Author: LPclient


Washington, D.C., Jan. 9, 2013 — The Securities and Exchange Commission today charged two auditors at KPMG for their roles in a failed audit of a Nebraska-based bank that hid millions of dollars in loan losses from investors during the financial crisis and eventually was forced to file for bankruptcy.

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The SEC previously charged three former TierOne Bank executives responsible for the scheme. Two executives agreed to settle the SEC’s charges, and the case continues against the other.

The new charges in the SEC’s case are against KPMG partner John J. Aesoph and senior manager Darren M. Bennett. The SEC’s investigation found that they failed to appropriately scrutinize management’s estimates of TierOne’s allowance for loan and lease losses (known as ALLL). Due to the financial crisis and problems in the real estate market, this was one of the highest risk areas of the audit, yet Aesoph and Bennett failed to obtain sufficient evidence supporting management’s estimates of fair value of the collateral underlying the bank’s troubled loans. Instead, they relied on stale information and management’s representations, and they failed to heed numerous red flags when issuing unqualified opinions on TierOne’s 2008 financial statements and the bank’s internal controls over its financial reporting.

“Aesoph and Bennett merely rubber-stamped TierOne’s collateral value estimates and ignored the red flags surrounding the bank’s troubled real estate loans,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Auditors must adhere to professional auditing standards and exercise due diligence rather than merely relying on management’s representations.”

According to the SEC’s order instituting administrative proceedings against Aesoph, who lives in Omaha, and Bennett, who lives in Elkhorn, Neb., the auditors failed to comply with professional auditing standards in their substantive audit procedures over the bank’s valuation of loan losses resulting from impaired loans. They relied principally on stale appraisals and management’s uncorroborated representations of current value despite evidence that management’s estimates were biased and inconsistent with independent market data. Aesoph and Bennett failed to exercise the appropriate professional skepticism and obtain sufficient evidence that management’s collateral value and loan loss estimates were reasonable.

According to the SEC’s order, the internal controls identified and tested by the auditing engagement team did not effectively test management’s use of stale and inadequate appraisals to value the collateral underlying the bank’s troubled loan portfolio. For example, the auditors identified TierOne’s Asset Classification Committee as a key ALLL control. But there was no reference in the audit work papers to whether or how the committee assessed the value of the collateral underlying individual loans evaluated for impairment, and the committee did not generate or review written documentation to support management’s assumptions. Given the complete lack of documentation, Aesoph and Bennett had insufficient evidence from which to conclude that the bank’s internal controls for valuation of collateral were effective.

The SEC’s order alleges that Aesoph and Bennett engaged in improper professional conduct as defined in Section 4C of the Securities Exchange Act of 1934 and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the order are true and what, if any, remedial sanctions are appropriate pursuant to Rule 102(e). The administrative law judge will issue an initial decision no later than 300 days from the date of service of the order.

The SEC’s investigation of the auditors was led by Mary Brady and Michael D’Angelo of the Denver Regional Office. Barbara Wells and Nicholas Heinke will lead the Enforcement Division’s litigation in the administrative proceeding.

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Author: LPclient

WASHINGTON — The Financial Industry Regulatory Authority (FINRA) marked 2012 with significant accomplishments in detecting fraudulent activity, implementing cross-market surveillance, increased transparency of securities markets and fulfilling its regulatory mandate to protect investors, assessing $68 million in fines, ordering a record $34 million in restitution to harmed customers and taking measures to ensure market integrity.

Author: LPclient


Washington, D.C., Jan. 7, 2013 — The Securities and Exchange Commission today announced that Chairman Elisse B. Walter has appointed Geoffrey F. Aronow as the agency’s General Counsel. He will begin his new role later this month.

Mr. Aronow comes to the SEC from the law firm of Bingham McCutchen LLP, where he is a partner in the Washington D.C. office. Mr. Aronow has prior federal government leadership experience as the Director of the Division of Enforcement at the Commodity Futures Trading Commission (CFTC) for nearly four years.

As the SEC’s chief legal officer, Mr. Aronow will lead the Office of the General Counsel in advising the Commission on issues ranging from enforcement actions, rulemakings, and legal proceedings in federal courts throughout the country. Mr. Aronow replaces Mark Cahn, who left the agency last week.

“Geoff brings the ideal combination of practical knowledge, expertise, and common sense that is so critical to addressing the often nuanced and difficult issues that come before the Commission,” said Chairman Walter. “Geoff is a faithful steward of the securities laws with a comprehensive understanding of law enforcement who shares our commitment to excellence and passion for investor protection.”

Mr. Aronow said, “I’m truly honored to re-enter public service as the General Counsel at an agency with such a storied history and critical mission of investor protection and effective market oversight. It is humbling to lead a dedicated staff of so many talented and distinguished lawyers in the Office of the General Counsel, and I look forward to working with them closely as we provide the wisest advice possible to Chairman Walter, the other Commissioners, and agency staff.”

Mr. Aronow, 57, has worked at Bingham McCutchen since August 2008 and has advised clients on matters before the SEC, CFTC, and other federal agencies as well as in litigation in federal courts and on legislative initiatives before Congress. His other legal experience includes two stints as a partner at Arnold & Porter LLP (1988-1995 and 1999-2004). He worked at Heller Ehrman LLP from 2004 to 2008.

As the head of enforcement at the CFTC from September 1995 to June 1999, Mr. Aronow oversaw investigations, recommendations of action to the Commission, and litigation in federal court or administrative proceedings. He coordinated with a wide breadth of other international, federal, state and local law enforcement and regulatory authorities.

Mr. Aronow is a former member of the National Adjudicatory Council, NASD Regulation. He also served on the board of directors for the National Capital Area Chapter of the American Civil Liberties Union.

Since 2010, Mr. Aronow has served as an adjunct professor at George Washington University Law School, where he co-teaches a seminar on futures and derivatives law. He previously served as an adjunct professor for two years at Catholic University’s Columbus School of Law. Mr. Aronow earned his J.D. from Yale Law School and earned his B.A. (summa cum laude and Phi Beta Kappa) from Yale College.

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Author: LPclient


Washington, D.C., Dec. 26, 2012 — The Securities and Exchange Commission today announced additional charges in an insider trading case against two brokers who traded on nonpublic information ahead of IBM Corporation’s acquisition of SPSS Inc.

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In an amended complaint filed in federal court in Manhattan, the SEC is now charging research analyst Trent Martin, who was the brokers’ source of confidential information in an insider trading scheme that yielded more than $1 million in illicit profits. Martin worked at a brokerage firm in Connecticut and specialized in Australian equity investments, and he learned nonpublic information about the impending IBM-SPSS transaction from an attorney friend who was working on the deal. Rather than maintaining the confidence of the information, Martin used the information for his own benefit, purchasing SPSS securities and subsequently tipping his roommate Thomas C. Conradt, who traded and tipped his friend and fellow retail broker David J. Weishaus. Martin was specifically named as their source in instant messages between Conradt and Weishaus about their illegal trading.

The SEC charged Conradt and Weishaus with insider trading on November 29. Martin, who fled the U.S. to Australia soon after learning about the SEC’s investigation, currently lives in Hong Kong.

“Martin is a licensed professional who knowingly disregarded insider trading laws to enrich himself, and then fled the United States when he learned of our investigation,” said Daniel M. Hawke, Director of the SEC’s Philadelphia Regional Office. “Martin could run but he could not hide, as the long arm of the SEC will extend to those who flee the United States hoping to avoid the consequences of their unlawful conduct.”

The SEC alleges that Martin’s attorney friend expected him to maintain information in confidence and refrain from illegal trading or disclosing it to others. The attorney sought moral support, reassurance, and advice when he privately told Martin about his new assignment working on the IBM-SPSS acquisition. The lawyer disclosed to Martin such details as the anticipated transaction price and the identities of the acquiring and target companies while he was describing the magnitude of the assignment.

According to the SEC’s complaint, Martin attempted to purchase SPSS common stock on the very first business day after learning the nonpublic information from his friend. His first three orders were cancelled because he did not have sufficient funds in the account to make the purchases, but he later wired $50,000 from his checking account into his brokerage account to purchase SPSS shares.

The SEC’s complaint alleges that Martin, Conradt and Weishaus violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest and financial penalties, and a permanent injunction against the brokers.

The SEC’s investigation, which is continuing, is being conducted by Mary P. Hansen, A. Kristina Littman, and John S. Rymas in the SEC’s Philadelphia Regional Office. G. Jeffrey Boujoukos and Catherine E. Pappas in the Philadelphia office are handling the litigation.

The SEC acknowledges the assistance of the Options Regulatory Surveillance Authority (ORSA), the New Zealand Securities Commission, and the Australia Securities and Investments Commission. The SEC also acknowledges the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.

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Author: LPclient


Washington, D.C., Dec. 26, 2012 — The Securities and Exchange Commission today issued an Investor Bulletin to help purchasers of municipal bonds better assess the bonds’ credit risks.

The bulletin provides several factors for investors to consider including the type of the bond, the purpose and nature of the financing, the overall financial condition of the issuer, and the sources of funds to pay both principal and interest.

The bulletin also urges investors to undertake their own independent review of municipal bonds’ credit risk and not rely solely on a credit rating or a short-hand label such as “general obligation” or “revenue” bond when deciding whether to purchase a municipal bond.

“Investors should gather as much relevant information as they can before spending their hard-earned dollars on any investment,” said SEC Chairman Elisse Walter. “While I will continue to push for enhanced and more timely disclosure by those who issue municipal securities, investors should continue to learn all they can before purchasing them.”

The bulletin also provides a list of additional resources where investors can find more information on municipal bonds. The bulletin was prepared by an intra-agency group including the Office of Investor Education and Advocacy, Division of Enforcement, Office of Credit Ratings, Office of Municipal Securities, Division of Trading and Markets, and the Division of Corporation Finance.

The bulletin is the 23rd issued this year by the agency. They are available on — an SEC website designed for individual investors.

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Author: LPclient

WASHINGTON – The Financial Industry Regulatory Authority (FINRA) announced today that it has ordered Pruco Securities, LLC of Newark, New Jersey, to pay more than $10.7 million in restitution, plus interest, to customers who placed mutual fund orders with Pruco via facsimile or mail (paper orders) from late 2003 to June 2011 and received an inferior price for their shares.

Author: LPclient


Washington, D.C., Dec. 21, 2012 — The Securities and Exchange Commission today unanimously approved new rules requiring broker-dealers to conduct searches for holders of securities with whom they have lost contact. 

A similar rule already applied to recordkeeping transfer agents, who are the intermediaries between the clearing house and the broker-dealer.  The Dodd-Frank Wall Street Reform and Consumer Protection Act tasked the SEC with extending the application of this rule to broker dealers so that broker-dealers have the same obligation.

The new rules also require broker-dealers and other securities market participants to provide notifications to persons who have not processed checks that they have received in connection with their securities holdings. 

“For the first time, broker-dealers will have a duty to reach out and find those they have lost touch with.   It’s a straightforward rule with a common-sense objective,” said SEC Chairman Elisse Walter.  “Among other things, it will make it more likely that investors will get the money that they may not have realized is owed to them.”

Specifically, the new rules:

  • Require broker-dealers to conduct certain searches for lost holders of securities that transfer agents currently are required to conduct.
  • Require “paying agents” – including certain issuers, broker-dealers, transfer agents, and other entities – to notify certain persons – termed “missing securityholders” in the statute and “unresponsive payees” in the adopted rules – in writing that the paying agent has sent the person a check that has not yet been negotiated.
  • Excludes paying agents from their notification requirement when the value of the not yet negotiated check is less than $25.
  • Add a provision clarifying that the notification requirement for paying agents shall have no effect on a state’s ability to collect funds that it deems abandoned under so-called state escheatment laws.
  • Add a conforming technical rule to help ensure that broker-dealers have notice of their new obligations regarding lost holders of securities and unresponsive payees.

The original rule – Rule 17Ad-17 – required only recordkeeping transfer agents to exercise reasonable care to ascertain the correct addresses of “lost securityholders” and conduct certain database searches for them.  This loss of contact can be harmful to holders of securities because they no longer receive corporate communications or the interest and dividend payments to which they may be entitled.  In addition, the securities and any related interest and dividend payments to which the holders of securities may be entitled are often placed at risk of being deemed abandoned under operation of state escheatment laws. 

The amendments will become effective 60 days after the date of publication of the release in the Federal Register.  The compliance date will be one year after the date of publication of the release in the Federal Register.

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The new rules are available in draft form while pending review at the Office of Management and Budget (OMB) of the major rule analysis under the Small Business Regulatory Enforcement Fairness Act.  After the OMB review is complete, the Commission will issue the rule release in final form and send it to the Federal Register for publication.

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Author: LPclient

WASHINGTON — The Financial Industry Regulatory Authority (FINRA) today announced that Carol Anthony (John) Davidson, retired Senior Vice President, Controller and Chief Accounting Officer of Tyco International, will join FINRA's Board of Governors. Mr. Davidson, who will begin his term on Jan. 1, fills the seat vacated by Ellyn Brown.