The SEC charged a brokerage firm and its founder for violations of net capital requirements and for falsifying documents in an attempt to keep the SEC from finding out. It also charged a Bahamas-based brokerage firm and its president with enabling a fraud; the state of Kansas with securities fraud; and an Atlanta-based accountant and three others with insider trading.
Also, the Justice Department is seeking both fine and forfeiture from Mathew Martoma for his role in SAC Capital's insider trading scheme, and two mutual fund companies suing Puerto Rico over its bankruptcy law changes are seeking to add claims to their suit.
Kansas Charged With Securities Fraud
The SEC has charged the state of Kansas with securities fraud for understating municipal bond exposure to unfunded pension liability.
According to the agency, the state's offering documents failed to disclose that the state's pension system was significantly underfunded, and the unfunded pension liability created a repayment risk for investors in those bonds.
The SEC has been conducting a nationwide review of bond offering documents to evaluate disclosures of material pension liabilities and other investor risks. Around the same time in 2010 that it charged the state of New Jersey with failing to disclose underfunding in that state's two largest pension plans, the agency also began to question disclosures surrounding eight bond offerings through which Kansas raised $273 million in 2009 and 2010.
The bond offerings were issued through the Kansas Development Finance Authority (KDFA) on behalf of the state and its agencies. According to one study at the time, the Kansas Public Employees Retirement System (KPERS) was the second-most underfunded statewide public pension system in the nation. In the offering documents for the bonds, however, Kansas did not disclose that significant unfunded liability, nor the effect of such an unfunded liability on the risk of nonappropriation of debt service payments by the Kansas state legislature.
As the SEC began its inquiry, Kansas began adopting new policies and procedures to improve disclosures about its pension liabilities. Kansas has now fully implemented those remedial actions, and has agreed to settle the SEC's charges for its prior incomplete disclosures without admitting or denying the findings.
Brokerage Firm, Founder Charged on Falsification, Net Capital Violations
Despite its efforts to mislead SEC examiners, a brokerage firm and its founder were charged with violating net capital requirements and falsifying books and records to conceal the capital deficiencies.
According to the agency, Charles "Chuck" Moore and Crucible Capital Group tried to hide the firm's extensive and repeated net capital shortfalls by offloading its liabilities onto the books of an affiliated firm and treating nonmarketable stock as an allowable asset. Moore even attempted to hide Crucible's true financial condition from SEC examiners via doctored invoices. Crucible had entered into an expense-sharing agreement with another firm, Angelic Holdings, that also was wholly owned by Moore. Under the agreement, Angelic was obligated to pay Crucible's expenses, so Moore had Crucible's vendors bill Angelic for the services they performed for Crucible. When SEC examiners asked for documents concerning Angelic's liabilities, Moore made sure the examiners got doctored copies of invoices that did not show significant past-due amounts.
Angelic didn't have the resources to pay the vendor debts, and if it were known that those debts were actually Crucible's, the fact that Crucible had failed to meet its required minimum net capital over the 10 months from December 2012 to September 2013 would become known.
The U.S. Attorney's Office for the Southern District of New York has also announced criminal charges against Moore for obstructing the SEC's examination.
Bahamas-Based Brokerage Firm, President Charged by SEC
The SEC has charged Bahamas-based Alliance Investment Management Limited (AIM) and its president, Julian Brown, with enabling a fraud that was stopped when the SEC charged the hedge fund manager at the center of the scheme.
According to the agency, Brown and AIM claimed to be the "custodian" for assets managed by Nikolai Battoo. Battoo's assets were frozen by the SEC in 2012 and he was charged with defrauding investors all over the world.
Brown and AIM misrepresented themselves to investors as Battoo's custodian when, since at least 2009, their firm did not have custody of most of the assets listed on investor account statements. They let Battoo create false account statements on AIM's letterhead that vastly overstated the value of investors' assets by more than $150 million. Brown and AIM then provided those statements to auditors and others acting on behalf of Battoo's investors.
