FINRA Files Proposed Changes to Arbitration Code

FINRA has filed with the SEC a proposed rule change to amend Rules 12100(r), 12506(a), and 12902(a) of the Code of Arbitration Procedure for Customer Disputes (“Customer Code”) and Rule 13100(r) of the Code of Arbitration Procedure for Industry Disputes (“Industry Code”) to amend the definition of “associated person,” streamline a case administration procedure, and clarify that customers could be assessed hearing session fees based on their own claims for relief in connection with an industry claim.  According to the accompanying releases, these amendments are necessitated by inadvertent deletions of language from the previous Code.

Comments are due 21 days after publication in the Federal Register.

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SEC Proposes Rule Amendments to Strengthen the Regulatory Framework for Money Market Funds

On June 24, 2009, the Securities and Exchange Commission (the “SEC”) proposed rule amendments designed to strengthen the regulatory framework for money market funds to increase their resilience to economic stresses and reduce the risks of runs on the funds.1

This alert provides a brief overview of money market funds and the SEC’s proposals to reform the regulation of these funds. It also assesses the SEC’s proposals against the recommendations included in the Treasury Department’s June 17, 2009 white paper on Financial Regulatory Reform (the “White Paper”) and the Investment Company Institute’s March 17, 2009 Report of the Money Market Working Group (the “Report of the Money Market Working Group”).

Please see full alert for more information.

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Man Charged In Ponzi-Like Scheme

- A Chula Vista resident and two entities he controls were charged in San Diego federal court Wednesday with operating a Ponzi-like scheme through five hedge funds.

According to the U.S. Securities and Exchange Commission complaint, Moises Pacheco, Advanced Money Management Inc. and Business Development & Consulting Co. raised $14.7 million from more than 200 investors over a 3 1/2-year period, acting as investment advisers to the five self-described hedge funds — AP Premium Value Funds I through IV and Capital Partnership Group.

According to the SEC suit, Pacheco told investors he had developed a lucrative investment strategy involving the purchase and sale of covered call options, and that the hedge funds exclusively relied upon that strategy to generate trading profits ranging from 30 to 48 percent per year.

In reality, Pacheco did not generate the returns he claimed and instead used investors’ principal to pay purported returns until the scheme collapsed, according to the SEC.

The SEC alleges that the defendants further misused investor principal by transferring victims’ money to Pacheco, entities under his control, or numerous third parties for reasons having nothing to do with the purported trading.

Neither Pacheco nor his entities were registered with the SEC, according to the complaint.

Most fund investors live in the Chula Vista area, and know either Pacheco, one of his friends or family members, or another investor, according to the SEC.

“Pacheco disseminated monthly statements reflecting purported profits and trading activity, but provided little detail about how those returns were generated,” alleged Rosalind Tyson, director of the SEC’s Los Angeles regional office.

“These investors were principally solicited through word-of-mouth, which serves as a reminder to beware of opaque investment opportunities that promise unusually high payoffs even if it’s a referral coming from family or friends,” she said.

According to the complaint, the actual profits from the hedge funds totaled about $367,000, but investors were promised returns of more than $9.7 million.

The SEC alleges Pacheco, AMM and BD&C violated the securities registration and antifraud provisions of federal securities laws and is seeking permanent injunctions, return of alleged ill-gotten gains with pre-judgment interest and financial penalties.

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Huntington Sees $46.2M Gain On Trust-Securities Buy

Huntington Bancshares Inc. (HBAN) said it will see a gain of $46.2 million from its purchase of trust preferred securities as the regional bank continues its push to bolster capital levels by $675 million.

To date, the company has raised $567 million, which includes $449 million of common stock sold. When the company unveiled its capital-raising effort last month, it pegged planned stock sales at $350 million.

Huntington said $166.3 million in trust securities were tendered, with the company paying $96.2 million. Another $303.9 million of the securities remain outstanding.

The exchange was less than the company targeted, as Huntington had planned on a $75 million gain.

Shares rose 2.3% premarket to $4.43. The stock through Thursday was down 43% this year.

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Googles Latest Investment

Google Inc. invested $2.6 million more in 23andMe Inc., a Mountain View personal genetics company started by the wife of Google co-founder Sergey Brin.

The investment this month in a Series B preferred stock financing raises Google’s investment in the company that Anne Wojcicki co-founded to $7 million.

The latest investment was disclosed in a Google filing Thursday with the Securities and Exchange Commission.

Read full story.

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Kenexa accused of violating securities laws

Kenexa Corp. and two of its top executives have been accused of violating federal securities laws by failing to disclose certain facts about its business in 2007.

The Wayne, Pa.-based maker of Web-based human resources applications said Friday the class-action suit filed in the U.S. District Court for the Eastern District of Pennsylvania was “without merit,” and that it intends to vigorously defend itself.

Kendall Law Group, a law firm representing investors who purchased Kenexa  ( KNXA -  news  -  people ) stock between May 8, 2007, and Nov. 7, 2007, said the company and some of its officers and directors had failed to disclose certain facts.

They include the fact that sales cycles for some of the company’s business lines were lengthening, weakening sales and revenue growth; that Kenexa was having problems with its international sales and would need to overhaul that sales force; that it was having problems with a significant client, and that the defendants lacked a reasonable basis for positive statements about the company, according to the law firm.

Kenexa said it had been notified of the purported suit targeting the company, its chief executive and chief financial officer. It said more complaints based on similar allegations may be filed under the Private Securities Litigation Reform Act.

Shares of Kenexa rose slid 45 cents, or 3.3 percent, to close at $13.39 Friday.

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Riverstone Settles Pay-to-Play Charges with New York AG

New York Attorney General Andrew M. Cuomo today announced an agreement with private equity firm Riverstone Holdings LLC (“Riverstone”) to reform the public pension fund investment system and to resolve Riverstone’s role in Cuomo’s investigation of corruption involving the New York State Common Retirement Fund (“the CRF”). Under the terms of today’s agreement, Riverstone will adopt Cuomo’s Public Pension Fund Code of Conduct and pay $30 million in restitution to the CRF.

Attorney General Cuomo’s code of conduct bans investment firms from hiring, utilizing, or compensating placement agents, lobbyists, or other third-party intermediaries to communicate or interact with public pension funds to obtain investments. To avoid pay-to-play schemes, the Code prohibits investment firms (and their principals, agents, employees and family members) from doing business with a public pension fund for two years after the firm makes a campaign contribution to an elected or appointed official who can influence the fund’s investment decisions. This provision would also bar all firms currently doing business with the pension fund from making such campaign contributions. Investment firms must also disclose any conflicts of interest to public pension fund officials or law enforcement authorities, to increase transparency and avoid abuse of the fund for personal gain.

Riverstone is the second company to sign on to Cuomo’s Code of Conduct and will pay $30 million in restitution to the CRF. This brings to $50 million the total amount collected by Attorney General Cuomo on the Carlyle/Riverstone investments. The Carlyle Group (“Carlyle”) signed onto the code last month and paid $20 million to the State of New York to resolve its role in the Attorney General’s ongoing investigation.

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Citigroup launches public exchange offers

Citigroup Inc. on Wednesday launched a series of public exchange offers that will effectively give the government a 34 percent stake in the troubled bank.

Citigroup expects to convert into common stock a total of $58 billion of preferred stock and trust preferred securities, assuming full participation in the swaps.

Citigroup said in late February that it wanted to offer investors the option of exchanging preferred stock into common stock as a way to boost its capital reserves. As such, the government agreed to convert about $25 billion of its $45 billion preferred investment in the bank to common stock, which will give it a 34 percent stake in the New York bank.

The deal boosts Citi’s common equity — a benchmark the government is using to measure a bank’s ability to absorb losses.

Citigroup has been one of the most troubled banks throughout the financial crisis. Investors have long criticized its board and management for allowing the bank to make big investments in the risky housing market — actions that led to Citigroup reporting billions in losses.

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Time is of Essence with Arbitration

Arbitration often allows you to resolve disputes more quickly and cheaply than by going to court. Instead of judges or juries, arbitrators decide if wrongdoing occurred and how to correct or compensate you for it.

To take advantage of your legal rights, you must take legal action promptly or you may lose the right to seek a remedy or recover funds. Time restrictions, called “statutes of limitations,” vary from state to state. For example, federal securities laws generally require that you bring a court action within two years of the date that you should have reasonably discovered the wrongdoing, but in no case later than five years from the date the wrongdoing actually occurred. Arbitrators look to either a federal or state statute of limitations, depending on whether your claim is a violation of federal or state law. You generally cannot pursue an issue through arbitration if it is more than six years old.

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Merrill Lynch buys back $38 million in securities

Merrill Lynch will return more than $38 million to Montana investors who lost money in auction-rate securities.

The Securities Settlement

The settlement also provides that Merrill Lynch will pay a fine of $372,977 to be deposited into the Montana general fund; and contribute $40,000 to the Investor Protection Trust, which provides investor education to help consumers make informed investment decisions.

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