Deutsche Bank to Pay Nearly $75 Million for Improper Handling of ADRs

The Securities and Exchange Commission today announced that two U.S.-based subsidiaries of Deutsche Bank AG will pay nearly $75 million to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs).

The case stems from a continuing SEC investigation into abuses involving pre-released ADRs.  In proceedings against Deutsche Bank Trust Co. Americas (DBTCA), a depositary bank, and Deutsche Bank Securities Inc. (DBSI), a registered broker-dealer, the SEC found that their misconduct allowed pre-released ADRs to be used for abusive practices, including inappropriate short selling and inappropriate profiting around dividend payouts.

ADRs – U.S. securities that represent foreign shares of a foreign company – require a corresponding number of foreign shares to be held in custody at a depositary bank.  The practice of “pre-release” allows ADRs to be issued without the deposit of foreign shares, provided brokers receiving them have an agreement with a depositary bank and the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADR represents. Information about ADRs is available in an SEC Investor Bulletin.

In the order against DBTCA, the SEC found that it improperly provided thousands of pre-released ADRs over a more than five-year period when neither the broker nor its customers had the requisite shares.  The order against DBSI found that its policies, procedures, and supervision failed to prevent and detect securities laws violations concerning borrowing and lending pre-released ADRs, involving approximately 850 transactions over more than three years.

Last year, the SEC announced settled charges against brokers ITG Inc. and Banca IMI Securities Corp., which at times obtained pre-released ADRs from DBTCA and other depositaries and lent them to other brokers, including DBSI.  The SEC also charged a former managing director and head of operations at broker-dealer ITG for failing to supervise personnel on ITG’s securities lending desk who improperly handled pre-released ADRs.

“The SEC’s actions involving pre-released ADRs have revealed industry-wide abuses,” said Stephanie Avakian, Co-Director of the SEC Enforcement Division.  “Failures at each institutional link in the chain of these transactions, from depositary bank to broker-dealer, left the markets for those ADRs ripe for potential abuse at the expense of ADR holders.”

Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, “Our charges against DBTCA and DBSI show that entities can’t just rely on representations from other professionals when they have doubts about their validity.  The charges also highlight the importance of supervising employees who use counterparties to engage in suspect transactions.”

Without admitting or denying the SEC’s findings, DBTCA agreed to return more than $44.4 million of alleged ill-gotten gains plus $6.6 million in prejudgment interest and a more than $22.2 million penalty, nearly $73.3 million in total.  DBSI, also without admitting or denying the SEC’s findings, agreed to pay nearly $1.6 million, representing $1.1 million in disgorgement and prejudgment interest and a nearly $500,000 penalty.  The SEC’s orders acknowledge each entity’s cooperation in the investigation and remedial acts.

The SEC’s continuing industry-wide investigation is being conducted by William Martin, Andrew Dean, Elzbieta Wraga, Philip Fortino, Joseph Ceglio, Richard Hong, and Adam Grace of the New York Regional Office and supervised by Mr. Wadhwa. 

SEC Press Release

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SEC Charges Investment Adviser and CEO With Misleading Retail Investors

The Securities and Exchange Commission today charged a Connecticut-based investment advisory firm and its chief executive officer with putting $19 million of investor money, including elderly investors’ retirement savings and pension plans, in risky investments and secretly pocketing hefty commissions from those investments. 

The SEC’s complaint alleges that Temenos Advisory Inc. and George L. Taylor steered advisory clients and other investors, including senior citizens and individuals approaching retirement, into four risky, illiquid private offerings.  While Temenos and Taylor charged advisory fees for unbiased financial advice, they allegedly concealed from their clients the high commissions they were pocketing from these risky and unsuitable investment recommendations, including cash and ownership stakes in the private companies they recommended, and fraudulently misled clients about the risks and prospects of the investments.  The SEC also alleges that Temenos and Taylor grossly overbilled some of their advisory clients.

“Investment advisers must put clients’ interests ahead of their own,” said Paul Levenson, Director of the SEC’s Boston Regional Office.  “Temenos violated that duty by placing clients in risky private placements while downplaying the risk of those investments and concealing the financial conflicts that motivated the recommendations.”

The SEC’s complaint, filed in federal court in Connecticut, charges the defendants with violating the anti-fraud and registration provisions of the federal securities laws. The SEC is seeking disgorgement of ill-gotten gains plus interest, penalties, and permanent injunctions.

The case is being handled by Dawn Edick, Marc Jones, Rua Kelly, Patrick Noone, and Amy Gwiazda.  The SEC examination that led to the investigation was conducted by Maria Viana, Kenneth Leung, and Mayeti Gametchu of the Boston office.

SEC Press Release

— If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

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SEC Adopts Rules to Enhance Transparency and Oversight of Alternative Trading Systems

The Securities and Exchange Commission today announced it has voted to adopt amendments to Regulation ATS to enhance operational transparency and regulatory oversight of alternative trading systems (ATSs) that trade stocks listed on a national securities exchange.

“I applaud the staff’s retrospective review of our regulation of ATSs.  I agree that promoting greater transparency in order interaction, matching, and execution will help empower investors and their intermediaries to find those trading venues that best meet their trading and investing objectives,” said SEC Chairman Jay Clayton.

Certain ATSs will be required to file detailed public disclosures on new Form ATS-N.  These disclosures are designed to allow market participants to assess potential conflicts of interest and risks of information leakage arising from the ATS-related activities of the ATS’s broker-dealer operator and its affiliates.  The disclosures will also inform market participants about how the ATS operates, including order types and market data used on the ATS, fees, the ATS’s execution and priority procedures, and any procedures to segment orders on the ATS.

Forms ATS-N will be made publicly available on the Commission’s website via the Commission’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.

The amendments also provide a process for the Commission to review Form ATS-N filings and, after notice and opportunity for hearing and upon certain findings, declare a Form ATS-N ineffective.  
In addition, all ATSs will be required to have written safeguards and procedures to protect subscribers’ confidential trading information.

 

*   *   *

FACT SHEET

SEC Open Meeting
July 18, 2018

Action

The Securities and Exchange Commission adopted new Form ATS-N and amendments to Regulation ATS and Exchange Act Rule 3a1-1 to enhance transparency and oversight of alternative trading systems (ATSs) that trade stocks listed on a national securities exchange (NMS Stock ATSs).  The amendments will require NMS Stock ATSs to publicly disclose detailed information about their operations and the ATS-related activities of their broker-dealer operators.  

Highlights of the Adopted Amendments

Detailed Disclosure of the Operations of NMS Stock ATSs

Form ATS-N will require an NMS Stock ATS to publicly disclose on Form ATS-N information about its manner of operations and the ATS-related activities of the broker-dealer that operates the ATS (“broker-dealer operator”) and its affiliates.  These public disclosures will allow market participants to understand how their orders will interact, match, and execute in the NMS Stock ATS.  The disclosures will also inform market participants about differences that may exist in the treatment of subscribers and the broker-dealer operator (and its affiliates) on the ATS, and allow them to assess potential conflicts of interest and risks of information leakage.  The enhanced disclosures are also designed to enable market participants to compare an NMS Stock ATS to other trading venues and better evaluate the ATS as a potential destination for their orders.

Specifically, Form ATS-N will require an NMS Stock ATS to disclose information regarding:

•    Information about its broker-dealer operator, including identifying information and ownership.

•    ATS-related activities of its broker-dealer operator, and the broker-dealer operator’s affiliates, including:
 
o    the trading activities of the broker-dealer operator and its affiliates on the ATS;
o    whether subscribers to the ATS can opt out from interacting with orders and trading interest of the broker dealer operator and its affiliates; 
o    arrangements between the broker-dealer operator or its affiliates and trading centers to access the ATS services;
o    products and services offered to ATS subscribers by the broker-dealer operator and its affiliates;
o    the activities of service providers to the broker-dealer operator and its affiliates; and
o    safeguards and procedures established to protect the confidential trading information of subscribers.

•    The manner of operations of the NMS Stock ATS, including:  

o    types of subscribers, the criteria for eligibility for ATS services, and conditions for excluding subscribers from ATS services;
o    means of entry for orders and trading interest;
o    connectivity and co-location procedures;
o    order types, attributes, and order size requirements and procedures;
o    use of and terms and conditions governing conditional orders and indications of interest;
o    hours of operation, opening, reopening, and closing processes, and procedures for trading outside of regular trading hours; 
o    trading services, facilities, and rules of the ATS;
o    arrangements with any subscriber or the broker-dealer operator to provide liquidity;
o    segmentation of orders and trading interest and the provision of notice regarding segmentation; 
o    counter-party selection;
o    display of orders and other trading interest; 
o    outbound routing from the ATS; 
o    fees;
o    procedures for stopping or suspending trading;
o    procedures regarding trade reporting, clearance, and settlement;
o    sources and uses of market data;
o    as applicable, information about an NMS Stock ATS’s obligations related to order display and execution access pursuant to Rule 301(b)(3) of Regulation ATS and fair access pursuant to Rule 301(b)(5) of Regulation ATS; and
o    aggregate platform-wide order flow and execution statistics provided by the NMS Stock ATS to one or more subscribers.

Public Availability of Form ATS-N

The Commission, through the Commission’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system, will make public an NMS Stock ATS’s Form ATS-N when it becomes effective, as well as amendments to an effective Form ATS-N.  In addition, each NMS Stock ATS will be required to make public on its website a direct URL hyperlink to the Commission’s website where these documents are located.

Commission Review of Form ATS-N Filings

The amendments to Regulation ATS establish a process for the Commission to review Form ATS-N filings.  Among other things:

•    An NMS Stock ATS’s initial Form ATS-N will become effective, unless declared ineffective, upon the earlier of:  (1) the completion of the Commission’s review and publication via posting on the Commission’s website, or (2) the expiration of the Commission review period, or, if applicable, the end of the extended review period.

•    An NMS Stock ATS will be required to file amendments to its Form ATS-N, which includes filing of material amendments.  Material amendments must be filed 30 calendar days prior to the implementation of the change and are made public upon the expiration of the 30 calendar day period, although a brief summary of the change will be made public upon filing.   

•    The amendments to Regulation ATS will provide a process for the Commission to review all Form ATS-N filings and, after notice and opportunity for hearing, and upon certain findings, declare, by order, an NMS Stock ATS’s Form ATS-N ineffective.

Safeguards and Procedures for Protecting Subscriber’s Confidential Trading Information

The amendments to Regulation ATS will require all ATSs to have and maintain written safeguards and procedures to protect the confidential trading information of their subscribers, and written procedures to ensure that those safeguards and procedures are followed.

Background

In 1998, the Commission adopted Regulation ATS, which established a new regulatory framework designed to encourage market innovation, while ensuring basic investor protections.  It gave securities markets a choice to register as a national securities exchange, or operate as an alternative trading system.

Since the adoption of Regulation ATS, the equity markets have evolved substantially and ATSs have become a significant source of liquidity in NMS stocks, accounting for approximately 11.4 percent of total share trading volume (11.5 percent of total dollar volume) in NMS stocks.  NMS Stock ATSs have grown in complexity and sophistication, and some NMS Stock ATSs now offer features similar to registered national securities exchanges, which applicable laws and regulations require to be transparent trading venues.  

Despite the important role of NMS Stock ATSs in the U.S. equity markets, prior to these amendments to Regulation ATS, inconsistent information was available to market participants about NMS Stock ATS’s manner of operations and the relationship between NMS Stock ATSs and the other business interests of their broker-dealer operators.  

What’s Next?

The amendments will be published on the Commission’s website and in the Federal Register and will become effective 60 days from the date of publication in the Federal Register.  An NMS Stock ATS that is operating pursuant to an initial operation report on Form ATS as of January 7, 2019 will be required to file a Form ATS-N no earlier than January 7, 2019 and no later than February 8, 2019.  As of January 7, 2019, an entity seeking to operate as an NMS Stock ATS will be required to file a Form ATS-N.
 

SEC Press Release

— If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

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SEC Adopts Final Rules and Solicits Public Comment on Ways to Modernize Offerings Pursuant to Compensatory Arrangements

The Securities and Exchange Commission today issued final rules to amend Securities Act Rule 701, which provides an exemption from registration for securities issued by non-reporting companies pursuant to compensatory arrangements.  As mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act, the amendment increases from $5 million to $10 million the threshold in excess of which the issuer is required to deliver additional disclosures to investors.  

In addition, the Commission is soliciting comment on possible ways to modernize rules related to compensatory arrangements in light of the significant evolution in both the types of compensatory offerings and the composition of the workforce since the Commission last substantively amended these rules in 1999.

“The rule as amended, and the concept release, are responsive to the fact that the American economy is rapidly evolving, including through the development of both new compensatory instruments and novel worker relationships – often referred to as the ‘gig economy.’  We must do all we can to ensure our regulatory framework reflects changes in our marketplace, including our labor markets,” said SEC Chairman Jay Clayton.  

The public comment period will remain open for 60 days following publication of the concept release in the Federal Register.

*   *   *

FACT SHEET

SEC Open Meeting 
July 18, 2018

Action

Adopting Release

As mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act, the Commission adopted final rules to revise Rule 701(e) to increase from $5 million to $10 million the aggregate sales price or amount of securities sold during any consecutive 12-month period in excess of which the issuer is required to deliver additional disclosures to investors.  

Concept Release

In addition, the Commission issued a Concept Release seeking public comment on ways to modernize compensatory securities offerings and sales. 

Equity compensation can be an important component of the employment relationship.  In addition to preserving cash for the company’s operations, equity compensation can align the incentives of employees with the success of the enterprise and facilitate recruitment and retention.  Securities Act Rule 701 allows non-reporting companies to sell securities to their employees without the need to register the offer and sale of such securities.  Securities Act Form S-8 provides a simplified registration form for companies to use to issue securities pursuant to employee stock purchase plans.  The Commission is soliciting comment on possible ways to update the requirements of Rule 701 and Form S-8, consistent with investor protection.  The Concept Release solicits comment on:

•    “Gig economy” relationships, in light of issuers using internet platforms to provide workers the opportunity to sell goods and services, to better understand how they work and determine what attributes of these relationships potentially may provide a basis for extending eligibility for the Rule 701 exemption;  

•    Whether the Commission should further revise the disclosure content and timing requirements of Rule 701(e); and

•    Whether the use of Form S-8 to register the offering of securities pursuant to employee benefit plans should be further streamlined.

What’s Next?

The revision to Rule 701(e) will become effective on the date the Adopting Release is published in the Federal Register.

The Concept Release will be posted on the Commission’s website and published in the Federal Register.  The comment period will remain open for 60 days after publication in the Federal Register.  
 

SEC Press Release

— If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

from SECLaw.com

SEC Charges BGC Financial for Failure to Preserve Documents and Maintain Accurate Books and Records

The Securities and Exchange Commission today announced that New York-based broker-dealer BGC Financial has agreed to pay a $1.25 million penalty to settle charges that it failed to preserve audio files sought by the SEC and inaccurately recorded travel, entertainment, and other expenses.

The SEC’s order finds that after receiving document requests in 2014 from the SEC’s Division of Enforcement, BGC deleted audio files for the recorded telephone lines of eight brokers that were responsive to the document requests.  According to the order, the department responsible for maintaining voice recordings was unaware of the SEC’s request and deleted the files in keeping with the firm’s policy of not maintaining them after one year. 

The SEC order also finds that BGC failed to maintain books and records that accurately recorded compensation, travel, entertainment, and gifts.  BGC provided a high performing broker with season tickets for a New York-area sports team that cost more than $600,000 per year, and failed to record the payments for the tickets as compensation in its general ledger.  BGC also reimbursed this same broker for more than $100,000 of expenses associated with an international trip for his birthday and other foreign travel that lacked a sufficiently documented business purpose.  BGC inaccurately recorded these items in its books and records as selling and promotion.  BGC also reimbursed a different broker for thousands of dollars of personal expenses spent on his birthday party, his bachelor party, and two separate trips to Las Vegas for his friends’ bachelor parties.  

“The federal securities laws require broker-dealers to maintain accurate books and records and promptly provide records requested by SEC staff,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “The failure to preserve and produce responsive documents undermines the Commission’s ability to provide effective oversight of registrants and to carry out its mission to protect investors.”

The SEC order finds that BGC violated books and records provisions of the federal securities laws and related SEC rules.  Without admitting or denying the SEC’s findings, BGC agreed to a cease-and-desist order, a censure, and a $1.25 million penalty.

The SEC’s investigation was conducted by Shannon Keyes, Christopher Dunnigan, Kenneth Gottlieb, and Charles D. Riely of the New York Regional Office and supervised by Sanjay Wadhwa.  

SEC Press Release

— If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

from SECLaw.com

SEC Charges Oil Company CEO, Board Member With Hiding Personal Loans

The Securities and Exchange Commission today charged the former CEO of Energy XXI Ltd. with hiding more than $10 million in personal loans that he obtained from company vendors and a candidate for Energy XXI’s board.  At the time of the alleged misconduct, Energy XXI was NASDAQ-listed and one of the largest oil and gas producers on the Gulf of Mexico shelf.  

According to the SEC’s complaint, CEO John D. Schiller Jr. maintained an extravagant lifestyle by using a highly leveraged margin account secured by his Energy XXI stock.  The complaint alleges that in 2014, when faced with significant margin calls, Schiller extracted more than $7.5 million in undisclosed personal loans from company vendors in exchange for business contracts with Energy XXI.  

Schiller also is alleged to have obtained a $3 million loan from Norman Louie, a portfolio manager at Energy XXI’s largest shareholder Mount Kellett Capital Management LP.  Louie was appointed to Energy XXI’s board just weeks later.  The SEC alleges that Schiller did not disclose the vendor loans or the Louie loan to Energy XXI.

“Executives of public companies have a duty to act in the best interests of investors,” said Anita B. Bandy, an Assistant Director in the SEC’s Division of Enforcement.  “Secret backroom deals for the benefit of corporate insiders violate those duties and deprive investors of important information.”      

The complaint also alleges Schiller received undisclosed compensation and perks in the form of lavish social events, first-class travel, a shopping spree, donations to Schiller-preferred charities, legal expenses for personal matters, and an office bar stocked with high-end liquor and cigars.  As a result, Energy XXI failed to report at least $1 million in excess compensation in its executive compensation disclosures over a five-year period.  

Schiller consented, without admitting or denying the SEC’s charges, to a permanent injunction that enjoins him from violating anti-fraud and reporting provisions of the federal securities laws, imposes a $180,000 penalty, and bars him from serving as an officer or director of a public company for five years.
 
The SEC also charged Louie for his role in hiding his loan to Schiller, and Mount Kellett is charged with failing to disclose its activist plan to place Louie on Energy XXI’s board.  Louie and Mount Kellett consented, without admitting or denying the findings, to an SEC order that they cease and desist from committing or causing any violations or any future violations of certain reporting and disclosure provisions of the federal securities laws.  Louie must pay a $100,000 penalty and Mount Kellett, which is an SEC-registered investment adviser, must pay a $160,000 penalty.  

The SEC’s investigation, which is continuing, has been conducted by Nicholas A. Brady and Asset Management Unit member Janene M. Smith with assistance from litigation counsel Charles D. Stodghill.  The case has been supervised by Ms. Bandy.  
 

SEC Press Release

— If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

from SECLaw.com

SEC Files Charges in Busted Microcap Schemes

Last weeks the SEC announced that it has charged a stock promoter and four others involved in an alleged series of microcap fraud schemes that were foiled by FBI undercover work and an SEC trading suspension.

According to the SEC’s complaint,a stock promoter Gannon Giguiere took control of a purported medical device company. Giguiere, together with a Cayman Islands-based broker, then allegedly engaged in a matched trading scheme that caused the company’s share price to rise from zero to $1.20 per share. Giguiere and the brokerage owner, Oliver-Barret Lindsay, allegedly coordinated their matched trading through an individual who turned out to be an FBI cooperating witness.

According to the complaint, despite extensive encrypted communications, the defendants were caught by an undercover FBI operation that recorded their communications, with Lindsay going so far as to tell an individual cooperating with the FBI, “I’m a little hesitant about typing all of these details into this app. … You can just imagine if it finds its way somewhere it’s fairly incriminating.” According to the complaint, the pair’s plan to dump millions of shares in the purported medical device company was thwarted when, this past March, the SEC suspended trading in the securities of the purported medical device company.

The SEC’s complaint also charges three others who began laying the groundwork for a pump-and-dump scheme involving a purported digital media company. The SEC alleges that Kevin Gillespie, Annetta Budhu, and Andrew Hackett entered into a number of sham stock and debt issuances, and Hackett wound up communicating with someone he believed to be a participant in the scheme who in reality was an undercover FBI agent.

“As alleged in our complaint, these stock traders hijacked companies and manipulated the market to enrich themselves at the expense of the investing public. Law enforcement is committed to rooting out microcap fraud and exposing it no matter how encrypted or complex such schemes may be,” said Marc P. Berger, Director of the SEC’s New York Office.

from SECLaw.com

SEC Files Charges in Busted Microcap Schemes

The Securities and Exchange Commission has charged a stock promoter and four others involved in an alleged series of microcap fraud schemes that were foiled by FBI undercover work and an SEC trading suspension.

According to the SEC’s complaint filed in federal court in southern California on July 6, stock promoter Gannon Giguiere took control of a purported medical device company.  Giguiere, together with a Cayman Islands-based broker, then allegedly engaged in a matched trading scheme that caused the company’s share price to rise from zero to $1.20 per share.  Giguiere and the brokerage owner, Oliver-Barret Lindsay, allegedly coordinated their matched trading through an individual who turned out to be an FBI cooperating witness.  According to the complaint, despite extensive encrypted communications, the defendants were caught by an undercover FBI operation that recorded their communications, with Lindsay going so far as to tell an individual cooperating with the FBI, “I’m a little hesitant about typing all of these details into this app. … You can just imagine if it finds its way somewhere it’s fairly incriminating.”  According to the complaint, the pair’s plan to dump millions of shares in the purported medical device company was thwarted when, this past March, the SEC suspended trading in the securities of the purported medical device company.

The SEC’s complaint also charges three others who began laying the groundwork for a pump-and-dump scheme involving a purported digital media company.  The SEC alleges that Kevin Gillespie, Annetta Budhu, and Andrew Hackett entered into a number of sham stock and debt issuances, and Hackett wound up communicating with someone he believed to be a participant in the scheme who in reality was an undercover FBI agent.

“As alleged in our complaint, these stock traders hijacked companies and manipulated the market to enrich themselves at the expense of the investing public.  Law enforcement is committed to rooting out microcap fraud and exposing it no matter how encrypted or complex such schemes may be,” said Marc P. Berger, Director of the SEC’s New York Office. 

The U.S. Attorney’s Office for the Southern District of California today announced criminal charges.

The SEC’s investigation, which is continuing, has been conducted by John O. Enright, Joseph P. Ceglio, Diego Brucculeri, and Sheldon L. Pollock of the New York office.  The SEC’s litigation will be handled by Messrs. Enright and Ceglio.  The case is being supervised by Sanjay Wadhwa.  The SEC appreciates the assistance of the FBI, U.S. Attorney’s Office for the Southern District of California, and Financial Industry Regulatory Authority.
 

SEC Press Release

— If you believe need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

from SECLaw.com