Thursday, August 27, 2015

Investor Alert: Market Risk: What You Don't Know Can Hurt You

FINRA has reissued an investor alert regarding market risk, to remind investors that  investing involves risks as well as rewards and that, generally speaking, the higher the risk, the greater the potential reward.

FINRA believes that "[w]hile it is important to consider the risks in the context of a specific investment or asset class, it is equally critical that investors consider market risk."

Common market risks include Interest Rate Risk, Inflation Risk, Currency Risk, Liquidity Risk, Sociopolitical Risk, Country Risk and Legal Remedies Risk.

Each of these market risks are discussed in the alert, as well as suggestions for managing these risks.

'Market Risk: What You Don't Know Can Hurt You |

Wednesday, August 26, 2015

Small Percentage of Brokers Fined is a Bad Thing?

It is truly a bizarre world that we live in. Anyone involved in the financial services industry knows that  the overwhelming majority, in fact almost all of the registered representatives in this country, are honest, hard working professionals.

Everyone also knows that not all  of the 630,000 individuals holding a Series 7 license actually deal with retail investors - or investors in general. In FINRA's grab for regulatory turf there are a host of brokerage firm employees  who are required to have the license who do not deal with investors, or trading, at all.

Then why, in a year where FINRA enforcement proceedings are up, and fines are up, are critics complaining that the increase in fines and proceedings are not enough, since "[o]nly a small fraction of the 629, 980 registered securities representatives that FINRA oversees—not to mention the almost 4,300 brokerage firms under the regulator’s supervision—were served with enforcement actions."

How about the fact that financial professionals are honest and hard working. Why isn't it a good thing that less than 1% of all Series 7 licensees have been the subject of a FINRA enforcement action in a year? FINRA certainly isn't slacking off on its enforcement proceedings, and it has become a huge fan of conducting overlapping annual exams at smaller firms.

Do we really want to encourage regulators to 'bring their number up"? To simply bring charges against brokers and firms simply to make the numbers look "better" or to increase their revenue?

That is not the purpose of our regulatory structure, nor should it be the goal of enforcement proceedings.

.A "Tougher" FINRA? | Industry content from

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Tuesday, August 25, 2015

More Filings and Regulations on the Way for Investment Advisers and Investment Companies

 The SEC is proposing to increase the reporting and disclosure requirements for Registered Investment Advisers and Investment companies.

The investment company proposals would increase data reporting for mutual funds, ETFs and other registered investment companies.  The proposals would require a new monthly portfolio reporting form and a new annual reporting form that would require census-type information.  The information would be reported in a structured data format, which would allow the Commission and, in theory, the public, to better analyze the information.  The proposals would also require enhanced and standardized disclosures in financial statements, and would permit mutual funds and other investment companies to provide shareholder reports by making them accessible on a website.

The proposed amendments to the investment adviser registration and reporting form (Form ADV) would require investment advisers to provide additional information for the Commission and investors to better understand the risk profile of individual advisers and the industry. The proposed amendments to Investment Advisers Act Rule 204-2 would require advisers to maintain records of performance calculations and communications related to performance.

 The proposals will be published on the Commission’s website and in the Federal Register.  The comment period for the proposed rules will be 60 days after publication in the Federal Register.

The press release detailing the proposal, with links to the comment section is available at the SEC web site: SEC Proposes Rules to Modernize and Enhance Information Reported by Investment Companies and Investment Advisers

Related Articles

Regulation and Registration of Investment Advisers

Introduction to the Federal Securities Laws

Tuesday, August 18, 2015

Texas Attorney General Ken Paxton, indicted for felony securities fraud, booked in Dallas

English: Seal of Texas General Attorney
Texas Attorney General Ken Paxton has been booked at a Dallas-area jail on felony charges alleging that he misled investors before becoming the state's top lawyer, Paxton was charged with two counts of first-degree securities fraud and a lesser count of failing to register with state securities regulators.

Texas Attorney General Ken Paxton, indicted for felony securities fraud, booked in Dallas 

'via Blog this'

Friday, August 14, 2015

Be Prepared - Clients Now Asking About Compliance Procedures

Everyone involved in the securities business knows that there has been a significant increase in compliance issues over recent years. I have seen  the increase in compliance requests made to our firm - to redraft procedures, review surveillance reports and processes and to conduct mock audits before FINRA and the SEC conduct their exams.

I still found it interesting that a recent survey conducted by the Wall Street Journal fournd that a significant number of securities professionals reported that prospective clients asked to review their firm's compliance policies or to interview compliance personnel.

The survey also found 63% of respondents saying they have a compliance committee at their firm, up from 48% in 2014—while 88% said they have conducted a compliance review in the last year, up from 67% in the prior year’s survey. Despite heightened awareness of compliance, only 53% said their firms were spending up to 5% of their total revenue on compliance. A summary of the survey's findings are available at the WSJ site. Thanks to Kevin Rosenberg for alerting us to the survey.

Thursday, August 13, 2015

Another Successful Whistleblower Claim - $3 Million to Whistleblower

The SEC has paid another whistleblower, this time more than $3 million. The payment was made to a company insider whose information helped the SEC crack a complex fraud.

According to the SEC, the whistleblower’s specific and detailed information comprehensively laid out the fraudulent scheme which otherwise would have been very difficult for investigators to detect. The whistleblower’s initial tip also led to related actions that increased the whistleblower’s award.
“Insiders may hold the key to helping our investigators unlock intricate fraudulent schemes,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement.  “By providing significant financial incentives for people to come forward, the SEC’s whistleblower program continues to be profoundly effective in helping us protect investors and hold wrongdoers accountable.”
Whistleblowers who provide the SEC with unique and useful information that contributes to a successful enforcement action are eligible for awards that can range from 10 percent to 30 percent of the money collected when financial sanctions exceed $1 million.  By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.

Our firm represents whistleblowers and potential whistleblowers, guiding them through the process, to help insure that they are properly classified and paid, and their identities protected. Call our office at 212-509-6544 for a free consultation if you believe you may have a whistleblower claim.

Since its inception in 2011, the SEC’s whistleblower program has paid more than $50 million to 18 whistleblowers, including a more than $30 million award in 2014 and a more than $14 million award in 2013.

Buying Car Insurance for Teenagers Can Be a Balancing Act

While keeping a teenage driver on a family policy can increase premiums significantly, there are ways to reduce the cost.

Wednesday, August 12, 2015

SEC Charges Former Software Executive With FCPA Violations

The Securities and Exchange Commission today announced that a former executive at a worldwide software manufacturer has agreed to settle charges that he violated the Foreign Corrupt Practices Act (FCPA) by bribing Panamanian government officials through an intermediary to procure software license sales.

An SEC investigation found that Vicente E. Garcia, the former vice president of global and strategic accounts for SAP SE, orchestrated a scheme to pay $145,000 in bribes to one government official and promised to pay two others in order to obtain four contracts to sell SAP software to the Panamanian government.  He essentially caused SAP, which is headquartered in Germany and executes most of its sales through a network of worldwide corporate partners, to sell software to a partner in Panama at discounts of up to 82 percent.  The excessive discounts enabled the partner to create a slush fund from its excessive earnings on the other end of the sales and tap that money to pay the bribes to Panamanian government officials so SAP could sell the software.  Garcia, who lives in Miami, also received kickbacks from the slush fund into his bank account.

In a parallel action, the U.S. Department of Justice today announced a criminal action against Garcia.

“Garcia attempted to avoid detection by arranging large, illegitimate discounts to a corporate partner in order to generate a cash pot to bribe government officials and win business for SAP,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit.

According to the SEC’s order instituting a settled administrative proceeding:

  • The scheme lasted from 2009 to 2013.
  • Garcia circumvented SAP’s internal controls by submitting various approval forms to SAP that falsified the reasons for the excessive discounts to the local partner.
  • Garcia used his SAP e-mail account and his personal e-mail account to communicate details of the bribery scheme and even identify the government officials and intended monetary amounts. 
  • In an e-mail to one government official, Garcia attached a letter on SAP letterhead detailing fictional meetings in Mexico as requested by the official in order to justify a trip there on false pretenses.  The next day, Garcia sent a subsequent e-mail asking, “Any news …?  Was the document OK for him?  Can you ask him to finalize a deal for us in Feb-March, I need between $5 and $10 million.”

The SEC’s order finds that Garcia violated the anti-bribery and internal controls provisions of the Securities Exchange Act of 1934.  Garcia consented to the entry of the cease-and-desist order and agreed to pay disgorgement of $85,965, which is the total amount of kickbacks he received, plus prejudgment interest of $6,430 for a total of $92,395.

The SEC’s continuing investigation is being conducted by Ansu Banerjee and supervised by Alka Patel.  The SEC appreciates the assistance of the U.S. Department of Justice, U.S. Attorney’s Office for the Northern District of California, and Federal Bureau of Investigation.

from Press Releases
via SEC Press Releases

Court Stops SEC From Pursuing Hearing Before its Own ALJ

We have been beating this drum for a while now. The SEC's abuse of its administrative law procedures has become legend, and a success rate of 90-100% demonstrates the unfairness of the process. After all, it is going to be tough to lose a trial if you get to write the complaint, pay the prosecutor, try it before a judge that you appointed and pay, and then you get to decide the appeal. Hardly the model of fairness.

There are other technical objections to the process, including the fact that the SEC's appointment process for these judges is unconstitutional.  In June we reported on a federal court decision which found that the process was "likely unconstitional." Now a second federal judge had ruled that the SEC's method for appointing in-house judges was probably illegal and today entered a preliminary injunction against the SEC, preventing it from moving forward with the administrative proceeding.

The original decision by U.S. District Judge Richard Berman in Manhattan rejected the agency’s method of selecting administrative law judges to whom it directs hundreds of cases a year.  In the decision on August 3, 2015 the court reserved judgment on the request for an injunction for 7 days to allow the SEC time to decide if it was going to cure the violation of the constitution.

The SEC then advised the court that there is another case before the Commission, where the SEC is considering whether its process is unconstitutional, but that no decision has been made. The SEC Staff then took the curious position that it was going to move forward with the case, despite the court's decision, since the Commission itself had not made a decision.

In response, today the court entered a preliminary injunction preventing the SEC from pursuing the case. The preliminary injunction decision is also available at our site.

While this is only addresses one of many problems with the mis-use of the ALJs, it is one that the Commission can probably fix with relative ease - either reappoint their ALJs in accordance with the constitution, or hold the trials themselves.

My guess? They do neither and continue to abuse the process while they pursue appeals.

The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions. We represent investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email to

Related Documents and Commentary:

Duka v SEC Decision and Order Re Preliminary Injunction

Duka vs. SEC Preliminary Injunction

Court Rules SEC In-House Judges "Likely Unconstitutional"

SEC Sued For Unconstitutional Use of Its Own Judges

SEC's Use of Administrative Hearings Under Fire

Former SEC ALJ Claims Bias in Administrative Proceedings

Judge Rakoff Questions the SEC's Overuse of Administrative Proceeding

How the SEC Avoids Judicial Oversight and the Constitution

Massive Insider Trading Scheme Uncovered - Lots of Blame to Share.

A massive insider trading scheme has allegedly been uncovered by the SEC and the DOJ, according to the SEC, involving computer hacking, foreign investors, tens of millions of dollars, and years of trading activity.

Yesterday the Commission announced the filing of charges against 32 defendants, alleging that they hacked their way into computers and traded on stolen nonpublic information regarding corporate earnings announcements from the wire services who were holding earnings releases for the public companies. The press release is online at and the complaint is at the commission’s web site at

I have been involved in cases involving allegations of computer fraud, and trading on undisclosed earnings announcements in the past in the URL Guessing cases,  but that was more of a misunderstanding on the part of the SEC Staff and the sloppiness of the issuers, than an organized hack. This case, at least according to the SEC, involves 5 years of advanced computer techniques to hack into two or more (un-named)  newswire services and stealing hundreds of corporate earnings announcements before they were released.

Some investors expressed surprise that the hacking of a wire service could be profitable. After all, there is a very small window of time to get the information and trade on it when you are dealing with earnings reports. One would assume that the earnings reports are delivered to the wire services minutes or an hour before its release.

You would also think that issuers would have learned from the URL Guessing cases. But apparently they have not. According to the SEC’s complaint, some of these issuers were uploading their releases days before the announcement, giving the hackers plenty of time to hack and trade.

For example, according to the complaint, while Zumiez uploaded its press release to the wire service at 1:29 pm for a 4:00 pm release, Acme Packet uploaded its press release at 5:53 pm, for release the next day at 4:05 pm, leaving the press release on a third party server for nearly 24 hours.

According to the complaint, the hacking went on for 5 years, and during that time (2010 until 2014), the hacker defendants hacked into the newswires'  computer systems and stole over 100,000 press releases before they were publicly issued.

And the hacking was apparently profitable. The SEC is alleging that the Defendants made over 100 million dollars in profits. However, keep in mind that the SEC does not concern itself with the losses. Not every trade pans out, and not every trade is profitable. The SEC however is only concerned with profits, and does not count losses.

One has to wonder what these wire services were doing all of these years, and why the hacking was not noticed.

One also has to wonder why the SEC, FINRA, and the exchanges did not notice the irregularities. Granted, we can assume that some of the press releases did not hold valuable information and there were no trades made, but according to the complaint the hackers were downloading press releases for years from the same two wire services.

While the defendants allegedly made significant sums of money, and, according to the SEC, hacked into computers to do so, one has to wonder where the responsibility of the wire services and the issuers lies in all of this.

First, the wire services had their computers hacked for years without noticing the hacks and allowing them to occur with over 100,000 press releases. While the SEC did not identify the wire services, they should have some liability to the shareholders of the issuers involved.

And the issuers – who surely share some of the blame, include Walter Energy, Caterpillar, Inc., Treehouse Foods, RadioShack, Brocade, Panera Bread, and others. Where were they during all of this – uploading their press releases, containing what is apparently very valuable information, days or hours in advance to unsecured third party vendors? Surely that is negligence and a breach of a duty to protect corporate information.

And lastly, the SEC. While they are now issuing press releases about what a great job they did in uncovering this alleged scheme, one has to wonder what the heck took them so long. These defendants are allegedly stealing over 100,000 press releases, for years, and generating millions of dollars in profits and the SEC never catches on until 4 years go by?

Spike in FINRA, SEC Regulation Leaves Star Brokers Exposed

We represent big producers and teams across the country, and have done so for years. While this article presents an unfair characterization of big producers, it makes a good point. FINRA and the SEC are cracking down and firms are looking to maximize profits (which sometimes means getting rid of brokers). None of that is good for brokers, and the  top teams are not immune from the problems.

Brokers need to protect themselves; unfortunately from their own firms as well as overzealous regulators.

Spike in FINRA, SEC regulation leaves star brokers exposed

Mark Astarita represents financial advisers across the country in their regulatory, transition and employment matters. Got a question? Give him a call at 212-509-6544.

SEC Charges ITG With Operating Secret Trading Desk and Misusing Dark Pool Subscriber Trading Information

The Securities and Exchange Commission today announced that ITG Inc. and its affiliate AlterNet Securities have agreed to pay $20.3 million to settle charges that they operated a secret trading desk and misused the confidential trading information of dark pool subscribers.

An SEC investigation found that despite telling the public that it was an “agency-only” broker whose interests don’t conflict with its customers, ITG operated an undisclosed proprietary trading desk known as “Project Omega” for more than a year.  While ITG claimed to protect the confidentiality of its dark pool subscribers’ trading information, during an eight-month period Project Omega accessed live feeds of order and execution information of its subscribers and used it to implement high-frequency algorithmic trading strategies, including one in which it traded against subscribers in ITG’s dark pool called POSIT.

ITG agreed to admit wrongdoing and pay disgorgement of $2,081,034 (the total proprietary revenues generated by Project Omega) plus prejudgment interest of $256,532 and a penalty of $18 million that is the SEC’s largest to date against an alternative trading system.

“ITG created a secret trading desk and misused highly confidential customer order and trading information for its own benefit,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “In doing so, ITG abused the trust of its customers and engaged in conduct justifying the significant sanctions imposed in this case.”
According to the SEC’s order instituting a settled administrative proceeding:
  • Project Omega traded a total of approximately 1.3 billion shares, including approximately 262 million shares with unsuspecting subscribers in ITG’s own dark pool.
  • Project Omega employed an algorithmic trading strategy called the “Facilitation Strategy” in which it executed trades based on a live feed of information concerning orders that its sell-side subscribers sent to ITG’s algorithms for handling. 
  • Project Omega accessed the feed by connecting to a software utility that was used by ITG’s sales and support teams.  As a result, Project Omega had a real-time view of subscriber orders being placed through ITG’s algorithms.
  • From April to December 2010, the Facilitation Strategy was designed to detect open orders of sell-side subscribers being handled by ITG.  Based on that information, Project Omega opened positions in displayed markets on the same side of the market as the detected orders, and then closed these positions in POSIT by trading against the detected orders.  By employing this strategy, Project Omega sought to capture the full “bid-ask spread” between the National Best Bid and Offer (NBBO).
  • Project Omega had access to the identities of POSIT subscribers and used this information to identify sell-side subscribers and trade with them in the dark pool in connection with the Facilitation Strategy.
  • To earn the full “bid-ask spread” in connection with the Facilitation Strategy, Project Omega needed the subscribers with which it traded in POSIT to be configured to trade “aggressively” so that the subscribers would “cross the spread” to trade with Project Omega.  Project Omega took steps to ensure that the sell-side subscribers were configured to trade aggressively in POSIT. 
  • Project Omega’s other primary strategy called the “Heatmap Strategy” involved trading on markets other than POSIT based on a live feed of confidential information relating to customer executions in other dark pools.  Based on customer executions, Project Omega’s Heatmap algorithm was designed to open positions in specific securities in displayed markets at the bid or the offer and then close them at midpoint or better in the external dark pools where customers had received midpoint executions.  The goal of this strategy was to earn a “half spread” or better based on knowledge of ITG customers’ executions.
The SEC’s order finds that ITG violated Sections 17(a)(2) and (3) of the Securities Act of 1933 in connection with Project Omega by engaging in a course of business that operated as a fraud and by failing to make disclosures about Project Omega and its proprietary trading activities.  ITG also violated Rules 301(b)(2) and 301(b)(10) of Regulation ATS by failing to amend its Form ATS filings in light of Project Omega’s trading activities in POSIT, failing to establish adequate safeguards, and failing to implement adequate oversight procedures to protect the confidential trading information of POSIT subscribers.

via SEC Press Releases