Monthly Archives: April 2014

False (Video) Promises: YouTube Videos at the Center of FL-Based Ponzi Scheme

Director's-BoardAn important and pervasive online tool has been used to lure investors to a new Ponzi scheme, according to the Securities and Exchange Commission (“SEC”). In a press release dated April 8, 2014, the SEC alleges that Joseph Signore of JCS Enterprises, Inc. and Paul L. Schumack II of T.B.T.I., Inc. colluded to use YouTube videos as promotional devices for selling investments in their proposed high-return product virtual concierge machines (“VCM”s). These VCMs, the videos purported, would be “ATM-like machines that businesses could use to advertise products and services via touch screen and printable tickets or coupons,” and would be accessible at hotels, airports and stadiums, with revenue supposedly generated through businesses advertising in the VCMs. Promising a “300 to 500 percent return within 4 years,” investor’s funds in upwards of $40 million (from 2011 to 2014) were instead used to pay returns to earlier investors and, according to the SEC, these investors “aren’t enjoying the riches touted on YouTube” from the VCMs.

The VCM YouTube video, in fact, aided heavily in perpetuating the “prosperous business” illusion of VCM ownership. Displaying “investors” polishing Cadillac’s and showing friends a new pool (see video here), the Virtual Concierge was touted as a promising return generator that could be placed in key advertising areas and monitored by password by their investors once placed. In reality, however, these machines were “not placed anywhere near the rate of those purchased by investors,” and their activity could therefore also not be monitored, or the machines located. The Ponzi scheme behind the false business model – which diverted funds in the millions to Signore and Schumack – was exposed when new investor funds “dried up”. The SEC and U.S. Attorney’s Office for the Southern District of Florida are pursuing charges, with the SEC seeking disgorgement of ill-gotten gains, prejudgment interest, a temporary restraining order and a temporary asset freeze, among other financial charges. Investors should always be aware: if the opportunity sounds too good to be true, it probably is.

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

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Manipulative Trading: Inside the Practice of “Layering”

The securities industry became privy once again to a form of manipulative trading – termed “layering” or “spoofing” – through the Securities and Exchange Commission’s (“SEC’s”) recent charges against the Holmdel, N.J.-based firm Visionary Trading, LLC (“Visionary”). According to the SEC’s April 4, 2014 press release, Visionary Trading, its owner, Joseph Dondero, and other owners not only participated in manipulative “layering” trading, but also perpetuated registration violations, including operating an unregistered brokerage firm, and policies and procedures issues that failed to “prevent and detect the improper sharing of commissions between its registered representatives.” We will briefly focus in on the “layering” charges of this case in this blog post.

“Layering” is a process in which a trader places orders with no intention of having them executed, but rather to trick others into buying or selling a stock at an artificial price, with that price,  in turn, being driven by the orders that the trader later cancels. In the case of Visionary, Dondero and others in the company used layering to “induce other market participants to trade in a particular stock.”  Visionary, then, created greater order book depth and national market best-bid fluctuations through “false signals” which mimicked “true demand for the stock” in the placing and then canceling of the stock orders. The end result was Dondero and three other owners lining their pockets with phony orders placed at distorted prices at the entry of trades, a charge which the SEC states “did not allow him to evade detection.” This case serves as a warning for firms to carefully review trading practices to help prevent against manipulative trading and the act of layering. It is prudent to check instant messaging and other forms of communications and to periodically conduct forensic testing for fraudulent activities.

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

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Broker-Dealer Registration

Last April in a speech to the American Bar Association, the Securities and Exchange Commission’s (“SEC”) Chief Counsel of the Division of Trading and Markets, David Blass, sent shock waves throughout the investment advisory community when he suggested that employees who market an investment adviser’s private fund may need to be registered representatives of a licensed securities broker-dealer, with the investment adviser being the registered broker-dealer. Even though the Chief Counsel retreated somewhat from this controversial position and the SEC has not published any official clarifying guidance or rulemaking on the matter, the SEC Staff remains focused on broker-dealer issues.  Accordingly, it is important for investment advisers to private funds to take note of this focus and maintain awareness of the rules governing their marketing activities.

Click below to read more.

JLG Legal Risk Management Tip – Broker-Dealer Registration – 04.2014

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SEC Charges Florida Firm with Perpetuating False Fee Discounts and Policy and Procedures Failures

RoundIcons-Free-Set-11A St. Petersburg, Florida-based financial services firm was recently charged with inappropriately-calculated fee discounts and inadequate policies and procedures (“P&P”). Charges were filed against Transamerica Financial Advisors (“Transamerica”) by the Securities and Exchange Commission (“SEC”) at the beginning of April 2014. The SEC found, through examinations and a later investigation based on the examination result, that Transamerica falsely offered advisory fee discounts to their clients “when they increased their assets in certain investment programs,” for which they would become eligible for discounts by “aggregat[ing] the values of related accounts.” The aggregation requests for discounted fees were not applied in all client accounts, causing certain “retail investors to overpay for advisory services in thousands of client accounts.”

In addition to the falsely-applied fee discounts, the SEC found inadequacy in Transamerica’s policy and procedures and weaknesses in the firm’s internal controls. The firm-wide “conflicting policies” about providing discounted fees with aggregation requests contributed greatly to the fee charge discrepancies. Although a 2010 SEC investigation of a Transamerica branch office found aggregation issues, the firm failed to evaluate and unify the policies and procedures of its remaining branch offices, which lead to additional aggregation problems at Transamerica’s headquarters in 2012.

It is imperative for firms to evaluate the adequacy and consistency of applying policies and procedures to actual business practices.

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

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DOL Proposes Amendment to Section 408(b)(2) of ERISA for Plan Fiduciaries Guide Requirement

The Department of Labor (“DOL”) released a fact sheet in March 2014 detailing a proposed amendment to Section 408(b)(2) of the Employee Retirement Income Security Act of 1974 (“ERISA”) that would, if passed and enacted, require a guide for plan fiduciaries to follow when disclosures are provided, particularly “if the disclosures are contained in multiple or lengthy documents.” In current regulation, pension plan service providers must provide disclosure documents to plan fiduciaries “before entering into, extending or renewing contracts or arrangements for services,” but these documents can be “complex” and difficult to navigate, making compensation information related to service providers harder to find.

Key to this new amendment, which was published on the Federal Register on March 12, 2014 and open for public comment, is the inclusion of a “specific locator” which includes “the identity of the document and where the information is located within the document,” with references to page and section numbers. More pointedly, the plan service providers must identify where certain important information of a plan can be found in disclosure documents, including:

  • the description of services to be provided;
  • the statement of services to be provided as a fiduciary and/or as a registered investment adviser (“RIA”);
  • the description of:
    • all direct and indirect compensation
    • any compensation that will be paid among related parties
    • compensation for termination of the contract or arrangement, and
    • compensation for recordkeeping services; and
  • the required investment disclosures for fiduciary services and recordkeeping and brokerage services, including annual operating expenses and ongoing expenses, or if applicable, total annual operating expenses.

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

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