JPMorgan to Pay More Than $135 Million for Improper Handling of ADRs

The Securities and Exchange Commission today announced that JPMorgan Chase Bank N.A. will pay more than $135 million to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs).

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. 

The SEC’s order found that JPMorgan improperly provided ADRs to brokers in thousands of pre-release transactions when neither the broker nor its customers had the foreign shares needed to support those new ADRs.  Such practices resulted in inflating the total number of a foreign issuer’s tradeable securities, which resulted in abusive practices like inappropriate short selling and dividend arbitrage that should not have been occurring. 

This is the eighth action against a bank or broker, and fourth action against a depositary bank, resulting from the SEC’s ongoing investigation into abusive ADR pre-release practices.  Information about ADRs is available in an SEC Investor Bulletin.

“With these charges against JPMorgan, the SEC has now held all four depositary banks accountable for their fraudulent issuances of ADRs into an unsuspecting market,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office.  “Our investigation continues into brokerage firms that profited by making use of these improperly issued ADRs.”

Without admitting or denying the SEC’s findings, JPMorgan agreed to pay disgorgement of more than $71 million in ill-gotten gains plus $14.4 million in prejudgment interest and a $49.7 million penalty for total monetary relief of more than $135 million.  The SEC’s order acknowledges JPMorgan’s cooperation in the investigation and remedial acts.

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

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Agencies Invite Comment on a Proposal to Exclude Community Banks from the Volcker Rule

Five federal financial regulatory agencies on Friday invited public comment on a proposal that would exclude certain community banks from the Volcker Rule, consistent with the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA).

The Volcker Rule generally restricts banking entities from engaging in proprietary trading and from owning or sponsoring hedge funds or private equity funds.  The agencies are jointly proposing to exclude community banks with $10 billion or less in total consolidated assets and total trading assets and liabilities of 5 percent or less of total consolidated assets from the restrictions of the Volcker Rule.

Additionally, consistent with EGRRCPA, the proposal would, under certain circumstances, permit a hedge fund or private equity fund to share the same name or a variation of the same name with an investment adviser that is not an insured depository institution, company that controls an insured depository institution, or bank holding company.

The proposal was issued by the Federal Reserve Board, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission.  Comments will be accepted for 30 days after publication in the Federal Register. 

# # #

Media Contacts: 

Federal Reserve Board

Eric Kollig

202-452-2955

CFTC

Donna Faulk-White

202-418-5080

FDIC

Julianne Breitbeil

202-898-6895

OCC

Bryan Hubbard

202-649-6870

SEC

Office of Public Affairs

202-551-4120

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— 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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Martha Miller Named Advocate for Small Business Capital Formation

The Securities and Exchange Commission today announced that Martha Legg Miller has been named as the first Advocate for Small Business Capital Formation.

The position and the new Office of the Advocate for Small Business Capital Formation were created pursuant to the bipartisan SEC Small Business Advocate Act of 2016. As the Advocate for Small Business Capital Formation, Ms. Miller will oversee the office dedicated to continuing to advance the interests of small businesses and their investors at the SEC and in our capital markets. The office will, among other things, provide assistance to small businesses, conduct outreach to better understand the obstacles small businesses face when attempting to access the capital markets, and recommend improvements to the regulatory environment to help facilitate capital formation. Ms. Miller will report directly to the Commission and will work collaboratively with the many staff across the agency focused on helping small businesses access our capital markets in an efficient and cost-effective manner.

Ms. Miller, currently a partner at the Birmingham, Alabama, firm Balch & Bingham LLP, will assume her new role in January 2019. Ms. Miller has been at Balch & Bingham since 2012, where she represents private companies and investors across a spectrum of corporate transactions, including matters related to the financing of small- and medium-sized businesses. She also serves as an adviser for several organizations dedicated to helping start-ups, entrepreneurs, and small businesses, including several focused on women- and minority-owned companies and their investors. Ms. Miller has served these organizations in a variety of ways, including as a board member of an incubator and legal counsel to an angel investor network.

Chairman Jay Clayton and Commissioners Kara Stein, Robert Jackson, Hester Peirce, and Elad Roisman said, “We are excited for Martha to take on this new and important role. Martha’s extensive experience working with a diverse set of companies, entrepreneurs and investors – including in communities away from the coasts – will allow her to serve as a direct link to, and advocate for, the many small businesses around the country that drive our local and national economies for the benefit of Main Street investors.”

“Having spent my career working closely with a variety of businesses and their investors, I have a deep appreciation for the needs they face at different phases of their growth,” said Ms. Miller. “I am truly honored to have the opportunity to serve as the first Advocate for Small Business Capital Formation, where I will work alongside the many talented professionals at the SEC to encourage capital access for privately-held and smaller public companies. I look forward to the work ahead crafting solutions that meet the needs of businesses across the country.”

Ms. Miller holds bachelor’s degrees in Cognitive Neuroscience and Communication Studies from Vanderbilt University and a J.D. from the Georgetown University Law Center. 

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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Two Advisory Firms, CEO Charged With Mutual Fund Share Class Disclosure Violations

The Securities and Exchange Commission today announced settled charges against two New York-based investment advisers and the CEO of one of the advisers who selected mutual fund share classes inconsistent with their disclosures to clients. The firms and the CEO will collectively pay more than $1.8 million, which will be returned to harmed investors.

According to the SEC’s orders, American Portfolios Advisers Inc., PPS Advisors Inc., and PPS’s Chief Executive Officer and Chief Investment Officer, Lawrence Nicholas Passaretti, invested advisory clients in mutual fund share classes that paid 12b-1 fees to the firms’ investment adviser representatives (IARs), even though less expensive share classes of the same funds were available. The orders find that American Portfolios and PPS failed to disclose conflicts of interest, violated their duty to seek best execution, and failed to implement policies and procedures designed to prevent violations of federal securities laws in connection with their mutual fund share class selection practices.  In particular, in disclosures to clients, American Portfolios incorrectly stated that its IARs either did not receive 12b-1 fees or only selected the more expensive share classes when less expensive share classes of the same fund were unavailable, while PPS incorrectly stated that it selected higher-cost share classes for the “long-term benefit” of clients and only where less expensive share classes of the same fund were unavailable.

“Advisers must be vigilant in disclosing all conflicts of interest arising from compensation received based on investment decisions made for clients,” said C. Dabney O’Riordan, Chief of the SEC Enforcement Division’s Asset Management Unit. “The documents these advisers provided to clients were incorrect and investors were harmed.  We are continuing our efforts to stop these violations and return money to harmed investors as quickly as possible.”

The SEC’s orders find that American Portfolios and PPS violated the antifraud and compliance provisions of federal securities laws, and that Passaretti caused PPS’s violations. Without admitting or denying the findings, American Portfolios, PPS, and Passaretti consented to cease-and-desist orders, and American Portfolios and PPS consented to censures. American Portfolios agreed to pay $895,353 in disgorgement and prejudgment interest and a civil penalty of $250,000. PPS and Passaretti agreed to pay $631,746 in disgorgement and prejudgment interest and a civil penalty of $75,000. Collectively, the firms and Passaretti will pay more than $1.8 million, which will be distributed to harmed clients through Fair Funds.

American Portfolios and PPS were not eligible to self-report pursuant to the Division of Enforcement’s Share Class Selection Disclosure Initiative announced in February because the Division contacted them about the disclosure violations before the initiative was announced.

The SEC’s investigation was conducted by Vincent T. Hull and John Farinacci of the Asset Management Unit and Richard Hong of the New York Regional Office, with support from Cristina Giangrande, Karen Karakaya, Rachel Lavery, Gerard Sansobrino, and Dawn Blankenship of the Office of Compliance Inspections and Examinations of the New York Regional Office. The case was supervised by Panayiota K. Bougiamas of the Asset Management Unit.

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 Charges Audit Firm and Suspends Accountants for Deficient Audits

The Securities and Exchange Commission today filed settled charges against national audit firm Crowe LLP, two of its partners, and two partners of a now-defunct audit firm for their significant failures in audits of Corporate Resource Services Inc., which went bankrupt in 2015 after the discovery of approximately $100 million in unpaid federal payroll tax liabilities. 

The SEC’s order against Crowe finds that its audit team identified pervasive fraud risks in connection with its 2013 audit of Corporate Resource Services yet failed to:

  • Include procedures designed to detect the company’s undisclosed payroll tax obligations;
  • Properly identify and audit the company’s related-party transactions;
  • Obtain sufficient appropriate audit evidence to respond to these fraud risks, support recognition of revenue, and otherwise support the audit opinion; 
  • Evaluate substantial doubt about the  company’s ability to continue as a going concern; and 
  • Conduct a proper engagement quality review.

The order also finds that Crowe was not independent as a result of an ongoing direct business relationship with Corporate Resource Services. According to the order, the audit deficiencies occurred despite the involvement of Crowe’s national office, which was aware of the high-risk nature of the engagement and the inability to obtain appropriate evidence. The order also finds that Crowe’s engagement partner, Joseph C. Macina, and engagement quality reviewer, Kevin V. Wydra, caused Crowe’s audit failures.

A related order finds that Mitchell J. Rubin and Michael Bernstein, former partners at Rosen, Seymour, Shapps, Martin & Co., LLP, engaged in fraud and performed a highly deficient audit of Corporate Resource Services’ 2012 financial statements, which amounted to no audit at all, and that Bernstein caused the firm to lack the required independence when he failed to comply with partner rotation requirements.

“The audit standards are designed to ensure that public accounting firms have reasonable procedures to identify and respond to illegality and issues that pose material risks to the integrity of an issuer’s financial statements,” said Anita B. Bandy, Associate Director in the Division of Enforcement. “As set out in our order, the pervasive audit failures of Crowe and these accountants left investors with a misleading picture of Corporate Resource Services’ financial condition.”

The SEC’s orders find that Crowe violated the audit requirement and accountant reporting provisions of the federal securities laws and that Macina and Wydra caused those violations. The orders find that Rubin and Bernstein violated the antifraud provisions and caused violations of the audit requirement and accountant reporting provisions of the federal securities laws. The orders also find that Crowe, Macina, Wydra, Rubin, and Bernstein caused Corporate Resource Services to violate the issuer reporting provisions of the federal securities laws. Additionally, the orders find that Crowe, Macina, Wydra, Rubin, and Bernstein engaged in improper professional conduct.

Crowe has agreed to pay a penalty of $1.5 million, be censured, and retain an independent compliance consultant to review its audit policies and procedures. Macina, Rubin, and Bernstein each agreed to pay a penalty of $25,000, and Wydra has agreed to pay a penalty of $15,000. Macina, Wydra, Rubin, and Bernstein agreed to be suspended from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies. The SEC’s order permits Macina and Wydra to apply for reinstatement after three years and one year, respectively. Crowe, Macina, Wydra, Rubin, and Bernstein, who settled without admitting or denying the findings, also were ordered to cease and desist from future violations.

The SEC’s investigation, which is continuing, has been conducted by Sharan K.S. Custer, Ernesto Amparo, Regina Barrett, and Kam Lee, and supervised by Ms. Bandy and Kristen Dieter.

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— 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 Staff Encourages Continued Engagement on Impact of MiFID II Research Provisions

Earlier this year, significant new rules relating to research became effective in the European Union (EU).  In an effort to assist market participants regarding their U.S.-regulated activities as they engage in efforts to comply with the EU’s Markets in Financial Instruments Directive (MiFID II), the staff of the U.S. Securities and Exchange Commission issued three related no-action letters. One letter, from the SEC’s Division of Investment Management, provided temporary no-action assurances under the Investment Advisers Act of 1940 to broker-dealers that receive payments in hard dollars or through MiFID-governed research payment accounts from MiFID-affected clients. These assurances expire on July 3, 2020.

In the year since MiFID II became effective, broker-dealers, investment advisers, issuers and other market participants have had an opportunity to observe the effects of MiFID II’s research provisions. During this time, SEC staff has also been monitoring and assessing the impact on the research marketplace and affected participants, including investment advisers and broker-dealers. As part of this effort, SEC staff continues to conduct industry outreach and engage with other regulators, including European authorities.  

“As the staff evaluates possible recommendations, it is invaluable to hear from a diverse group of market participants,” said SEC Chairman Jay Clayton. “In particular, it is important to have data and other information about how MiFID II’s research provisions are affecting broker-dealers, investors and small, medium, and large issuers, including whether research availability has been adversely affected. Thank you to all who have been engaging with us on these issues.” 

We continue to encourage members of the public to provide data and other information relating to the effects of MiFID II’s research provisions. 

Electronic submissions:

Use the SEC’s Internet submission form or send an e-mail to:IMMiFIDII@sec.gov

Comments would be appreciated by Jan. 31, 2019 so that they can be of greatest value in the staff’s evaluation of possible recommendations. In particular, data and information covering the period from MiFID II’s implementation to a recent date would be particularly useful.  

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