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Hedge Fund Manager to Pay $5 Million for Compliance Failures Related to Valuation of Fund Assets

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SECWashington D.C., June 4, 2019 — The Securities and Exchange Commission today announced that a private fund manager in the mortgage-backed securities space has agreed to pay a $5 million penalty to settle charges stemming from compliance deficiencies that contributed to the firm’s failure to ensure that certain securities in its flagship fund were valued properly.

The fund manager’s chief investment officer (CIO) agreed to pay a $250,000 penalty.

An SEC investigation found that Colorado-based investment adviser Deer Park Road Management Company LP, in connection with its flagship STS Partners’ fund which has been ranked as one of the most consistent performing hedge funds in the country, failed to have policies and procedures to address the risk that its traders were undervaluing securities and selling for a profit when needed.  The firm also failed to guard against its traders’ providing inaccurate information to a pricing vendor and then using the prices it got back to value bonds.  CIO Scott Burg oversaw the valuation of certain assets in the flagship fund and approved valuations that the traders flagged as “undervalued” with notations to “mark up gradually.”  Also overseeing valuation was a committee comprised of the principal’s relatives and others without relevant expertise.

“Valuation of client assets is a critically important area for investment advisers,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.  “Deer Park’s pervasive compliance failures allowed its traders to mark assets up gradually instead of marking them to market, in violation of the accounting principles they were required to follow.”

Without admitting or denying the findings in the SEC’s order, Deer Park consented to a censure and Deer Park and Burg agreed to cease and desist from committing or causing any violations and future violations of a provision of the Investment Advisers Act requiring reasonably designed policies and procedures.

The SEC’s investigation was conducted by William Finkel and Gregory Smolar of the Complex Financial Instruments Unit and Douglas Smith of the New York office with assistance from Ling Yu of the Office of Compliance Inspections and Examinations as well as Dugan Bliss and Christopher Dunnigan.  Osman Nawaz and Mr. Michael supervised the case.

21 Charges Filed by FMA Act Against Man Who Convinced Members of the Public to ‘Invest’ with Him

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FMA FMA ActThe Financial Markets Authority has charged a man with offences under the Crimes Act and the FMA Act at the Manukau District Court.

He has been charged with:

  • 16 charges of obtaining by deception under Section 240 of the Crimes Act 1961
  • 3 charges of dishonestly using a document under Section 228 of the Crimes Act 1961
  • 2 charges of obstruction of the FMA’s powers under Section 61 (1) (b) of the Financial Markets Authority Act 2011.

The maximum penalty for the Crimes Act charges is 7 years imprisonment. The maximum penalty for obstruction of the FMA’s powers is a fine of $300,000.

The FMA alleges the man contacted people and convinced them to ‘invest’ by transferring money into bank accounts he controlled. After incorporating a company, he further cold-called other investors to promote a foreign exchange investment service which did not exist.

He obtained just under $100,000 from the people he contacted. Neither he, nor his company was authorised or licensed by the FMA, but he held out he would invest funds on their behalf.

Karen Chang, FMA Head of Enforcement said, “The FMA will take enforcement action where it sees conduct at the perimeter of financial markets that harms investors or could damage the reputation of New Zealand’s financial markets.”

“Investors should always check if the person or company they are dealing with is licensed by the FMA, which provides basic protections.” Ms. Chang said. More information for investors on how to protect themselves from scams can be found here.

The man also obstructed the exercise of the FMA’s powers during the investigation, by giving false evidence in purported compliance with a notice issued to him under section 25 of the Financial Markets Authority Act 2011.

A first hearing is scheduled for 12 June 2019.

SEC Sues Alleged Perpetrator of Fraudulent Pyramid Scheme Promising Investors Cryptocurrency Riches

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SECWashington D.C., May 23, 2019 — The Securities and Exchange Commission filed a civil injunctive action against Daniel Pacheco, a resident of San Clemente, California, and the alleged perpetrator of a multimillion-dollar pyramid scheme.

The SEC’s complaint, filed Wednesday, alleges that from January 2017 through March 2018, Pacheco conducted a fraudulent, unregistered offering of securities through two California-based companies he controls, IPro Solutions LLC and IPro Network LLC (collectively, “IPro”). IPro raised more than $26 million from investors by selling instructional packages that provided lessons on e-commerce. Investors also received “points” that could be converted into a digital asset known as PRO Currency. Investors who contributed additional funds could earn a mixture of cash commissions and additional convertible points by recruiting new investors into the IPro network. As alleged in the complaint, however, IPro was a fraudulent pyramid scheme. IPro’s inevitable collapse was hastened by Pacheco’s fraudulent use of investor funds, which included, among other things, the all-cash purchase of a $2.5 million home and a Rolls Royce. Pacheco’s misappropriation accelerated the rate at which IPro became unable to pay the commissions and bonuses due its investors.

The complaint further alleged that Pacheco’s offer and sale of IPro instructional packages constituted an unregistered sale of securities because the IPro instructional packages involve (i) an investment in a pyramid scheme; and/or (ii) an investment in the PRO Currency digital assets, and therefore must be registered with the SEC unless an exemption applies. No registration exemption applies to Pacheco’s offer and sale of IPro instructional packages.

“We allege that Pacheco hid an old fraud under the guise of cutting-edge technology,”said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office. “He enticed investors by offering them the opportunity to speculate in cryptocurrency, when in fact he was simply operating a pyramid scheme.”

The SEC’s complaint, filed in U.S. District Court for the Central District of California, charges Pacheco with violating Sections 5(a), 5(c), 17(a)(1) and 17(a)(3) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and (c) thereunder.  The complaint also names seven relief defendants for the purpose of recovering investor proceeds in their possession that must be returned. The SEC does not allege wrongdoing with respect to these relief defendants.

The SEC’s investigation was conducted by Peter Del Greco, Eric Shu and Maria Rodriguez, and supervised by Marc Blau, of the Los Angeles office, with the assistance of trial attorney Gary Leung, who will lead the litigation.

Broadridge to Launch Investor Voting App

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Investor Voting AppThe Investor Voting App, which builds on the firm’s mobile voting feature launched in 2011, allows investors to vote directly and receive important regulatory and educational information relating to corporate direction.

Broadridge Financial Solutions has announced the imminent launch of a new app on Android and iPhone for individual investors that allows them to vote and equips them with new tools and educational resources designed to drive more meaningful engagement from social media to government elections.

The app’s single personalized dashboard creates an intuitive, streamlined experience designed to empower people to have their voices heard and exercise their rights.

According to ProxyPulse, individual investors participated in only 28 percent of the total voting opportunities available to them in 2018. Broadridge’s app targets this demographics specifically. This app is the next step in using technology to transform and increase individual investor engagement.

Tim Gokey, President and Chief Operating Officer at Broadridge

Tim Gokey, President and Chief Operating Officer at Broadridge

Tim Gokey, President and Chief Executive Officer at Broadridge, commented:

“Individual investors have an important voice in the future of the companies that they invest in, yet few realize the power they yield. Their votes not only impact their own financial well-being, but can have lasting effects on our economy and society. This app will empower investors of all kinds to exercise their right to vote and participate in the corporate governance process.”

Through thumbprint and facial recognition, individual investors can sign-in securely as well as sign up for mobile push notifications to alert them of meetings and elections. Banks’ and brokers’ branding will be prominently featured within the app. Investors will be able to review and change their votes, sign up for electronic delivery from their bank or broker and download materials, among other features.

This month, Broadridge launched a firm-specific fund-by-fund comparative securities lending assessment solution for mutual fund companies and the boards that oversee their funds.

The company has further expanded its global market intelligence business with the acquisition of MackayWilliams in mid-2018.

New SEC Campaign Educates Investors on Where and How to Get Answers

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SECWashington D.C., April 8, 2019 — The Securities and Exchange Commission today unveiled a public service campaign to empower Main Street investors to take control of their financial future. New SEC Campaign Educates Investors to use the free tools and unbiased information available on the SEC’s online resource for investor education−Investor.gov−to get answers to their questions about investing.

Jay Clayton, SEC Chairman

Jay Clayton, SEC Chairman

“Main Street investors around the country have consistently told me two things: one, that they wish they were better informed about investing, and two, they wish they had started investing earlier. Asking the right questions of yourself and of those who provide financial services is key to getting started and staying on the right track,” said SEC Chairman Jay Clayton. “Whether you’re an experienced investor or new to the market, Investor.gov can help you identify questions and find answers.”

“This campaign is another way to maximize our education efforts to make investors aware of the information they need to make smart saving and investing decisions,” said Lori Schock, Director of the SEC’s Office of Investor Education and Advocacy. “Starting early and creating a financial plan is the best way to secure your financial future, and Investor.gov is a great place to start.”

The PSA highlights people from various walks of life asking questions about investing topics, such as planning for retirement, reading a 10-K, checking out the background of an investment professional, and understanding fees, IPOs, hedge funds, 529 plans, compound interest, and more. It concludes with asking the question, “Where do I start?” encouraging investors to go to Investor.gov to get answers to their most commonly asked questions.

New SEC Campaign Educates Investors on Where and How to Get Answers

New SEC Campaign Educates Investors on Where and How to Get Answers

Additional information on the PSA can be found here.

More than 12 million new users have accessed Investor.gov since it launched in October 2009.  The SEC expanded its outreach program in 2016 to include PSAs to reach and educate more investors.

Marketing of Funds in Norway in Case of a No-Deal Brexit.

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finanstilsynetThe UK will become a third country in relation to EU-rules if it withdraws from the EU without a deal (“hard Brexit” or ” no-deal Brexit “). Fund management companies based in third countries are not eligible for the notification regime (passporting) for marketing, as set out in the UCITS and AIFMD directives. Marketing of funds associated with third countries in Norway requires authorisation from Finanstilsynet.

Repeal of right to market funds in Norway

Foreign funds (UCITS and AIFs) may be marketed in Norway depending on the funds category and the location of both the fund and the fund manager. The following legal grounds to market funds in Norway will no longer apply in case of a no-deal Brexit.

  • The right to market UCITS established in the UK under the notification regime according to the UCITS-directive. UCITS established in the UK will be reclassified as third country AIFs.
  • The right to market UCITS established in another EEA-country where the fund manager is established in the UK, and the fund is notified for marketing in Norway.
  • The right to market AIFs established in the UK to professional investors according to the notification regime in the AIFMD. This applies regardless of whether the AIFM is established in the UK or in another EEA-country.
  • The right to market AIFs established in another EEA-country based on the notification regime as per the AIFMD where the AIFM is established in the UK.
  • The right to market AIFs established in a third country where the AIFM is established in the UK with authorisation according to the Norwegian AIFM Act section 6-4 (AIFMD article 36).

If a no deal Brexit occurs, Finanstilsynet will deregister funds in the above listed categories, in which case all marketing activities must cease.

Marketing of alternative investment funds in Norway where the fund or the manager is established in a third country

In accordance with Norwegian law (The Norwegian AIFM Act and the Norwegian Securities Funds Act), funds established in third countries may be marketed in Norway with authorisation from Finanstilsynet. Finanstilsynet may also permit the marketing of funds domiciled in the EEA where the fund manager is established in a third country.

Marketing of funds to non-professional investors:

Marketing of securities funds to non-professional investors may be permitted under the Norwegian Securities Funds Act section 9-4. This includes current UK UCITS funds reclassified as AIFs in case of a no deal Brexit, and where authorisation from Finanstilsynet will be required.

Marketing of funds to professional investors:

  • Alternative investment fund managers established in the EEA may apply for a marketing permission pursuant to the Norwegian AIF Act section 6-4 (AIFMD article 36), where the fund subject to marketing is established in a third country.
  • Alternative investment fund managers established in a third country may apply for a marketing permission pursuant to the Norwegian AIF Act section 6-5 (AIFMD article 42). This applies regardless of where the fund is established.

Special cases

Alternative investment fund managers that hold a marketing authorisation granted under the Norwegian AIF Act section 6-4 (AIFMD article 36) may apply for an authorisation according to the Norwegian AIF Act section 6-5 (AIFMD article 42) following a simplified procedure. Reclassification of the AIFMs marketing authorisation will require reporting to Finanstilsynet pursuant to AIFMD Annex IV.

UCITS established in the UK that currently market units in Norway based on the notification-regime may apply for a license to market units to non-professional investors pursuant to the Norwegian Securities Funds Act section 9-4 following a simplified procedure. In addition, if the units are to be marketed to professional investors, marketing permission following the Norwegian AIF Act section 6-5 (AIFMD article 42) must be applied for.

Regarding applications

Finanstilsynet will not process any applications as described above before it is certain that the UK becomes a third country (no deal Brexit).

Broadridge Launches Securities Lending Assessment Solution for Mutual Funds

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Securities Lending Assessment SolutionThe solution is currently being used by a number of clients including a tier-one global investment manager. Broadridge Financial Solutions has launched its firm-specific fund-by-fund comparative securities lending assessment solution for mutual fund companies and the boards that oversee their funds.

Going by the name of Broadridge Securities Lending Board Insights, the client-specific report lets companies monitor the relative cost, fee ‘splits’, and income obtained from their securities lending arrangements.

Additionally, it helps interested parties receive appropriate rewards for the risks they undergo in their lending programs and helps to reduce risk related to mal-distributed securities lending income.

Eric Bernstein, Head of Asset Management Solutions at Broadridge

Eric Bernstein, Head of Asset Management Solutions at Broadridge

Eric Bernstein, head of Asset Management Solutions at Broadridge, commented:

“Faced with mounting pressure on fees and the need for a clearer understanding of competitive financials, many funds are looking to securities lending programs to maximize yield on their long-term holdings. Based on Broadridge’s unique data set, coupled with rich subject-matter expertise, the reports help boards and fund companies get ahead of today’s challenges to capitalize on what’s next, uncovering opportunities to improve their returns.”

Designed specifically for those who oversee (rather than carry out) securities lending arrangements, the Securities Lending Board Insights reports may also provide useful insights for the agent lender community as they look to benchmark their offerings against other service providers and to discuss program parameters with clients.

The solution fulfils obligations under Section 15(c) of the Investment Company Act of 1940, as well as the SEC mandates and other regulatory requirements.

The global Fintech leader and part of the S&P 500 Index has recently appointed Manuel Baptista as Managing Director and Head of Sales. Based in Brussels, Belgium, he is leading a global sales team focusing on expanding Broadridge’s Investor Communication Solutions (ICS) suite of services.

“Funds in Focus”: Invest like Warren Buffet – Value Investing in 2019

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SIX Swiss Exchange“Funds in Focus”: Invest like Warren Buffet – Value Investing in 2019

A series of articles by Bank Julius Baer looks at topical investment themes in the Sponsored Funds trading segment of SIX Swiss Exchange.

Focus on the investment approach “value strategy” – this the latest guest contribution by Julius Baer[PDF]. Value investors do not want to achieve short-term profits, but instead make investments with long-term expectations. The current situation on the financial markets is not causing much concern among value investors, as they adhere to strict rules as to when to buy and resell a stock. They only buy a stock if the trading price is, for example, 40% lower than the intrinsic value that they have calculated. Benjamin Graham named this the safety margin. Value investors will only sell a stock once it has reached the calculated intrinsic value. A selection of traditional value investing investment funds that are traded at SIX in the Sponsored Funds segment are listed in this article.

Article series: “Funds in Focus”

Launched in March 2017, the series of articles “Funds in Focus” presents different topical investment themes, including a list of Sponsored Funds that relate to the given theme. The team of authors consists of the fund specialists at Bank Julius Baer that handle the market making of traditional investment funds.

The series of articles had started with a guest contribution about gold mine funds. The second issue in the series had looked at investment funds, that, when transacted in the traditional way on the primary market, attract commission paid to the fund by the investor – fees that can be avoided by trading fund units on the stock exchange. All the articles are available on our website.

SIX Swiss Exchange launched the trading segment for Sponsored Funds in March 2013 together with Julius Baer in November 2013. Currently the segment includes 436 products and close to 80 leading providers.

Broad information offering

We provide investors with extensive expertise and comprehensive information. You can view trading activity on SIX Swiss Exchange on our website at any time. Further information about the benefits of Sponsored Funds may be found in ourfactsheet[PDF].

Smart Investor Tool Launched to Help Kiwis Get Ahead Financially

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FMAA new online tool called Smart Investor Tool enables Kiwis to search and compare New Zealand investments such as KiwiSaver, shares, bonds and other types of managed products for the first time.

Housed on the Sorted website, the portal offers the first opportunity for KiwiSaver members to explore their fund’s investments in detail, and compare their fund against other offerings.

Sorted’s Managing Editor, Tom Hartmann, says that members would be able to see, for example, the companies in which their KiwiSaver funds were invested, and decide whether their money was invested ethically. Fees would be broken down and compared against those of other providers, along with returns.

“The tool will encourage greater transparency in the financial sector by revealing everything to consumers about where their money is going, and how well their provider is performing,” says Hartmann.

When KiwiSaver members are ready to move on to other types of investing, they can compare other managed funds, managed investments and share and bond offers. The site also offers guides on investing and definitions of jargon.

“Our aim was to break down the barriers to investing so that all New Zealanders could benefit from this way of growing their money,” says Hartmann.

Smart Investor has been built by three government agencies – the Ministry for Business, Innovation and Employment (MBIE), the Financial Markets Authority (FMA) and the Commission for Financial Capability (CFFC), which runs Sorted. Its creation was part of the government fulfilling its role in enabling anyone to compare information about financial products.

Scott McMurray, FMA acting director of investor capability, welcomed Smart Investor as a major step in helping people make informed decisions about their investments.

“With all the relevant information in one place, investors can review a whole range of financial products, including KiwiSaver and managed funds, bonds and shares. You can check how similar products compare with each other for fees and returns, and also find out where and how your money is invested.”

The information the site provides is pulled from the Disclose Register run by the Companies Office. Financial Service Providers are required to provide this information as part of their legal disclosure requirements. Smart Investor is updated daily.

Consumers do not have to input any personal information to access the site’s services, which are independent and impartial.

“The tool simply serves up heaps of helpful facts so Kiwis can make savvy decisions,” says Hartmann. “It’s a safe environment to compare the many investment options out there to help New Zealanders get ahead financially.”

Federal Court Orders Husband and Wife Team and Their Company to Pay Defrauded Customers More Than $1 Million in Connection with a Futures Trading Scheme

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CFTC Futures Trading SchemeThe Commodity Futures Trading Commission (CFTC) announced today that on December 27, 2018 a Washington State federal court ordered Bellevue, Washington residents Sung Hong a/k/a Lawrence Hong or Laurence Hong, his wife, Hyun Joo Hong a/k/a/ Grace Hong, and their company Pishon Holding LLC to pay more than $1.25 million in restitution in connection with an enforcement action brought by the CFTC charging the defendants with fraudulent solicitation and misappropriation involving futures contracts.  In addition to the restitution, the Court Order also imposes a permanent trading and registration ban on the Hongs and Pishon and prohibits them from violating provisions of the Commodity Exchange Act (CEA) as charged.

The Court’s Order stems from a CFTC Complaint filed on June 1, 2017 in the U.S. District Court for the Western District of Washington.  [See CFTC Press Release 7569-17].  In the Order, Judge Marsha Pechman found that the Hongs and Pishon misappropriated $1,259,317.77 from their customers.  Additionally, the court found that the Hongs and Pishon fraudulently solicited more than $11 million dollars from customers for the purpose of trading futures contacts.  The court further found that the Hongs and Pishon lied about, about among other things how much money they had under management; Laurence Hong’s prior trading success; and how trading fees would be deducted from customer accounts.  At the same time, the Court Order found, the Hongs and Pishon failed to tell customers that Laurence Hong had been imprisoned previously for 33 months in connection with wire fraud charges.

In a parallel criminal case filed in the United States District Court for the Western District of Washington, Laurence Hong and Grace Hong pleaded guilty on March 27, 2018 and March 30, 2018, respectively, to multiple criminal counts.  See Case No. CR17-163TSZ.  On October 11, 2018, Laurence Hong was sentenced to a 180-month prison term and Grace Hong was sentenced to a 72-month prison term.  The court ordered that the defendants also pay restitution in the criminal matter.  In recognition of the prior restitution award in the criminal matter, Judge Pechman ordered that the defendants may offset their civil restitution obligation with payments in the criminal matter on a one-to-one basis.

The CFTC cautions victims that restitution orders may not result in the recovery of money lost because the wrongdoers may not have sufficient funds or assets.  The CFTC will continue to fight vigorously for the protection of customers and to ensure the wrongdoers are held accountable.

The Division of Enforcement thanks the United States Attorney for the Western District of Washington and the FBI for their invaluable assistance and cooperation.

The CFTC Division of Enforcement staff members responsible for this case are Kevin Samuel, Ilana Waxman, Kim Bruno, Alison Wilson, and Rick Glaser.

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