thinkadvisor.com | February 8, 2016
Among recent enforcement actions by the Securities and Exchange Commission, Wells Fargo & Co. has agreed to pay $1.2 billion to settle a lawsuit that brought claims of mortgage fraud against the firm.
In addition, the SEC charged a lending company and a brokerage firm with fraud and imposed a $1 million penalty on a brokerage firm for violating anti-money laundering protocols.
Wells Fargo to Pay $1.2 Billion on Mortgage Fraud Claims
Wells Fargo has agreed to pay $1.2 billion to settle a 2012 lawsuit filed in Manhattan that alleged misconduct by the firm in the origination and underwriting of government-insured mortgages.
In an 8-K filing with the SEC, the firm said it had “reached an agreement in principle” not only with the U.S. Attorney’s Office for the Southern District of New York, but also with the U.S. Attorney's Office in San Francisco and the U.S. Department of Housing and Urban Development to pay $1.2 billion “to resolve certain civil claims … relating to the company’s Federal Housing Administration (‘FHA’) lending program for the time period 2001–2010, as well as other potential civil claims relating to the company’s FHA lending activities for other periods.”
The Department of Justice had sought both damages and civil penalties under the False Claims Act when the suit was first filed.
Brokerage Firm to Pay $1 Million to Settle AML Charges From SEC
Miami-based brokerage firm E.S. Financial Services, now named Brickell Global Markets, has agreed to settle SEC charges that it violated anti-money laundering rules by allowing foreign entities to buy and sell securities without verifying the identities of the non-U.S. citizens who beneficially owned them.
According to the agency, during SEC examinations of E.S. Financial Services, the firm twice failed to provide required books and records identifying certain foreign customers whom they were soliciting directly and to whom they were providing investment advice.
In the SEC examination that followed, E.S. Financial’s customer identification program (CIP) failed to obtain and maintain documentation to verify the identities of certain non-U.S. customers who traded through a brokerage account opened by a Central American bank affiliated with the firm.
During a period of aproximately 10 years, E.S. Financial maintained a brokerage account for a Central American bank that was supposedly trading for its sole benefit. The firm, however, allowed 13 non-U.S. corporate entities and, in turn, 23 non-U.S. citizens who were their beneficial owners to execute more than $23 million in securities transactions through the Central American bank’s brokerage account.
E.S. Financial worked directly with these non-U.S. citizens as if they were E.S. Financial customers, but did not collect, verify,or document any information regarding their identities as required under anti-money laundering/CIP regulations.
The firm has neither admitted nor denied the findings. In addition to the $1 million penalty it has agreed to pay, it is also required to retain an independent monitor to directly review its anti-money laundering/CIP policies, procedures and practices for the next two years.
The SEC’s investigation is continuing.
Lending Company, Brokerage Firm Charged With Fraud
The SEC has charged Manhattan-based lending company American Growth Funding II LLC and its owner Ralph Johnson with fraud after they were accused of repeatedly lying to investors purchasing high-yield securities. The SEC also charged the brokerage firm that acted as the placement agent and two of its executives.
According to the agency, AGF II and Johnson promised investors 12% annual returns and falsely claimed its financial statements were being audited each year. Also, in offering documents, AGF II — which raises capital from investors to provide loans to businesses — also misrepresented its management and hid details about falling loan values that could endanger full payment of the promised returns to investors.
The company’s placement agent, Portfolio Advisors Alliance, and its owner, Howard Allen, and President Kerri Wasserman are alleged to have known the offering documents were inaccurate, but used them anyway to solicit sales of AGF II securities.
In a private placement offering, AGF II raised approximately $8.6 million from investors from March 2011 to December 2013. Its offering documents claimed that its financial statements had been audited and would continue to be audited each fiscal year. However, Johnson knew this was not true; no audit of AGF II’s financials occurred until 2014.
The documents also claimed that AGF II was governed by a board of managers, made up of Johnson and two other individuals, but the other two never agreed to serve in any managerial capacity.
Johnson caused AGF II to send out monthly account statements to investors that hid the true state of its finances. The company did not tell investors that it could not have possibly paid them their stated account balances because the majority of its loans were likely uncollectible at the time.
While PAA acted as the placement agent, Allen knew no later than June 2012 that AGF II’s offering documents were not accurate — but he continued using them to bring in investors, never telling prospects that the financial statements were unaudited. Allen told Wasserman that the offering documents contained false information, but Wasserman did nothing and the firm’s brokers continued using misleading documents to solicit investors.
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