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On February 17, 2016, the Securities and Exchange Commission (“SEC”) filed an Order Instituting Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 15(b) and 21c of the Securities Exchange Act of 1934, Section 203(f) of the Investment Advisers Act of 1940, and Section 9(b) of the Investment Company Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (the “Order”), against Charles P. Grom (“Grom), a Deutsche Bank  Securities, Inc. (“Deutsche Bank”) Analyst, for issuing a stock rating for Big Lots, Inc. (“Big Lots”) that was inconsistent with his own personal opinions, in violation of Rule 501 of Regulation AC, which requires that “brokers, dealers, and certain persons associated with a broker dealer, including research analysts, include in their research reports a certification by the research analyst that the views expressed in the research report accurately reflect the research analyst’s personal views about the subject securities and issuers.”

Grom worked as a Managing Director and a senior equity research analyst at Deutsche Bank from June 2011 to February 2013, covering two subsectors of the consumer retail sector – broadlines/department stores and supermarkets.  According to the Order, he was terminated in February 2013 for “‘conduct not consistent with firm standards.’”  He is currently employed at CRT Capital Group LLC.

Deutsche Bank equity research analysts provide insight and recommendations through publicized research reports, which include ratings based on a company’s performance for the prior twelve months (BUY, SELL or HOLD), the expected price of the stock in the next twelve months, and “estimates of the company’s upcoming quarterly and annual earnings per share.”    As part of Deutsche Bank’s evaluation of an analyst, it reviews how well the analyst is able to cultivate relationships with senior-level management at the companies on which the analyst is conducting research.  Such relationships ultimately allow Deutsche Bank greater access to those companies, and yield more accurate and complete research.

On February 4, 2016, a Financial Industry Regulatory Authority (“FINRA”) panel (the “Panel”) awarded Herbert M. Doucet and Margie Doucet (collectively “Claimants”) $307,000 for losses stemming from investments in direct participation programs (“DPPs”) involving non-traded real estate investment trusts (“REITs”), promissory note programs, master limited partnerships (“MLPs”) and private oil drilling programs offered by VSR Financial Services, Inc. (“VSR”).  VSR is a small, full-service securities broker-dealer founded in 1985, focusing on long-term strategies and products.

In their Statement of Claim, the Claimants alleged the following causes of action against VSR: breach of fiduciary duty; fraud, misrepresentation and non-disclosure; negligence and gross negligence; breach of contract; violation of Louisiana Blue Sky Law; and unjust enrichment.

The amount awarded reflects almost all of the $308,221 in compensatory damages the Claimants originally sought.  The Panel further held that the Claimants could retain their investments in these DPPs, specifically MPF Senior Note Program I, Atlas America Series #25 – 2004, AmREIT Monthly Income & Growth II, Cole Credit Property Trust, and ArciTerra Note Fund II.

On February 5, 2016, the Securities and Exchange Commission (“SEC”) filed a Complaint in the United States District Court for the District of Connecticut (the “Complaint”) charging Dennis Wayne Hamilton, the Vice President of Tax for Harman International Industries, Inc. (“Harman”), with insider trading in his own employer’s stock, in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

Harman is headquartered in Stamford Connecticut, dealing in high quality audio systems for personal and professional use.  Harman is listed on the New York Stock Exchange (symbol HAR).  Dennis Wayne Hamilton, a resident of Norwalk, Connecticut, is a Certified Public Accountant in Colorado, and has been the Vice President of Tax for Harman since 2009, working closely with the Chief Executive Officer and the Chief Financial Officer to prepare the taxes and earnings announcements.  According to the Complaint, Dennis Wayne Hamilton “also regularly attended meetings of Harman’s audit committee that were held after the close of each fiscal quarter.  At these meetings, the audit committee received drafts of Harman’s not-yet-announced earnings releases and other nonpublic information.”

The Complaint alleges that towards the end of 2013, Dennis Wayne Hamilton used the unreleased quarterly earnings figures and announcement for the first quarter of 2014 to facilitate his purchase of 17,000 shares of Harman stock at $72.02 per share, for a total purchase price of over $1.2 million.  Dennis Wayne Hamilton violated Harmon’s own internal policies by not only using nonpublic information, but also by failing to obtain permission from general counsel to trade in the company’s stock.  He was able to generate a profit of $131,958.62 when the earnings report was made public the next day and the stock price subsequently rose by more than 12% to $81.02.

On December 15, 2015, the Securities and Exchange Commission (“SEC”) filed a Complaint and Jury Demand (the “Complaint”), alleging fraud charges against Atlantic Asset Management LLC (“AAM”), an investment advisory firm in Stamford, Connecticut, which is believed to have invested more than $43 million of its clients’ funds into bonds with secret financial connections to BFG Socially Responsible Investments Ltd. (“BFG”), an undisclosed owner of AAM.

AAM is a Virginia corporation that is headquartered in Stamford, Connecticut, with offices in Alexandria, Virginia, and is a wholly-owned subsidiary of GMT Duncan LLC (“GMT”).  AAM was initially registered with the SEC in 1993 under Hughes Capital Management, LLC (“Hughes”), which GMT acquired in July of 2014, and is owned and controlled by GMT’s two officers (the “Owning Officers”) and BFG, and undisclosed owner.  The Owning Officers also hold all of GMT’s Class A interests and BFG holds all of GMT’s Class B interests.  When GMT purchased Hughes, the Form ADV filed with the SEC indicated the Owning Officers’ partial ownership of GMT, but failed to disclose BFG’s partial ownership.  On April 2, 2015, GMT merged Hughes with AAM, keeping the latter’s name for the newly-formed entity, and GMT itself began doing business under the name Atlantic Capital Holdings LLC.  In the new Form ADV filed with the SEC, which reflected the merger, BFG was again omitted as a partial owner of GMT.

The Complaint alleges that after GMT’s acquisition of Hughes in 2014, representatives of BFG proposed that Hughes’ clients invest in certain “dubious, illiquid bonds issued by a Native American tribal corporation” (the “Tribal bonds”), with the proceeds of the issuance “to be used primarily to purchase an annuity that would be provided and managed by BFG’s parent company, the Annuity Provider.”  The Complaint alleges that one of the Owning Officers “knew, or was reckless in not knowing … that fees would be owed to the Annuity Provider for the provision and administration of the annuity” in the amount of $0.006 per $1.00 per annum on the full amount used to buy the annuity (approximately $260,000 per year), as well as to a Placement Agent (who received $250,000), both of whom have affiliations with BFG.  In bringing these allegations, the Complaint points to that officer’s repeated demonstrations of reluctance in executing the deal.  In addition to expressing reservations to superiors, he or she had one of Hughes’ compliance officers perform an analysis of “whether the clients’ investment guidelines allowed for purchase of the bonds,” and the compliance officer concluded that “most of the clients would not accept the purchase, and that in no case could the investment be made without consulting the client first.”

On November 17, 2015, the Securities and Exchange Commission (“SEC”) filed a Complaint against Jammin’ Java Corp. d/b/a Marley Coffee, Shane G. Whittle, Wayne S. P. Weaver, Michael K. Sun, Rene Berlinger, Stephen B. Wheatley, Kevin P. Miller, Mohammed A. Al-Barwani, Alexander J. Hunter, and Thomas E. Hunter (the “Complaint”) for allegedly running a ‘pump-and-dump’ scheme involving Marley Coffee stock, which generated at least $78 million in profits.

A ‘pump-and-dump’ scheme involves a fraudster’s use of false or misleading statements to raise the price of a stock.  After the price is inflated, the fraudster then sells his or her own shares, creating a profit but at the same time flooding the market with shares and causing investors to lose money as the price of the stock plummets.  When the fraudsters sell large quantities of such stock to the public without registering the transactions, they might be violating the Securities Act of 1933 (the “Securities Act”).  Further, manipulative trading used to inflate a stock’s price may be violations of antifraud provisions in the Security Act as well as the Securities Exchange Act of 1934 (the “Exchange Act”).  Furthermore, fraudsters who attempt to conceal their control of the stock may violate the Exchange Act’s reporting requirements.

Jammin’ Java Corp. is a Nevada corporation that is currently headquartered in Denver, Colorado.  The Complaint states that “[f]rom its inception until at least September 2011, Jammin’ Java [Corp.] was a shell company, without any significant operations or assets.  Jammin’ Java [Corp.] has failed to earn positive operational cash flow or an accounting profit, and consistently disclosed going-concern risks in its SEC filings.  As of January 31, 2015, Jammin’ Java [Corp.] had accumulated a deficit of $24 million in operating losses.”  Shane G. Whittle served as the CEO, Treasurer, Secretary and director of Jammin’ Java Corp., and continued to direct the business as a de facto officer and then as a consultant after his resignation in April and May of 2010 from his board and executive officer positions.

On December 4, 2015, the New York Times (the “Times”) reported that JPMorgan Chase had solicited fake customer complaints against a former broker, Johnny Burris, when he reported to various news outlets and the Securities and Exchange Commission (“SEC”) that JPMorgan Chase was pressuring brokers like him to sell JPMorgan Chase’s proprietary mutual funds “even when the offerings from competitors were more suitable.”

According to the Times, in 2012, Johnny Burris had secretly recorded his supervisors at the JPMorgan Sun City West branch, outside Phoenix, using pressured sales tactics on their brokers to sell JPMorgan Chase’s proprietary funds.  The recordings came after Johnny Burris had voiced concerns over these sales tactics, and had been met with resistance.  Johnny Burris’ recordings prompted an SEC investigation and a currently pending settlement, wherein JPMorgan Chase will pay $100 million as a result of its unlawful practices.  JPMorgan Chase subsequently terminated Johnny Burris.

On or about January 4, 2013, Johnny Burris, filed an arbitration claim against JP Morgan Chase alleging the following causes of action in his Statement of Claim: wrongful termination; breach of contract, defamation; and intentional interference with contract/prospective economic advantage.  All of the causes of action relate to Johnny Burris’ former employment with JP Morgan Chase.  According to the Times, in 2013, after Johnny Burris reported JP Morgan Chase’s sales tactics, customer complaints began appearing on his disciplinary records, which are available to the public and to prospective employers through the Financial Industry Regulatory Authority (“FINRA”).   As a result of the customer complaints, Johnny Burris had difficulty getting another job as a broker in the industry.  Further, after seventeen (17) hearing sessions, the Arbitration Panel denied Johnny Burris’ claims in the entirety.

On October 20, 2015, Credit Suisse Group AG (“Credit Suisse”) confirmed that it is closing its U.S. Domestic Private Banking business and announced that it was entering into an exclusive recruiting arrangement with Wells Fargo & Company (“Wells Fargo”) to provide Credit Suisse financial advisors and their clients in Credit Suisse’s U.S. Domestic Private Banking business an opportunity to transition to Wells Fargo’s brokerage business by early 2016.  Credit Suisse is now taking the unreasonable position that if a financial advisor does not accept employment with Wells Fargo, he or she will forfeit their deferred compensation, even though in most, if not all, instances the deferred compensation is paid to the financial advisor if he or she is terminated without cause.  Since Credit Suisse’s financial advisors’ termination is undoubtedly without cause as they are leaving the firm because Credit Suisse is closing its U.S. Domestic Private Banking business, Credit Suisse financial advisors will most likely have a claim against Credit Suisse for any unpaid deferred compensation.

The Credit Suisse Employment Dispute Resolution Program, which covers claims by an employee against Credit Suisse, does not permit employees to bring a class action suit for any claims relating to deferred compensation, and requires that the employee arbitrate the dispute before JAMS or the American Arbitration Association (AAA), private non-regulatory arbitration forums.  There is, however, an argument to challenge the alleged mandatory JAMS and AAA arbitration provision contained in the Credit Suisse Employment Disputes Resolution Program, as brokers who are registered with FINRA are required to arbitrate disputes, claims or controversies with a member firm at the Financial Industry Regulatory Authority, Inc. (FINRA), which is a different arbitration forum than the two selected by Credit Suisse.  In fact, there are many benefits for a financial advisor to have his or her claim arbitrated at FINRA as opposed to JAMS or AAA; namely, the FINRA arbitrator’s awards are publically available, the FINRA arbitrator’s disclosure requirements are more exhaustive, and the FINRA arbitrator’s ability to refer the matter to FINRA’s Department of Enforcement. Class action claims may not be arbitrated under the FINRA Code of Arbitration Procedure.  Further, the United States Court of Appeals for the Second Circuit in New York recently held that class action waivers, such as the provision contained in the Credit Suisse Employment Dispute Resolution Program, are enforceable.  Therefore, Credit Suisse financial advisors may only bring individual claims in arbitration against Credit Suisse for any unpaid deferred compensation.

In addition, Credit Suisse financial advisors will be receiving an Onboarding Agreement confirming the terms of resignation of employment from Credit Suisse in connection with a potential offer of employment from Wells Fargo Advisors.  It is imperative that Credit Suisse financial advisors contact an attorney to review the Onboarding Agreement, as it requires that the financial advisor release significant rights and claims, including claims against Credit Suisse for deferred compensation and other claims relating to the financial advisor’s employment with Credit Suisse.  In fact, the Onboarding Agreement advises the financial advisor to consult with an attorney before executing it.   Lax & Neville LLP has extensive experience and success representing and protecting the interests of financial professionals, including assisting brokers/financial advisors in reviewing recruitment packages and agreements, and counseling financial advisors of their legal rights surrounding those agreements.  Lax & Neville LLP also has successfully transitioned brokers between firms and counseled them through the transition process.  Lax & Neville LLP also has extensive experience representing financial advisors in compensation related claims.

On November 4, 2015, the Securities and Exchange Committee (“SEC”) filed an Order, pursuant to Rules 21F-10(g) and (h), 17 C.F.R. §§ 240.21F-10(g) and (h) (the “Order”), whereby it awarded an unnamed claimant (“Claimant”) over $325,000 pursuant to the SEC’s Claims Review Staff’s Preliminary Determination for Notice of Covered Action, which recommended that Claimant receive a whistleblower award pursuant to the amount of monetary sanctions collected from his ex-employer.  The SEC does not divulge the names of whistleblowers, nor does it disclose any information that could potentially reveal the whistleblower’s identity.

In determining the amount of the whistleblower award, the Claims Review Staff considered the significance of the information provided, the Claimant’s assistance in the investigation, and the applicable law-enforcement’s interests.  The Claims Review Staff also considered the Claimant’s delay in reporting the improprieties, which the Claims Review Staff felt was unreasonable because such delay allowed the violations to continue, and allowed the underlying respondents to continue to reap their ill-gotten gains.  In response, Claimant requested an increase in the award percentage, which typically ranges between 10 and 30 percent when the sanctions exceed $1 million, stating that the delay was too heavily weighted in the Claims Review Staff’s analysis.  According to the Order, Claimant argued that the risks in reporting violations to the SEC had not been adequately accounted for, that timely reporting may lead to “poor quality tips”, and that the Claimant’s failure to report the violations internally was improperly assessed.

The SEC denied the Claimant’s request, holding that the delay occurred after the whistleblower protections contained in the Dodd-Frank Act were implemented.  Pursuant to the Order, the SEC stated that before whistleblower protections were enacted, individuals did not have much incentive to report violations by firm for whom they were still employed, but with such protections in place, individuals can now safely report violations while having financial incentive to do so and without fear of retaliation.  The SEC goes on to state, “[w]here the period of delay occurs entirely after the creation of the Commission’s whistleblower program, we will weigh the delay more heavily in assessing the appropriate award percentage.”  However, the SEC did point out that they “did not give negative weight to the fact that Claimant declined to report the violations internally.”

On October 20, 2015, Credit Suisse Group AG (“Credit Suisse”) and Wells Fargo & Company (“Wells Fargo”) announced an exclusive recruiting arrangement to provide Credit Suisse financial advisors and their clients in Credit Suisse’s U.S. Domestic Private Banking business an opportunity to transition to Wells Fargo’s brokerage business, Wells Fargo Advisors, LLC (“Wells Fargo Advisors”), by early 2016.  If you are a Credit Suisse financial advisor, you will be receiving an Onboarding Agreement confirming the terms of your resignation of employment from Credit Suisse in connection with a potential offer of employment from Wells Fargo Advisors.  It is imperative that Credit Suisse financial advisors contact an attorney to review the Onboarding Agreement as it requires that the financial advisor release significant rights and claims, including claims against Credit Suisse for deferred compensation and other claims relating to the financial advisor’s employment with Credit Suisse.  In fact, the Onboarding Agreement advises the financial advisor to consult with an attorney before executing the Onboarding Agreement.   Lax & Neville LLP has extensive experience and success representing and protecting the interests of financial professionals, including assisting brokers/financial advisors in reviewing recruitment packages and agreements, and counseling the financial advisors of their legal rights surrounding those agreements.  Lax & Neville LLP also has successfully transitioned brokers between firms and counseled them through the transition process.  Please contact our team of attorneys for a consultation at (212) 696-1999.

On October 13, 2015, the Securities and Exchange Commission (“SEC”), in its first case against an issuer of retail structured notes, filed an Order Instituting Cease and Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Making Findings and Imposing Remedial Sanctions and a Cease and Desist Order (the “Order”) against UBS AG (“UBS”).  UBS is a Swiss corporation that is one of the largest issuers of structured notes in the world.  In 2014 alone, UBS issued and registered $2.7 billion of structured notes with the SEC.

The Order compels UBS to pay a $19 million settlement involving structured notes that were linked to a proprietary foreign exchange trading strategy called the V10 Currency Index with Volatility Cap (“V10”).  Disgorgement and prejudgment interest constitute $11 million of the settlement, of which $5.5 million are to be distributed to investors to cover their losses. In addition, $8 million of the settlement reflects a monetary penalty paid to the SEC.  The Order also requires that “UBS cease and desist from committing or causing any violations and any future violations of Section 17(a)(2) of the Securities Act.”

According to the Order, “UBS offered and sold approximately $190 million of medium term notes linked to the V10 (Notes) in registered offering under the Securities Act to approximately 1,900 retail investors … between December 2009 and November 2010.”  UBS told investors that the V10 was a “‘transparent’ and ‘systematic’ currency trading strategy” and that the V10 “was calculated using ‘market prices’ for the relevant underlying financial instruments,” but failed to disclose that they were “taking unjustified markups, engaging in hedging trades with non-systematic spreads and trading in advance of certain hedging transactions – that negatively impacted or, in the case of trading before hedging transactions, had the potential to negatively impact, pricing inputs used to calculate the V10.”  The Order found that “[i]n reality, the V10 was neither transparent nor systematic, market prices were not consistently used to calculate the Index, and V10 investors were thereby misled as to certain key features of this complex financial instrument.”  Ultimately, the Order found that UBS violated Section 17(a)(2) of the Securities Act, which prohibits “obtaining money or property by means of misstatements and omissions in the offer or sale of securities,” by engaging in negligent conduct and making materially misleading statements and omissions.