The Securities and Exchange Commission (“SEC”) has accused a Bellevue, Washington man of defrauding 250 Chinese investors. In its complaint, the SEC alleges that Lobsang Dargey (“Dargey”), through his “Path America” companies, was able to raise over $125 million from investors seeking United States residency through the EB-5 Immigrant Investor Pilot Program. Under the EB-5 program, foreign citizens may qualify for residency for making qualified investments of at least $500,000 in in a specified project that creates or preserves at least 10 jobs for U.S. workers.

As part of his scheme, Dargey told the investors and U.S. Citizenship and Immigration Services (“USCIS”) they would be investing in a Seattle Skyscraper and other real estate projects in Everett, Washington. Instead, $14 million was diverted to unrelated real estate projects and $3 million was used to purchase a home and make cash withdrawals at various casinos. According to Jina L. Choi, Director of the SEC’s San Francisco Regional Office “Dargey promised investors their money would be used to develop specific real estate projects approved under the EB-5 program, but he misused millions of dollars to enrich himself and jeopardized investors’ prospects for U.S. residency.”

As a means to protect current and future investors, the SEC has frozen Dargey’s assets as he recently filed new materials with USCIS to raise an additional $95 million through the EB-5 Program. Dargey also transferred $3 million to a foreign bank account which the SEC is requiring he repatriate. A restraining order also has been issued against Dargey and his companies from soliciting additional investors.

Jacko Law Group, PC can assist your firm with issues pertaining to its EB-5 business. JLG can provide counsel pertaining to consulting arrangements and requisite disclosures for EB-5 offerings to your clients and regulatory considerations pertaining thereto.

For more information on this and other related subjects, please contact us at info@jackolg.com

or (619) 298-2880.

According to a Financial Industry Regulatory Authority (“FINRA”) complaint, Aegis Capital Corp. (“Aegis”), a New York-based retail and institutional broker-dealer, was found to have committed securities-related misconduct during its time as a FINRA member. FINRA has charged Aegis with improper sales of billions of shares of unregistered penny stocks, and supervisory and anti-money laundering (“AML”) systems and procedures failures. The violations resulted in sales of $24.5 million and $1.1 million in commissions for Aegis.

The Securities and Exchange Commission (“SEC”) announced last week that it paid out over $3 million to a whistleblower. The payment marks the third highest award since the inception of the Office of the Whistleblower, which was established to administer the SEC’s whistleblower program in 2011. According to the SEC press release the “whistleblower’s specific and detailed information comprehensively laid out the fraudulent scheme which otherwise would have been very difficult for investigators to detect.”

As part of its 2015 Examination Priorities the Office of Compliance Inspections and Examinations (“OCIE”) included “examining matters of importance to retail investors and investors saving for retirement” to its initiatives. Based on this priority, the Retirement-Targeted Industry Reviews and Examinations (“ReTIRE”) Initiative has been created under which examinations of SEC-registered investment advisers and broker-dealers (collectively, “registrants”) will take place. OCIE will administer the examinations through the National Examination Program (“NEP”).

The Securities and Exchange Commission (“SEC”) has charged a Wisconsin-based investment advisory firm and its owner with “cherry-picking.” Mark P. Welhouse of Welhouse and Associates, Inc. (“Welhouse”) has been accused of placing more favorable trades in his personal and business accounts while allocating less favorable ones to his clients. This is the first case resulting from the SEC’s data-driven initiative.

This May the Financial Industry Regulatory Authority (“FINRA”) made revisions to its Sanction Guidelines pertaining to misrepresentations and suitability. The Sanction Guidelines were developed for FINRA by The National Adjudicatory Council (“NAC”) to assist Hearing Panels and the NAC (collectively, the “Adjudicators”) to determine appropriate disciplinary sanctions. Periodically, the NAC reviews the Sanction Guidelines to determine whether current sanctions “are sufficient to achieve deterrence and reflect sanction trends in litigated and settled cases.”

While the NAC did not cite examples of violations as an impetus for the changes, a review of the Sanction Guidelines found that current sanctions were not sufficient to achieve deterrence. Below are highlights of the NAC’s revisions to the Sanction Guidelines from FINRA’s Regulatory Notice 15-15:

• Revisions to the Sanction Guideline Related to Fraud, Misrepresentations or Material Omissions of Fact

For reckless or intentional fraud the new Sanction Guidelines “eliminates the guidance that individuals should merely be “considered” for a bar in egregious cases. The revision states Adjudicators should “strongly consider” barring an individual”. Similar amendments were made addressing firms.

• Revisions to the Sanction Guideline Related to Suitability – Unsuitable Recommendations

The guideline was amended to “increase the high-end of the suspension from one year to two years and to “strongly consider” barring an individual respondent where aggravating factors predominate the respondent’s misconduct” for unsuitable recommendations by individuals.

• Revisions to the General Principles Applicable to All Sanction Determinations, Nos. 1 and 2

The amended General Principle No. 1 advised Adjudicators to consider imposing higher sanctions than recommended to “achieve deterrence, and not a mere cost of doing business.” General Principle No. 2 has been amended to advise adjudicators to impose “progressively escalating sanctions” on individuals and firms with disciplinary history.

These changes reflect the predominant mentality among Adjudicators that harder penalties are required to deter wrongdoing. It is strongly recommended that firms examine their Written Supervisory Procedures in light of these revisions to ensure compliance and avoid harsh penalties.

For more information on this and other related subjects, please contact us at info@jackolg.com

or (619) 298-2880.

Last September, Houston-based Investment Advisory Firm, Robare Group Ltd. (“Robare”), was charged with violating Sections 206(1), 206(2) and 207 of the Investment Advisers Act of 1940 by the Securities and Exchange Commission (“SEC”). The SEC’s enforcement division discovered an undisclosed revenue sharing agreement between Robare and its custodian Fidelity Institutional (“Fidelity”). According to the SEC, Robare made mutual fund recommendations to its clients without properly disclosing the agreement. The arrangement resulted in payments of $440,000 over eight (8) years.

The SEC alleged that Robare did not disclose this potential conflict of interest on its Form ADV Part 2. According to Judge Grimes, “Fidelity would remit payments to the Robare Group when the Robare Group’s clients invested on Fidelity’s platform in certain “eligible” non-Fidelity non-transaction fee funds.” Under the agreement Robare would receive between two (2) and twelve (12) basis points based on eligible assets under management.

Last week one of the SEC’s own administrative law judges, James Grimes, dismissed the charges against Robare and its co-owners Mr. Mark L. Robare, and Jack L. Jones, Jr in a 44-page decision. Judge Grimes stated that while the firm didn’t disclose the relationship in its Form ADV “The form itself says that a firm ‘may disclose this additional information to client in [the firm’s] brochure or by some other means.” The “other means” in this case were a brochure, fee agreement, new account agreement and disclosure documents.

Judge Grimes also argued that Robare’s use of out outside compliance firms “to ensure the Robare Group was compliant with its disclosure obligations belies any argument that Mr. Robare or Mr. Jones acted with intent to deceive, manipulate, or defraud anyone.” This may be reason for advisers to seek counsel when evaluating existing disclosures or creating new ones.

Jacko Law Group, PC (“JLG”) creates, analyzes and revises client disclosure documents on behalf of broker-dealers, investment advisory firms, investment companies, hedge fund managers, private equity firms, and other financial, securities and corporate law clients throughout the United States and internationally.

JLG can assist you with evaluating disclosure documents and assess how you may wish to enhance them.

For more information on this and other related subjects, please contact us at info@jackolg.com

or (619) 298-2880.

Jacko Law Group, PC (“JLG”) published its monthly Legal Risk Management Tip (“Legal Tip”), written by Managing Partner & CEO, Michelle Jacko. Jacko’s Legal Tip discusses the May 20, 2015 Securities and Exchange Commission's Release No. IA-4091 which proposes certain amendments to Form ADV in order to obtain additional data related to an adviser’s business practices in three broad areas:

Jacko Law Group, PC (“JLG”) published its monthly Legal Risk Management Tip (“Legal Tip”), written by its Attorney, Robert Boeche this April. Boeche’s Legal Tip discusses whether anti-money laundering (“AML”) regulations apply to investment advisers, duties owed by investment advisers, and potential regulatory changes that may be occurring in the near future.

This March the Securities Industry and Financial Markets Association’s (“SIFMA”) Compliance and Legal Society Annual Seminar was held in Phoenix, Arizona. The seminar hosted over 300 industry experts who discussed the latest regulatory and compliance issues. This post will highlight remarks made by Mary Jo White, Chair of the U.S. Securities and Exchange Commission (“SEC”).