Securities Law Blog

FTC Capital Markets Inc. (FTC), a midtown Manhattan based registered broker-dealer, and its Chairman Guillermo Clamens, also based in New York City, were found jointly liable for more than a $20 million judgment awarded to the Securities and Exchange Commission (SEC).

In May 2009, the SEC filed a civil injunction against FTC, Clamens, and FTC employee Lina Lopez for engaging in millions of dollars of unauthorized securities trading through the accounts of two FTC customers. The complaint alleges that the broker-dealer defrauded Citgo Petroleum Corp. and its parent company PDV Holdings Inc. Clamens, with the help of Lopez, purportedly knowingly prepared and sent the customers false account statements that omitted the unauthorized securities trades and falsely listed holdings exclusively in short-term, low risk, liquid investments of the type that the customers authorized FTC to make on its behalf.

The Commission claims that Clamens and Lopez defrauded FTC’s customers in part to conceal their prior fraudulent sale of $50 million in non-existent notes to a Venezuelan bank through an FTC affiliated entity and unregistered broker-dealer Emerging Markets. When the notes held by the Venezuelan bank came due in August 2008, Clamens allegedly misappropriated $50 million from FTC customers to fund the redemption.

The Ponzi-like scheme began to unravel around October 2008 when investors began requesting withdrawals from their accounts and there wasn’t enough cash to fulfill the requests.

Clamens and Lopez have also been charged criminally by federal prosecutors in the U.S. Attorney’s Office in Manhattan. Lopez pleaded guilty in October 2009 to conspiracy and securities fraud and awaits sentencing. Clamens has been ordered to pay $1.7 million in interest and penalties but is reported to remain at large.

The State of New Jersey agreed to settle claims of securities fraud filed by the Securities and Exchange Commission (SEC). In the first ever SEC order against a state for violations of the federal securities laws, New Jersey was charged with misrepresenting and failing to disclose to investors in municipal bond offerings that it was underfunding the state’s two largest pension plans.

The SEC alleges that the state misled investors to believe it was adequately funding the $34 billion Teachers’ Pension and Annuity Fund (TPAF) and the $28 billion Public Employees’ Retirement System (PERS). From August 2001 through August 2007, New Jersey allegedly sold more than $26 billion worth of municipal bonds in 79 offerings that helped mask the truth about New Jersey’s pension contributions.

The SEC’s order found that New Jersey made material misrepresentations and omissions about the underfunding of TPAF and PERS in preliminary official statements, official statements, and continuing disclosures. New Jersey allegedly misrepresented or omitted information regarding legislation adopted in 2001 that impacted the benefits employees and retirees enrolled in TPAF and PERS, as well as the state’s use of Benefit Enhancement Funds as part of a five year plan to begin making contributions to the pension funds.

According to the SEC findings, New Jersey was aware of the underfunding and its potential effects. The state allegedly had no written policies about the review of bond offering documents, nor did it provide training to its employees about the state’s disclosure obligations.

New Jersey has neither admitted nor denied the SEC’s findings, and is required to cease and desist from committing any violations or future violations.

In 2008 the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA) and North American Securities Administrators Associate (NASAA) published a joint report to highlight proactive steps that some financial firms have adopted to better serve senior investors as they approach retirement.

On August 13, 2010 the SEC, FINRA and NASAA issued an addendum to that report summarizing additional compliance, supervisory and other practices being used by securities professionals.

The 2010 Addendum focuses on communicating effectively with senior investors; training and educating firm employees on senior-specific issues; establishing an internal process for escalating issues and taking next steps; obtaining information at account opening; ensuring appropriateness of investments; conducting senior-focused supervision, surveillance and compliance reviews.

“Securities regulators continue to bring solid enforcement cases to protect our seniors from investment fraud and abuse,” said NASAA President Denise Voigt Crawford. “Strong regulation coupled with effective industry compliance, supervision and innovative senior-specific practices are essential toward ensuring that our growing population of senior investors is being treated fairly and responsibly by the financial services industry.”

According to the SEC, as a result of the economic downturn, older investors are dealing with smaller nest eggs. The industry regulator estimated that total retirement assets decreased by $4.5 trillion from 2007 to the first quarter of 2009.