABA’s Securities Litigation Journal, Volume 17, No. 1-Fall 2006. For more on this welcome and long overdue change in the government’s stance, see Department of Justice Press Release and Remarks of Deputy Attorney General. In a related development, the Second Circuit affirmed the dismissal of the government's indictment against 13 former partners and employees of KPMG, LLP. The Court found that the government deprived the defendants of their Sixth Amendment right to counsel by causing KPMG to place conditions on the advancement of legal fees to defendants and to cap the fees and ultimately end them. Sanity has returned. Okay, at least a little leveling of the playing field...

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

I am consistently amazed at folks who fall for Ponzi schemes—but I must admit that this one really shocked me. This is not just a couple people being defrauded out of $100,000. This is a whopper! On August 11, 2008, the SEC filed charges against Wextrust Capital, LLC (Wextrust), its principals, and four affiliated Wextrust entities, alleging that defendants conducted a massive Ponzi-type scheme from 2005 or earlier that raised approximately $255 million from approximately 1,200 investors. The targets of the fraudulent offerings are primarily members of the Orthodox Jewish community. Simultaneous with the filing of the action, the Commission is seeking emergency relief from the Court to freeze the defendants' assets and place the Wextrust entities under the control of a receiver to safeguard assets. The Commission is also seeking a temporary restraining order to stop the ongoing offerings and other immediate relief.

Scott Friestad, Deputy Director of Enforcement, said, "This case demonstrates that the Commission will aggressively seek out and pursue affinity frauds. It is also a signal to investors to be wary of friends touting great investment 'opportunities.' In this case, Wextrust purported to be 'a globally diversified private equity and specialty finance company, specializing in investment opportunities ranging from real estate to specialty finance and investment banking.' The reality, as alleged in our complaint, was very different."

Andrew M. Calamari, Associate Director of Enforcement, added, "Our complaint alleges an affinity fraud of very large scale. In this case, one of the defendants used his extensive connections in the orthodox Jewish community to solicit more than $250 million from unsuspecting investors. Affinity frauds are especially pernicious because the victims tend to let their guards down in circumstances where they might otherwise proceed with much more caution."

The Commission's complaint, filed in federal court in Manhattan, charges that Wextrust, its principals Steven Byers and Joseph Shereshevsky, and its affiliated entities Wextrust Equity Partners, LLC (WEP), Wextrust Development Group, LLC (WDG), Wextrust Securities, LLC (Wextrust Securities) and Axela Hospitality, LLC (Axela) conducted at least 60 securities offerings through private placements and created approximately 150 entities in the form of limited liability companies or similar vehicles to act as issuers or facilitators of the offerings, purportedly to fund the acquisition of specified assets, the majority of which were commercial real estate ventures. Contrary to representations in the offering memoranda that proceeds would be used for specific projects, the defendants allegedly diverted funds to pay returns to investors in prior offerings, or to fund expenses of the defendants.

In one offering, conducted in 2005, the SEC complaint alleges that defendants falsely represented to investors that the more than $9 million raised would be used to purchase seven specifically identified real estate properties that were leased by federal government agencies, such as the General Services Administration. In fact, according to the complaint, the defendants never purchased the seven properties. Moreover, at the time the offering occurred, they knew or were reckless in not knowing that the seven properties would not be acquired. Significantly, while the offering was ongoing, the Wextrust entities "borrowed" more than $6 million from the funds raised in the GSA offering and used these funds for purposes unrelated to the GSA offering.

Overall, the complaint alleges, defendants diverted at least $100 million dollars to unauthorized purposes. The complaint alleges that the defendants are conducting at least four ongoing offering frauds intended to raise money to pay back investors from prior offerings.

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

The SEC recently issued a Compliance Alert to registered investment advisers, which summarized select areas that SEC examiners have observed and taken issue with during recent examinations. A complete copy of the SEC's Compliance Alert can be found at http://www.sec.gov/about/offices/ocie/complialert0708.htm

Personal Trading by Advisory Staff
Personal trading has been an area of focus during many SEC examinations of investment advisers. Specifically, SEC examiners review an adviser’s internal compliance controls governing employees’ trading and trading by the firm for its own proprietary accounts. Deficiencies frequently identified by examiners include:

a) Adviser’s code of ethics was incomplete
b) Adviser’s code of ethics was not followed
c) Reporting requirements were not followed and/or monitoring was not performed
d) Disclosure was inaccurate

Examiners recently conducted a risk-targeted examination review that focused on advisers’ compliance practices and internal controls with respect to access persons’ personal trading and trading in proprietary accounts.

In addition to firms establishing procedures to ensure compliance with specific regulatory mandates, examiners observed that the following practices appeared to be effective in assisting in the prevention of violations of the Advisers Act:

Internal Compliance Controls
* Written policies and procedures were designed to address conflicts of interest with respect to trading in personal and proprietary accounts.
* Restricted lists and watch lists were accurate and maintained on a current basis.
* Time-stamped order tickets were utilized.
* To enable centralized monitoring of all trading, all personal securities transactions were effected through the adviser’s trading desk.
* Trades in client accounts were consistently bundled with, or executed prior to, trades in personal or proprietary accounts.
* “Black-out” periods, during which access persons are not permitted to execute personal securities transactions, were strictly enforced.
* Access persons were prohibited from engaging in short-term trading (i.e., the purchase and sale of a security within 60 days.

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

The Securities and Exchange Commission's Division of Enforcement today announced a preliminary settlement in principle with UBS Securities LLC and UBS Financial Services, Inc. (collectively, UBS) including proposed charges and a plan that would restore approximately $22 billion in liquidity to its customers who invested in auction rate securities (ARS). This plan includes approximately $8.2 billion for individual investors, small businesses, and charitable organizations, $3.3 billion for holders of tax-exempt Auction Preferred Shares (subject to regulatory review), and $10.3 billion for institutional investors.

Read more

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.