Securities Law Blog

The Securities Investor Protection Corp. (SIPC) discovered Monday March 8, 2010 that a web site called i-sipc.com was mimicking the SIPC web site, sipc.org. Using the name International Securities Investor Protection Corp., “I-SIPC”, the site modeled itself after the SIPC site. It copied both the structural design and artwork in an alleged attempt to obtain sensitive information or money from victims of the Bernard Madoff Ponzi scheme.

The real SIPC works to restore funds to investors with assets in the hands of bankrupt and otherwise financially troubled brokerage firms. The SIPC will act as trustee or an independent court-appointed trustee in a brokerage solvency case to recover funds. Since the collapse of the Madoff scam, the SIPC has been providing funds up to $500,000 to certain investors who lost money. In order to utilize the organizations services, the victims provide their financial and other personal information.

The fake copycat group claims to be based in Geneva, as well as having ties to the United Nations and the International Monetary Fund. The site published images of stacks of U.S currency totaling $1.3 billion which was claimed to have been recovered in Malaysia in collaboration with Interpol. In an attempt to further legitimize its claims, the site posted alleged statements from Madoff victims who reported receiving funds from I-SPIC. The quotes were later found to have been lifted from a New York Times article and taken out of context.

“Investors who lose money in widely publicized schemes are often targeted by con artists looking to cash in on the victim’s desire to recover losses,” said Lori Schock, Director of the SEC’s Office of Investor Education Advocacy. “Victims of fraudulent schemes should be aware that such refund schemes commonly exist, and can be perpetrated through copycat web sites that appear similar to those of actual regulators or other organizations.”

According to SIPC President, Stephen Harbeck, SIPC learned of the phony site when an individual contacted the organization asking about the legitimacy of the I-SPIC. The individual had contacted I-SPIC via email, and received a response directing him to send $1,000 to an offshore account. Since the reported incident, the phony site has been disabled.

The appellate body of the Financial Industry Regulation Authority (FINRA) issued a ruling dismissing the charges against two senior personnel of Knight Securities, Kenneth Pasternak and John Leighton. The National Adjudicatory Council (NAC) reversed an earlier FINRA Hearing Panel decision that found the former CEO and the head of the firm’s Institutional Sales Desk, responsible for supervisory failures.

The original charges filed against Mr. Pasternak and Mr. Leighton stemmed from a March 2005 charging memorandum which alleged that “Pasternak and Leighton did not take reasonable steps to ensure that Knight Securities’ leading institutional sales trader adhered to ‘industry standards’ when executing orders for institutional customers.”

The NAC determined that FINRA failed to satisfy its burden of proof in relation to the 2005 allegations. According to the NAC, the evidence presented by FINRA did not support the claim that Mr. Pasternak and Mr. Leighton failed provide reasonable supervision, nor did it support allegations that Mr. Pasternak did not respond appropriately to “red flags” in relation to the sales trader’s execution of institutional customer orders.

The $100,000 fines, and other sanctions imposed on the two men were vacated by the NAC’s ruling.

The founders and co-owners of the Miami-based real estate development company Royal West Properties, Inc. have been charged with fraud for conducting a $135 million Ponzi scheme. The Securities and Exchange Commission (SEC) alleges that Gaston E. Cantens and his wife allegedly sold promissory notes to investors after acquiring various properties and later financing their sale.

According to the civil complaint filed by the SEC, the Cantens targeted members of the Cuban-American community. Well-known within the close-knit community, the couple gained the trust of mostly elderly investors whom they met at charitable and religious gatherings, and at events hosted at their Miami home. Mr. Cantens also allegedly used his connections as an alumnus and board member at the Belén Prep School to recruit investors. Outside of their immediate community, investors were attracted by televised commercials broadcast on Spanish-language channels nationwide.

Despite the Cantens not being registered with the SEC under the federal securities laws to make securities offerings to investors, reportedly no questions were asked of the couple that a community regarded as old friends.

In a statement given by Director of the SEC’s Miami Regional Office, Eric I. Bustillo commented on the couples’ recruiting tactics, saying that “They portrayed themselves as a pious couple closely involved with educational and religious organizations, while in reality they were living lavishly off money from defrauded investors.”

Along with allegedly using investor money to repay earlier investors, the SEC also contends that the Cantens misappropriated more than $20 million to fund personal business ventures, pay themselves high salaries, and allocated an estimated $1 million to their children and grandchildren citing “consulting fees”.

The Cantens allegedly made promises to investors of high annual returns of 9 to 16 percent. Investors were told the money would come from mortgages on land in southwest Florida sold by Royal West. The SEC claims that the Cantens made “numerous material misrepresentations and omissions about the safety and security of investors’ principal and returns, the success of Royal West’s business, the source of purported investment returns, and the use of investor funds.” The South Florida couple is charged with violating the securities registration and antifraud provisions of the federal securities laws. The SEC is seeking permanent injunctions, sworn accountings, disgorgement of ill-gotten gains and financial penalties against the Cantens.

The company that was started in 1982 allegedly began showing operating losses by 2002 when property owners began defaulting on their mortgages, but continued to promote their business as financially sound in order to attract new investors. The couple allegedly began using new investor funds to make principal and interest payments to earlier investors. When Royal West went bankrupt last year and ceased making interest payments, rumors began about the mismanagement of the real estate development company.

Following the charges issued March 3, 2010, the couple released a statement denying the SEC’s claims. Instead they cited the collapse of the real estate market as the cause of their company’s financial problems.

A 2007 lawsuit filed against the Financial Industry Regulation Authority (FINRA) was dismissed on March 1, 2010. The suit stemmed from a complaint that National Association of Securities Dealers (NASD) members were misled during the 2007 merger of the NASD and the regulatory arm of NYSE. The plaintiffs, Standard Investment Chartered Inc. and Benchmark Financial Services Inc., each filed class-action lawsuits in 2007 and 2008 respectively.

Judge Jed S. Rakoff, of the U.S. District Court for the Southern District of New York, held that the NASD, now known as FINRA, has immunity from “private damage suits challenging official conduct performed within the scope of their regulatory functions.”

The lawyers for the plaintiffs argued that their claim was unrelated to the organization’s regulatory function. Instead it was based on allegedly misleading statements made by the NASD and its executives regarding their finances.

The disputed issue was the adequacy of the $35,000 payout received by NASD member firms at the completion of the merger. The intent of the payout was to compensate members in exchange for giving up significant voting rights under the new FINRA corporate structure. Both plaintiffs said the NASD allegedly misled its members by telling brokerages that due to Internal Revenue Service (IRS) rules governing non-profits, the $35,000 payout was the maximum it could dish out to each member firm.

According to Jonathan Cuneo, lawyer for Benchmark Financial and Standard Investment, a March 2007 IRS letter to FINRA gave a very different range of permissible payouts. Allegedly the letter showed that the NASD could have paid brokerages between $70,000 to $111,000 each. However, the letter was sealed in 2007 by another U.S. District Judge, the late Shirley Whol Kram, with the dollar amounts of the possible payments redacted. Judge Kram’s reasoning was that disclosure of the IRS payment range would harm the NASD’s competitive advantage.