S&P Dow Jones Indices Charged for Failures Relating to Volatility Index

The SEC announced settled charges against S&P Dow Jones Indices LLC for failures relating to a previously undisclosed quality control feature of one of its volatility-related indices, which led S&P DJI to publish and disseminate stale index values during a period of unprecedented volatility.
The SEC’s order finds that the S&P 500 VIX Short Term Futures Index ER (Index) published by S&P DJI was intended to calculate values based on real-time prices of certain CBOE Volatility Index (VIX) futures contracts.  According to the order, S&P DJI licenses the Index to, among others, issuers that use it to offer securities, including the issuer of the inverse exchange-traded note called XIV, and the license agreement requires S&P DJI’s approval of the description of the index in offering documents.  On Monday, Feb. 5, 2018, the VIX experienced a spike of 115%, but the Index remained static during certain intervals between 4:00 p.m. and 5:08 p.m. that day.  According to the SEC’s order, this was due to an undisclosed “Auto Hold” feature, which is triggered if an index value breaches certain thresholds, at which point the immediately prior index value continues to be reported.  The SEC found that XIV’s issuer derived information about the Index from S&P DJI’s public disclosures about the Index, but the Auto Hold feature had never been publicly disclosed.  The SEC’s order finds that S&P DJI personnel did not release the Auto Hold for the Index during the referenced intervals, as they had the ability to do, resulting in the publication and dissemination of stale and static Index values, rather than values based on the real-time prices of certain VIX futures contracts.
The SEC’s order finds that, because the Index was the primary input for the calculation of the XIV ETN’s indicative value, the ETN’s indicative values published to the market during the same intervals were similarly static and, as a result, the indicative values being reported in real-time were higher than they would have been if the Auto Hold had not been triggered.  While the Auto Hold was in place freezing the values being published to the market, XIV’s indicative value breached a key metric, which provided XIV’s issuer the right to accelerate all outstanding notes.  According to the SEC’s order, XIV, therefore, had an economic value that was substantially lower than what had been publicly reported and was at risk of being accelerated by its issuer.
“Index providers like S&P DJI play a crucial role in the financial markets,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.  “When index providers license their indices for the issuance of securities, as S&P DJI did here, they must ensure that the disclosure of critical features of their products, as well as the publication of real-time values, are accurate.”
The SEC’s order charges S&P DJI with violating Section 17(a)(3) of the Securities Act.  Without admitting or denying the SEC’s findings, S&P DJI agreed to a cease-and-desist order and to pay a $9 million penalty.

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SEC Charges Healthcare Company with Multimillion Dollar Fraud

The Securities and Exchange Commission today charged a New Jersey-based healthcare company and its founder with fraudulently raising nearly $4 million from over 130 investors nationwide through the sale of membership units in the company. According to…

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Robinhood Facing Multiple SEC Investigations Into Its Business Practices

According to Forbes, Robinhood is reportedly facing multiple investigations by the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) regarding its March service outage, and, separately, 2018 disclosures relating to its revenue practices.

Details on the investigations are scarce. Bloomberg reports that it has received information from a source involved in a joint SEC/FINRA investigation of how the company handled and responded to a major service disruption in March. Separately, the SEC is reportedly looking into public disclosures of the company’s practice of selling client order flow to third-party firms.



Interactive Brokers Charged With Failing to File Suspicious Activity Reports

The Securities and Exchange Commission today announced that Interactive Brokers LLC will pay an $11.5 million penalty to settle charges it repeatedly failed to file Suspicious Activity Reports (SARs) for U.S. microcap securities trades it executed on…

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SEC Charges Energy Storage Company, Former Executive in Fraudulent Scheme to Inflate Financial Results

The Securities and Exchange Commission today charged a California-based energy storage and power delivery product manufacturer and one of its former sales executives in a fraudulent revenue recognition scheme designed to inflate the company’s reported financial results.
According to the SEC’s order, Maxwell Technologies, Inc. prematurely recognized revenue from the sale of ultracapacitors – small energy storage and power delivery products – in order to better meet analyst expectations.  Van Andrews, a former Maxwell sales executive and corporate officer, allegedly inflated the company’s revenues by entering into secret side deals with customers and by falsifying records in order to conceal the scheme from Maxwell’s finance and accounting personnel and external auditors.  Maxwell’s former CEO David Schramm and former controller James DeWitt also were charged for failing adequately to respond to red flags that should have alerted them to the misconduct. 

“Maxwell recorded revenue before it was actually earned in order to make investors believe that the company’s most important business segment, ultracapacitors, was growing faster than it really was” said Charles Cain, Chief of the SEC Enforcement Division’s FCPA Unit.  “This action demonstrates our commitment to holding issuers and their executives accountable when they deny investors the ability to make investment decisions based on accurate financial information.”

The SEC’s order found that Maxwell and Andrews violated antifraud, books and records, and internal accounting controls provisions of the federal securities laws and that Andrews caused certain violations by Maxwell.  Both Maxwell and Andrews consented to the SEC’s order without admitting or denying the allegations and agreed to pay penalties of $2.8 million and $50,000, respectively.  Andrews also agreed to be barred from serving as an officer or director of a public company for five years.  Without admitting or denying the findings that they caused certain violations by Maxwell, Schramm agreed to pay a total of nearly $80,000 in disgorgement, prejudgment interest, and penalty and DeWitt agreed to pay a $20,000 penalty.  

The money collected in this proceeding will be used to establish a Fair Fund for the benefit of investors harmed by the accounting fraud.  Maxwell’s former CFO Kevin Royal, who was not charged with wrongdoing, has reimbursed the company $135,800 for incentive-based compensation he received during the period when the company was found to have committed accounting violations.  

The SEC’s investigation was conducted by James Valentino and Natalie Lentz with assistance from Kevin Lombardi.  The case was supervised by Tracy L. Price.

SEC Press Release

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Citigroup Paying $18 Million for Overbilling Clients

The Securities and Exchange Commission today announced that Citigroup Global Markets has agreed to pay $18.3 million to settle charges that it overbilled investment advisory clients and misplaced client contracts. The SEC’s order finds that at least 60,000 advisory clients were overcharged approximately $18 million in unauthorized fees because Citigroup failed to confirm the accuracy of billing rates entered into its computer systems in comparison to fee rates outlined in client contracts, billing histories.

If you are a Citigroup customer who was overcharged, or a Citigroup broker with clients who were overcharged by the firm, give us a call – 973-559-5566. We represent customers and brokers in securities related matters nationwide.

Source: SEC.gov | Citigroup Paying $18 Million for Overbilling Clients

SEC Appeals Process on the Slow Track – WSJ

More problems surfacing for the SEC’s in-house legal system, where the SEC gets to be prosecutor, judge, jury and appellate court and industry participants get screwed.According to the Wall Street Journal, “[s]ince Mary Jo White became SEC chairman in April 2013, the median time for the agency to decide appeals of its in-house judges’ decisions has increased to 19 months.”

Source: The Securities Law Blog: SEC Appeals Process on the Slow Track – WSJ

Traders in China and Hong Kong Paying $920,000 to Settle Insider Trading Case

The SEC has settled insider trading cases with two traders in China and Hong Kong, who agreed to pay more than $920,000 to settle the charges against them.Cousins and business associates Zhichen Zhou and Yannan Liu, whose assets were frozen by an emergency court order when the SEC’s complaint was filed against them last month, must disgorge their entire ill-gotten profits of $306,929.59 plus pay penalties of $306,929.59 each.

Source: The Securities Law Blog: Traders in China and Hong Kong Paying $920,000 to Settle Insider Trading Case

False Tweets Cause Market Drop, and SEC Charges

The SEC announced the filing of securities fraud charges against a Scottish trader whose false tweets caused sharp drops in the stock prices of two companies and triggered a trading halt in one of them.

According to the SEC’s complaint filed in federal court in the Northern District of California, James Alan Craig of Dunragit, Scotland, tweeted multiple false statements about ADNC and SRPTon Twitter accounts that he deceptively created to look like the real Twitter accounts of well-known securities research firms. Complaint and screenshots of the tweets at the link.


Investor Alert: Pimco Gets SEC Wells Notice for its Total Return Active ETF

Pimco disclosed that it received a Wells notice from the SEC concerning its Total Return Active ETF. A Wells notice is sent to a protential defendant by the SEC to advise the potential defendant of the Staff’s intention to file civil charges, and to give the potential defendant the opportunity to argue why the action should not be commenced.

The notice is not a lawsuit, and is not a formal allegation of wrongdoing. While the mere existence of a Wells notice does not indicate that there has been wrongdoing, the Wells notice does indicate that the Staff believes it has grounds to institute an enforcement proceeding.

The SEC is looking at a four-month time period between the fund’s launch on Feb. 29, 2012 and June 30, 2012, examining how Pimco valued smaller-size positions in nonagency mortgage-backed securities purchased by the ETF during that time, according to the release. They are also looking at the fund’s performance disclosures for that period, and at Pimco’s compliance policies and procedures.

Source: Pimco Gets Warning From SEC That Lawsuit Could Be Coming – WSJ