Securities Law Blog

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.

Expert consulting firm, Broadband Research Corporation, and its owner, John Kinnucan, have been charged by the SEC for allegedly providing clients with material nonpublic information. Kinnucan and his Portland, Oregon-based consulting firm claimed to be in the business of providing clients with legitimate research about publicly traded technology companies.

According to the SEC’s complaint filed in federal court in Manhattan, Kinnucan and Broadband received significant consulting fees for providing information obtained from prohibited sources inside publicly-traded technology companies to portfolio managers and analysts at prominent hedge funds. Kinnucan reportedly compensated his sources with cash, meals, ski trips and other vacations. The SEC’s complaint alleged that Kinnucan’s misconduct occurred from at least 2009 to 2010, during which he generated hundreds of thousands of dollars in annual revenues for Broadband.

In July 2010, Kinnucan reportedly obtained insider information from a source at F5 Networks Inc. According to the complaint, within hours of learning the confidential details, Kinnucan had phone conversations with several clients to convey that F5’s revenues would exceed market expectations. Subsequently, three clients placed trades at their respective investment advisory firms based on the information they allegedly received from Kinnucan and reaped profits (or avoided losses) of nearly $1.6 million.

The SEC is seeking a final judgment ordering Kinnucan and Broadband to disgorge their ill-gotten gains plus prejudgment interest, requiring them to pay financial penalties, and permanently enjoining them from future violations.

In a parallel criminal case, Kinnucan has been arrested and charged with one count of securities fraud and one count of wire fraud.

Two brothers have been charged by the SEC with naked short selling for failing to locate and deliver shares involved in short sales to broker-dealers. The SEC alleges that Jeffrey Wolfson engaged in naked short sales while working as a broker-dealer himself and later as the principal trader at a Chicago-based broker-dealer that is no longer in business. Robert Wolfson allegedly used the technique he learned from his brother to conduct illegal naked short sales while trading through an account at New York-based broker-dealer Golden Anchor Trading II, LLC, now known as Barabino Trading, LLC.

The brothers reportedly used two types of transactions in order to promote their scheme. According to the SEC’s order, from July 2006 to July 2007, the Wolfsons used a reverse conversion to sell stock short and simultaneously sell a put option and buy a call option on the stock. The second type of transaction allegedly used by the brothers was a stock and option combination that created the illusion that the party subject to a close-out obligation had satisfied that obligation by buying the same kind and quantity of securities it had sold short. In regard to this transaction, the SEC claims that the stock was always sold either the next day or within several days, and that the Wolfsons had reason to know that the purchased shares in these sham transactions would never be delivered because they were purchased from another naked short seller who did not own the stock either.

In a recorded telephone conversation Jeffrey Wolfson stated, “What I sell them is not guaranteed, it never gets delivered, it’s funny paper,” according to the SEC’s order.

The SEC’s order instituting administrative proceedings against Jeffrey and Robert Wolfson claims that the brothers generated more than $17 million in ill-gotten gains from naked short selling transactions involving such stocks as Chipotle Mexican Grill Inc., Fairfax Financial Holding, Ltd., Novastar Financial Inc., and NYSE Group.

Over the course of 14 months and on 150 occasions, a Latvian trader broke into online brokerage accounts of customers at large U.S. broker-dealers and drove stock prices up or down by making unauthorized purchases or sales in the hijacked accounts. Igors Nagaicevs reportedly used the direct, anonymous market access provided to him by various unregistered firms to trade those same securities at artificial prices and reaped more than $850,000 in illegal profits.

According to the SEC’s complaint filed in federal court in San Francisco, Nagaicevs manipulated the prices of more than 100 NYSE and Nasdaq securities and caused more than $2 million in harm to customers of U.S. brokerage firms. The SEC alleges that Nagaicevs violated the antifraud provisions of the federal securities laws and seeks injunctive relief, disgorgement with prejudgment interest, and financial penalties.

The SEC also instituted administrative proceedings against the four electronic trading firms that allowed Nagaicevs to trade through their electronic platforms without first registering. The SEC alleged that the firms gave Nagaicevs a gateway to the U.S. securities markets while circumventing the protections of the federal securities laws, including requirements for brokers to maintain and follow adequate procedures to gather information about customers and their trading. The four firms include: Alchemy Ventures, Inc of San Mateo, California; KM Capital Management, LLC of Philadelphia; Zanshin Enterprises, LLC of Boise, Idaho; and Mercury Capital of La Jolla, California.