Three Charged in NYS Retirement Fund Pay-to-Play Scheme

nys-retirement-fund-pay-to-play-scheme

Two former bond brokers for broker-dealer Sterne Agee and an ex-PM overseeing fixed income investing for the NYS Retirement Fund were named as defendants in a pay-to-play scheme that had the brokers plying former fixed income portfolio manager with plenty of partying and prostitutes in exchange for millions of dollars in fixed income commission fees, according to the office of US Attorney Preet Bharara.

The indictment says that there was an agreement among ex PM Kang, and Sterne Agee executives Deborah Kelley and Gregg Schonhorn to pay Kang bribes in the form of “entertainment, travel, lavish meals, prostitutes, nightclub bottle service, narcotics, luxury gifts, and cash payments” among other things, in exchange for fixed-income business.

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us_v._kang_and_kelley_indictment.pdf by Chris Bragg

The value of the alleged bribe was more than $1 million, Bharara’s office said, including such gifts as trips to New Orleans and Montreal, a ski trip to Park City, Utah, a $17,400 luxury wrist watch, tickets to Broadway shows and the U.S. Open, cocaine and crack cocaine, as well as thousands of dollars for strippers and prostitutes.

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Kang steered more than $2 billion in fixed-income business to the brokers, the indictment says, which resulted in millions in commissions.

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(Reuters)-Dec 21 U.S. prosecutors on Wednesday accused a former portfolio manager at New York state’s retirement fund of steering $2 billion in trades in exchange for bribes from brokerage employees, in the latest pay-to-play case to rock the fund.

Navnoor Kang

Navnoor Kang

Navnoor Kang, the ex-director of fixed income at the New York State Common Retirement Fund, was charged in an indictment filed in Manhattan federal court along with Deborah Kelley, a former Sterne Agee Group Inc managing director. Gregg Schonhorn, another broker-dealer whom prosecutors said paid bribes, was charged in related court filings (Reporting by Nate Raymond and David Ingram)

More Securities law news courtesy of Law360.com ….

 

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  • BREAKING: Ex-Blackrock Exec Jailed In UK For Insider Trading

    A former Blackrock investment manager was sentenced to 12 months in prison by a London court on Wednesday for insider dealing stemming from trades in energy companies in 2011, in another win for the Financial Conduct Authority.

  • December 20, 2016

    Texas Man Charged With Bilking Investors In Ponzi Scheme

    A Texas financial adviser was arrested Monday on charges he cheated investors out of $6 million by selling unregistered securities in a purported digital advertising company that was really a Ponzi scheme, the Texas State Securities Board said.

  • December 20, 2016

    Chancery Mulls Largest Incentive Award Ever In Occam Case

    The Delaware Chancery Court opened a rare trial Tuesday for a so-called incentive award for the lead plaintiff in the class action that challenged Occam Networks Inc. merger with Calix Inc., which proposed at roughly $3 million is believed to be largest of its kind in the court’s history.

  • December 20, 2016

    RPM International Can’t Move SEC Suit Over $61M Deal

    A Washington, D.C., federal judge refused to move the U.S. Securities and Exchange Commission’s suit accusing government contractor RPM International Inc. of failing to account for a nearly $61 million settlement, saying Tuesday the Ohio company hadn’t proven it would be more conveniently heard elsewhere.

  • December 20, 2016

    SEC, MSRB Fight GOP’s Challenge To New Pay-To-Play Rule

    The U.S. Securities and Exchange Commission and the Municipal Securities Rulemaking Board told the Sixth Circuit on Monday that it doesn’t have jurisdictional standing to consider the Republican Party’s challenge to new rules that increase pay-to-play restrictions on municipal advisers, saying the rules were created “by congressional will” and not by a final SEC order that can be appealed.

  • December 20, 2016

    Neustar Settles SEC Investigation Over Severance Clause

    Technology company NeuStar Inc. has agreed to pay $180,000 to end allegations that it violated a whistleblower protection rule by restricting what former employees were allowed to say about the company, the Securities and Exchange Commission announced Monday.

  • December 20, 2016

    Energy Co. To Pay SEC $1.4M Over Whistleblower Firing

    The U.S. Securities and Exchange Commission reached its first settlement over internal-whistleblower retaliation Tuesday, with an Oklahoma energy company agreeing to pay $1.4 million, subject to a bankruptcy plan, to resolve claims it fired a worker for whistleblowing and used restrictive separation agreements.

  • December 20, 2016

    SIFMA, ABA Air Worries Over CFTC Cross-Border Swaps Rule

    The Securities Industry and Financial Markets Association, the American Bankers Association and other swap market interest groups urged the U.S. Commodity Futures Trading Commission on Monday to hit the brakes on proposed definitions for U.S. and foreign entities under cross-border swap rules, underscoring potential harm to the U.S economy and potential regulatory overreach.

  • December 20, 2016

    Schulte Roth Withdraws As Patriarch’s Counsel In Zohar Suit

    Schulte Roth & Zabel LLP told a New York federal judge Tuesday that it will no longer represent Lynn Tilton’s Patriarch Partners in a breach of contract case against investment funds previously managed by Patriarch, citing “irreconcilable differences.”

  • December 20, 2016

    Chancery Won’t Revive Suit Over OM Group’s $1B Apollo Sale

    Delaware’s Chancery Court has said it will not allow OM Group Inc. shareholders to reargue their recently dismissed suit targeting the company’s board members over its $1 billion buyout by Apollo Global Management, finding that the court adequately considered the evidence at hand.

  • December 20, 2016

    Tokai Hopes To Move $97M Suit Over IPO To Mass. Fed. Court

    Tokai Pharmaceuticals Inc. Monday sought to move a putative class action by investors claiming it withheld important drug testing information prior to its $97 million initial public offering to a Massachusetts federal court Monday.

  • December 20, 2016

    4th Circ. Says FINRA Challenge Must Go To SEC First

    The Fourth Circuit on Tuesday found microcap broker-dealer Scottsdale Capital Advisors Corp. can’t challenge the Financial Industry Regulatory Authority’s power in federal court, because Congress gave exclusive review of FINRA rules and decisions to the U.S. Securities and Exchange Commission.

  • December 20, 2016

    Citibank Renews Bid To Dodge $2.3B RMBS Class Action

    Citibank NA on Tuesday again asked a New York judge to toss a proposed class action accusing the bank of ignoring pervasive problems with residential mortgage-backed securities, saying precedent from a recent state appellate ruling supports its contention that the suit is inadequately pled.

  • December 20, 2016

    Bondholders Dismissed From Bank Libor Conspiracy MDL

    A New York federal judge Tuesday dismissed a class of bondholders from multidistrict litigation accusing big banks of rigging the London Interbank Offered Rate, saying their alleged antitrust injuries were not caused by the banks.

  • December 20, 2016

    Bankrupt Oil Co. Gives Preferred-Share Action The Slip

    A Manhattan federal judge dismissed a class action lawsuit against New Source Energy Partners LP and underwriters over the company’s $40 million 2015 preferred-share offering Monday, finding that the bankrupt oil and gas portfolio’s risk-disclosures were “precise” and “exhaustive” and did not run afoul of the securities laws.

  • December 20, 2016

    Morgan Stanley Pays $7.5M For Customer Protection Offenses

    Morgan Stanley & Co. LLC agreed to pay $7.5 million Tuesday to settle allegations it violated the U.S. Securities and Exchange Commission’s Customer Protection Rule when using customer cash as collateral on loans used to finance hedging swap trades.

  • December 20, 2016

    Del. Supreme Court Upholds Chancery On TC Pipeline Case

    Bare claims of unfairness cannot overcome a partnership’s valid “special approval” shields for company decisions, Delaware’s Supreme Court said Monday in a ruling that rejected a master limited partnership member’s appeal of a losing challenge to a $446 million TransCanada Pipelines deal.

  • December 20, 2016

    $2.5M CFTC Spoofing Settlement Gets Green Light

    An Illinois federal judge on Tuesday signed off on a deal that settles a yearlong legal dispute between the U.S. Commodity Futures Trading Commission and a Chicago-based trader accused of placing spoof bids on futures markets and who has now agreed to pay $2.5 million to resolve the suit before a trial.

FINRA Trying to Be More Transparent; No Easy Trick

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Brokerdealer regulator FINRA trying to be more transparent is no easy trick considering that its constituency is often conflicted when it comes to the topic of disclosure and visibilty, but industry veteran Tom Gira, EVP of Market Regulation is putting his best foot forward.

(Traders Magazine) –Nov 19–The Financial Industry Regulatory Authority is right on top of the evolving financial market structure and to that end, has announced new initiatives designed to increase market transparency.

The Financial Industry Regulatory Authority is right on top of the evolving financial market structure and to that end, has announced new initiatives designed to increase market transparency.

Thomas Gira, Executive Vice President, Market Regulation at FINRA, laid out the regulator’s future plans in remarks made Tuesday, November 15 at the Inaugural Traders Magazine Equity Market Structure Town hall forum at the Upper Story in New York City. In speaking to the audience, he assured that the group is on top of changes in the market and seeks to continue to provide clarity, guidance and transparency into the trading markets.

tom-gira-finra-market-regulation

Tom Gira, FINRA EVP Market Regulation

Gira provided a brief recap of what initiatives have already been put into place, creating a “multi-faceted safety net for the markets and are designed to promote investor confidence.” Among the changes, he told of how regulators adjusted the market-wide circuit breakers, which give market participants an opportunity to assess their positions, valuation models and operational capabilities when extreme periods of volatility occur. On top of that, the marketplace now has a limit up/limit down regime, which addresses the type of sudden individual stock-price movements that the market experienced during the May 2010 flash crash.

Also, he reminded that the Securities and Exchange Commission has also passed the Market Access Rule, which requires firms entering orders into the market, or allowing their customers to enter orders into the market, to have pre-trade controls to avoid erroneous and duplicative orders and to establish pre-trade capital and credit controls on orders entered into the market, among other things. And most recently, the SEC implemented Regulation SCI to strengthen the technology infrastructure of the U.S. securities markets.

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“In sum, I think we are rightly focusing on the evolution of the market more than whether there is something seriously wrong with the market,” Gira said. “So in that vein, I would like to focus on how FINRA is working to stay ahead of issues through our focus on transparency and by making use of innovative technology in our surveillance programs.”

Among the new transparency initiatives, FINRA is continuing to look at ways to expand its Trade Reporting and Compliance Engine, or TRACE, which looks at the trading of corporate bonds and their trade data, including the price and size. The system is now looking at expanding TRACE to include transaction and quote data for the $13 trillion Treasury market.

“There is currently no centralized trade reporting system for Treasuries. Regulators, including FINRA, the SEC, the Treasury Department and the Federal Reserve Board, have taken steps to implement a transaction-reporting regime for Treasuries,” he said. “Starting next July, firms will have to report certain transactions in Treasury securities to TRACE.”

At this time, he added FINRA will not disseminate information on transactions in Treasuries. This new requirement will significantly enhance the ability of FINRA and other regulators to understand trading activity in Treasury securities.

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SEC Chair White Last Major Speech to BDs: Market Structure

mary jo white-sec-chair-brokerdealer

SEC Preparing to Finalize Transparency Rules for “Polluted” Dark Pools, Mary Jo White Says

Agency could alter 2015 proposal, which sought to pull back the curtain on opaque trading venues

In what might be her last major speech to members of the broker-dealer community as the Obama administration winds down and gets ready for the closing bell, SEC Chair Mary Joe White addressed a Washington DC gathering of the Securities Traders Association this week and talked about BDs favorite topic: equities market structure.  After taking a few accolades for approving Finra-recommended regulations that require software developers of algorithmic trading tools to be registered and licensed just as securities traders, Ms White  summarized her accomplishments  and forward looking perspectives regarding SEC efforts to address inequities in the equities market structure.

Courtesy of Mondo Visione, below are the opening extracts from Ms. White’s speech:

Thank you, Jim [Toes], for that kind introduction.  I am honored to join you again for your annual market structure conference.

The American equity markets are the strongest in the world, and one of the Commission’s most important responsibilities is to work every day to maintain their fairness, orderliness, and efficiency.  Optimizing market structure is a continuous process, one that requires the Commission to act with both care and intensity, strictly guided by what is best for investors and capital formation for public companies.

I emphasized this guiding principle when I last joined you in 2013,[1] and in 2014 when I laid out a program for enhancing equity market structure.[2]  Fulfilling our responsibility to investors and issuers, of course, demands that the Commission act quickly to address issues that are demonstrably undermining the interests of investors and issuers.  But it also requires the Commission to carefully consider changes to market structure where the impact on those interests is far less clear and the data to support competing perspectives is lacking or conflicting.

Where improvements to equity market structure are clearly called for, the Commission has acted.  The operational integrity of our markets – my top priority – has been significantly enhanced by a number of measures.  The staff is gathering and analyzing more market data than ever before to inform policymaking, and the consolidated audit trail is becoming reality.  And we have detailed proposals out for comment that will give investors more transparency into how the off-exchange markets operate and broker-dealers handle their orders.

At the same time, the Commission has undertaken a deliberate, data-driven process to assess – and, as appropriate, begun to implement – more fundamental changes to equity market structure.  This process requires great care.  The American equity markets today continue to serve well the interests of retail and institutional investors, delivering better executions at lower costs than ever before.  Broad changes to this market structure – especially those executed precipitously or without adequate data – can have serious unintended consequences for investors and issuers as their impact is fully realized, sometimes years down the road.

This two-pronged approach recognizes that market structure can never be perfect and, correspondingly, that the Commission’s work is never – and should never – be done.[3]  Market structure is continually evolving as technology and competition spur innovation.  That fluidity means that the Commission’s review must be both comprehensive and nimble, constantly testing existing assumptions, regulations, and market practices, while remaining poised to act quickly on issues that immediate attention can address.

Today, I want to report on some of our progress on both our targeted enhancements to tackle such issues, and our consideration of more fundamental market structure questions.  While the Commission has been active in a number of areas, I will focus today on operational integrity, market transparency, and algorithmic trading.

In assessing these areas and others, we have been fortunate to have the assistance of our relatively new Equity Market Structure Advisory Committee, or EMSAC.  Especially in addressing some of the more complex issues in market structure today, the EMSAC, which brings deep expertise and a wide range of perspectives, provides a public forum for valuable and timely discussions, both within the Committee itself and as a result of its efforts to reach out to a wide range of others with expertise on key issues.

Strengthening Operational Integrity and Market Stability

Let me begin where I always do, with operational integrity and market stability.  Since I arrived at the Commission, enhancing the reliability and resilience of our markets has been my top priority.  Weaknesses or disruptions in operations can destabilize markets and, in some cases, lead to extreme price volatility and the loss of investor confidence.  The Commission’s work here continues – we can never be complacent – but I am very pleased with the steps we have taken to strengthen the market systems on which investors depend every day.

Regulation SCI

Central to this effort has been Regulation SCI, which the Commission adopted at the end of 2014.[4]  While no measure can eliminate technology disruptions altogether, Regulation SCI is designed to reduce the occurrence of systems issues and to improve resilience and communication when systems problems do occur.  It imposes requirements on key market participants – the exchanges, high‑volume alternative trading systems (ATSs), clearing agencies, the securities information processors (SIPs), the Financial Industry Regulatory Authority (FINRA), and the Municipal Securities Rulemaking Board (MSRB).

These “SCI entities” were required to start complying with most of the requirements of Regulation SCI last November.[5]  In the first instance, this means maintaining comprehensive policies and procedures to ensure the capacity, integrity, resiliency, availability, and security of key automated systems.  It also means: taking appropriate corrective action when systems issues happen; reporting systems problems and changes directly to the Commission and market participants; and conducting periodic reviews and testing of automated systems.

Approaching the first full year of the regulation’s operation, our examiners have been reviewing compliance with Regulation SCI.  It is apparent from these examinations that many market participants have devoted significant resources to compliance, and there has been good progress in implementation.  But a few areas for additional attention have emerged.  For example, it is clear that processes for patching and updating systems deserve close attention – human errors in these routine tasks can create much more significant issues.  Another example is diversifying primary and backup systems – in seeking to fulfill their recovery obligations under Regulation SCI, market participants should focus on not just the geographic locations of those systems, but also consider their reliance on different electrical, telecommunications, and other infrastructure support.  Our staff is continuing to work with market participants in these areas and others to help ensure that the goals of Regulation SCI are achieved.

Improvements to Critical Market Infrastructure

Regulation SCI has been complemented by a number of initiatives by the exchanges and FINRA to enhance the operational integrity of critical market infrastructure like the SIPs and the open/close process.  At my direction, following the Nasdaq SIP outage in 2013 and NYSE’s trading outage in 2015, SEC staff worked with the exchanges and FINRA to correct the defects that caused these incidents, as well as to identify and address other potential single points of failure.  These cooperative efforts were expanded after the unusual volatility of August 24, 2015, and there has been significant progress.

  • First, the resilience of the SIPs is considerably improved.  There are now enhanced disaster recovery sites and systems to establish a “hot/warm” backup process, which provides for a failover from the primary site to the backup site in ten minutes or less.[6]
  • Second, as of June, the equity listing exchanges now have mutual backup arrangements for their closing auctions, which will address situations when a disruption might prevent the execution of a closing auction on the primary listing exchange.[7]
  • And third, the process for opening auctions, especially in volatile markets, has been and continues to be improved.[8] 

Enhancements to Volatility Moderators

Amidst these and other improvements,[9] reminders persist about the continued importance of the volatility moderators implemented after the “Flash Crash,” especially the “limit-up/limit-down” plan designed to reduce extraordinary volatility in individual securities.  The exchanges and FINRA have already implemented basic enhancements to limit-up/limit-down in the wake of the events of August 24, 2015,[10] and I have asked them to address additional issues that emerged during that event. 

Further Strengthening Market Operations

One such issue is the application of the mechanism to exchange-traded products (ETPs), where we have a broader program underway to help ensure that these increasingly popular products operate robustly in a variety of market conditions.  We saw during the Flash Crash and on August 24 that ETPs can be disproportionately affected when markets become disorderly.  Orderly trading in an ETP requires a smoothly functioning market for the ETP’s holdings so that market makers and authorized participants can reliably value the ETP’s portfolio.  If the underlying market becomes disorderly, or if market makers and authorized participants step away from trading, the arbitrage mechanism can be disrupted and an ETP can trade at prices substantially away from its implied value.

Commission staff, as well as the exchanges and FINRA, are assessing the special characteristics of ETP trading in determining whether particular changes should be made to the limit-up/limit-down mechanism to reflect the sensitivity of ETPs to disorderly market activity.[11]  In addition, I have directed the staff’s ETP Working Group to identify and analyze a broad range of issues relating to the structure, trading, and use of ETPs.  The Working Group is considering, among other things: what portfolio characteristics and market structures support effective arbitrage; the roles and practices of market makers and authorized participants; and the effects of the ongoing exchange pilot programs to incentivize trading in less‑liquid ETPs.

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White House To Nix GOP Securities Bill

white-house-veto-gop-securities-bill

(Law360)  New York (September 7, 2016, 4:14 PM ET) — The Obama administration on Tuesday said it would likely veto several bills aimed at simplifying the registration process for selling securities and cutting paperwork for private funds, as well as a bill prohibiting the government from reaching settlements that require donations to third parties.

The White House Office of Management and Budget on Tuesday issued three statements of administrative policy, saying that senior advisers would recommend President Barack Obama veto a series of laws currently pending in the U.S. House of Representatives that the administration claims…

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Broker Check-Who Are You Gonna Call?

brokercheck-broker-dealer

(WSJ) by Jason Zweig-

Most people expect the food in a three-star restaurant to be tastier than one-star grub and a two-thumbs-up movie to be better than a flick that got a solitary upward-pointing thumb. Good luck, however, finding a handy way to rank stockbrokers.

That needs to change, because new research shows the most valuable information about brokers emerges only when you can compare them and their firms industry-wide.

The Financial Industry Regulatory Authority, which oversees how investments are sold, maintains BrokerCheck, a database and website that provides information on nearly 1.27 million current and former brokers. A study by Finra last fall found that BrokerCheck data could reliably predict which brokers are most likely to harm their clients.

And so you could, if you had open access to all the data Finra collects on BrokerCheck. But, contends a new report, the regulator keeps such a tight hold that the service doesn’t tell investors what they need to know.

The vast majority of brokers are hardworking, honest folks who have no customer complaints on their records.

But those who have been active since before 2000, and those whose colleagues have a history of misconduct, are much more likely to generate complaints from customers, according to the new analysis.

Those insights emerge only from analyzing oceans of data on brokers and their firms — an absurdly impractical task for ordinary investors looking up BrokerCheck records one at a time.

How much should you worry if a broker settled a complaint for $25,000? Are four arbitrations in 27 years a lot or a few? Have 13 out of 14 of the other employees in your broker’s office had complaints lodged against them? There’s no way outsiders with conventional computing power can tell. Nor can investors readily figure out which firms have the most employees with marks on their records.

And that matters — a lot — because taking advantage of clients seems to be contagious.

Brokers whose colleagues have spotty track records end up harming investors much more often, the new report says.

An unrelated recent study, which looked at some 150,000 brokers at nearly 1,000 firms, found that in the wake of a merger between firms, the average broker becomes over one-third more likely to incur customer complaints if his or her new brokerage colleagues have a history of misconduct.

Yet another analysis, released last month by economists at the University of Minnesota and the University of Chicago, found that brokers with a history of complaints were snapped up by other firms rather than being driven out of the industry.

So, before hiring a broker, you should know the disciplinary record of his or her colleagues. Even a report from Finra itself last fall drew a similar conclusion.

The latest study was conducted by Securities Litigation and Consulting Group, a research firm in Fairfax, Va. Part of its business is providing expert-witness testimony in arbitration proceedings against brokers and their firms. Still, “my incentives don’t change the arithmetic,” says SLCG founder Craig McCann, a former economist at the Securities and Exchange Commission.

The study bases its analysis on Finra’s own standards for judging whether investors were harmed; it replicates several of the regulator’s findings from last fall almost exactly. Finra’s chief economist, Jonathan Sokobin, says the SLCG report “essentially validated our results.”