Excessive or Unnecessary Mark-up fraud and Misrepresentation FINRA Arbitration and Litigation Attorney, Russell L. Forkey, Esq.
The Securities and Exchange Commission recently charged a former securities trader at a San Diego-based brokerage firm with orchestrating an illegal trading scheme.
The SEC alleges that Aurelio Rodriguez acted in concert with a Mexican investment adviser, InvesTrust, and unnecessarily inserted a separate broker-dealer as a middleman into securities transactions in order to generate millions of dollars in additional fees. Rodriguez, who resided in Coronado, Calif., at the time and currently lives in Mexico, agreed to pay $1 million to settle the SEC’s charges. The SEC also charged his former firm Investment Placement Group (IPG) and its CEO with failing to properly supervise Rodriguez. IPG agreed to pay more than $4 million to settle the charges.
In an interpositioning scheme, an extra broker-dealer is illegally added as a principal on trades even though no real services are being provided. The SEC alleges that Rodriguez colluded with InvesTrust and needlessly inserted a broker-dealer based in Mexico into securities transactions between IPG and InvesTrust’s pension fund clients, causing the pension funds to pay approximately $65 million more than they would have without the middleman.
“Rodriguez repeatedly abused his position as a securities industry professional to commit this cross-border fraudulent scheme to the detriment of the pension funds,” said Rosalind R. Tyson, Director of the SEC’s Los Angeles Regional Office. “The scheme’s participants reaped millions of dollars from these illicit activities.”
According to the SEC’s order instituting administrative proceedings against Rodriguez, the scheme occurred from January to November 2008. Rodriguez in coordination with InvesTrust acquired 10 different credit-linked notes in an IPG proprietary account. Rodriguez knew that the notes were slated for InvesTrust’s pension fund clients.
The SEC alleges that IPG, through Rodriguez, added a markup of roughly 1.5 to 4.5 percent to the purchase price and then sold the notes to the middleman Mexican brokerage firm. IPG, through Rodriguez, repurchased the notes from the Mexican brokerage firm within a day or so at a slightly higher price. IPG added another markup and then sold the securities to InvesTrust’s pension fund clients.
According to the SEC’s order, in some instances Rodriguez repeated the buy-sell pattern with the middleman Mexican brokerage firm multiple times, driving up the price with each successive trade before finally selling the notes to the pension funds at artificially inflated prices. Rodriguez received millions of dollars in additional markups generated from the interpositioned transactions.
The SEC’s order finds that Rodriguez violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5. Without admitting or denying the SEC’s findings, Rodriguez consented to the order and agreed to pay $1 million in ill-gotten gains and to be barred from the securities industry as well as from participating in any penny stock offering, for five years. The order also requires him to cease and desist from committing or causing any violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5.
The SEC instituted separate but related administrative proceedings against IPG and its CEO Adolfo Gonzalez-Rubio, who was Rodriguez’s direct supervisor. IPG and Gonzalez-Rubio each agreed to settle their cases without admitting or denying the SEC’s findings. IPG agreed to be censured, pay approximately $3.8 million in disgorgement and prejudgment interest, pay a $260,000 penalty, and comply with certain undertakings. Gonzalez-Rubio agreed to a three-month suspension as a supervisor with any broker, dealer, investment adviser, or certain other registered entities.