Monthly Archives: January 2014

Misrepresentations of Fund Valuation Charged by SEC to Oppenheimer Fund Manager

RoundIcons-Free-Set-33The Securities and Exchange Commission (“SEC”) began the first month of the year 2014 with a range of new regulatory charges and fines issued against financial individuals and advising firms, including a portfolio manager formerly associated with a private equity firm. Specifically, Oppenheimer & Co. was charged with fraud for its fund valuation in late January. Brian Williamson was first faced with charges in August 2013, and on January 22, 2014, he agreed to settle the matter. This included paying a $100,000 fine, a cease-and-desist order and being banned from the securities industry for two years for “making misrepresentations about the valuation of a fund consisting of other private equity funds.”

The SEC found that Williamson made “misrepresentations” based on overvaluation, adding a “significant markup” to the largest fund of the overall fund’s value designated by that underlying fund’s manager. Other layers of “misrepresentation” further appeared, with Williamson disseminating prospective client marketing material claiming a “misleading internal rate of return” that purposefully did not include the fund’s fees and other expenditures, as well as making “false…statements to investor consultants” regarding the valuation of the fund and other related information in covering up his misdeeds. As such, the SEC determined that Williamson violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 and Section 206(4) of the Investment Advisers Act of 1940. Williamson’s case serves as a prime cautionary example of the many legal ramifications of misleading investors within the financial industry – a lesson certainly hard to swallow in the wake of another Oppenheimer settlement of $2.8 million less than a year ago in March 2013.

For further information on this and other related subjects, please contact us at info@jackolg.com  or (619) 298-2880.

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SEC Issues Further Guidance on Rule 506 of Regulation D

RoundIcons-Free-Set-55Last year, the Securities and Exchange Commission (“SEC”) amended Regulation D of the Securities Act of 1933 (the “Securities Act”), by adding Rules 506(c), 506(d) and 506(e).  As we have described previously, there are several considerations and requirements of Rule 506(d).  In an effort to further clarify these rules, the SEC’s Division of Corporation Finance publishes updates to the Securities Act Rules Compliance and Disclosure Interpretations (“C&DIs”) section of their website titled Questions and Answers of General Applicability.  This resource presents the SEC’s views, general guidance and interpretations of these and other rules adopted under the Securities Act.

On January 3, 2014, the SEC provided new guidance, in a release, that includes interpretation on the following five (5) topics:

  • Determining whether a shareholder that becomes a 20% beneficial owner is considered a covered person at the time of each sale of securities
  • Interpreting the term “beneficial owner” under Rule 506(d)
  • When to “Look through” entities in regards to direct and indirect beneficial ownership
  • Shareholder voting agreements and their effects on 20% beneficial owners
  • Waiving disclosure obligations set forth in Rule 506(e)

For further information on this and other related subjects, please contact us at info@jackolg.com or (619) 298-2880.

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Filed under Investment Advisers, Regulation D

Record-Breaking $2.6 Billion Settlement Highlights Failure of J.P. Morgan to Report Red Flags

flag-icon-128On January 7, 2014, a deferred prosecution agreement was released, describing the settlement between J.P. Morgan Chase & Co. (“J.P. Morgan”) and U.S. prosecutors regarding J.P. Morgan’s compliance failures in its dealings with Bernard Madoff (“Madoff”) and his firm Bernard L. Madoff Investment Securities, LLC.

In 2008, Madoff was charged with securities fraud for a multi-billion dollar Ponzi scheme he used to defraud his advisory clients. J.P. Morgan served as the primary bank handling Madoff’s accounts during that time. J.P. Morgan has been ordered to pay an astounding $2.6 billion in federal fines due to its failure to identify and report suspicious activities in relation to Madoff’s funds.  The firm said in a filing that the bank will pay $1.7 billion to settle the government’s charges, $350 million in a related case by the Office of the Comptroller of the Currency, and $543 million to cover private claims.

The charges surrounding the case involve J.P. Morgan’s violations of the Bank Secrecy Act, which requires banks to have an effective Anti-Money Laundering (“AML”) program in place designed to detect and report suspicious activity. Specifically, J.P. Morgan’s London office detected a “red flag” where it could not validate Madoff’s trading activity or custody of assets. Moreover, J.P. Morgan’s AML software identified at least two red flags that were ignored by bank employees.  Wire transfers of $757 million occurred in one day, which were 27 times the average daily value, but there was no investigation.  J.P. Morgan’s awareness of these suspicious activities, and failure to properly report them to the Financial Crimes Enforcement Network (“FinCEN”) by filing a Suspicious Activity Report (“SAR”), further exasperated the wrongdoing.

This case exemplifies the importance of developing strong AML programs, and more importantly, testing to ensure that such programs are adhered to. Banks, broker-dealers and other financial institutions need to ensure their AML programs are effective through training and continuous review for potential “red flags” of money laundering activities.

For further information on AML Programs, please see JLG’s Legal Tip (Aug. 2013). If you have questions or require information in other areas, please contact us at info@jackolg.com or (619) 298-2880.

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FINRA Provides Important Guidance on IRA Rollovers

This month, the Financial Industry Regulatory Authority (“FINRA”) released a regulatory notice reminding member firms of their responsibilities concerning individual retirement account (“IRA”) rollovers and potential conflicts of interest. A conflict exists when brokerage firms have an economic incentive to rollover retirement assets into an IRA sold by the brokers. Consequently, FINRA is reminding brokers that they must evaluate whether it is in the clients best interest to transfer money from the client’s previous 401(k) Plan into an IRA rather, than having a client leave its money in the company plan. Failure to do so could constitute a violation of Rule 2111, relating to FINRA’s suitability rule. 

The Regulatory Notice also warns member firms to be careful on how they market IRAs.  According to FINRA’s release, “any recommendation to sell, purchase or hold securities must be suitable for the customer and the information that investors receive must be fair, balanced and not misleading.”  [To this end], “the marketing of the IRA rollover services offered by the broker-dealer must be balanced by a discussion of other available options and how they compare to the IRA offered, particularly with regard to fees.”  The release went on to urge FINRA members to educate representatives to understand the tax, fee and investment implications of a rollover so that this important information is analyzed and provided to clients at the point of sale.

FINRA also relayed that this area will be an examination priority for FINRA in 2014. With this is in mind, it is recommended that member firms review their policies, provide training and reminders to its representatives regarding suitability considerations for IRA rollovers and review all marketing materials for fair and balanced representations.

For further information on this, or other related topics, please contact us at info@jackolg.com or (619) 298-2880.

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