7 enforcement trends and notable cases in 2022

December 26, 2022 4:42 PM

In a year that saw in the downfall FTX the most spectacular company collapse since the 2008 market crash, regulators had already been kept busier than usual with enforcement actions.

Both the Securities and Exchange Commission, which oversees Wall Street, and the North American Securities Administrators Association, which represents state and provincial regulators in the U.S., Canada and Mexico, released reports this year showing big increases in fines and restitution obtained from companies and professionals who had gone astray. The SEC obtained more than $6.4 billion in civil penalties, disgorgement and prejudgment in its 2022 fiscal year, which ran from Oct. 1, 2021, to Sept. 30 this year. That was the highest figure ever for the SEC, showing a 50% increase from the previous fiscal year.

Not to be topped, NASAA released a report on Sept. 21 showing its previous year's haul in fines came to $145 million, a 313% year-over-year increase. NASAA also obtained $4 million for investor education and $312 million in investor restitution.

Although the collapse of FTX overshadowed every other financial scandal this year, there were plenty of smaller cases that kept regulators busy. Here were some of the bigger ones.

Troubling trends

NASAA's enforcement report warned of emerging trends with scams involving everything from cryptocurrency to promissory notes. State regulators opened 161 investigations the previous year into cases dealing with promissory notes, 106 with the internet or social media, 90 with digital assets, 89 with stocks and equities, and 63 with Ponzi or pyramid schemes. NASAA also reported that state regulators received 6,643 tips and complaints in 2021, a 34% increase from the previous year. Those led to 5,337 new investigations and 1,661 enforcement actions.

The SEC's report called attention to similar trends while also singling out individual cases for special mention. The agency initiated 760 total enforcement actions in fiscal year 2022, a 9% increase from the previous year. Although the report's time period doesn't include the recent settlements the SEC reached with a pair of FTX executives, it does make mention of several cases involving crypto. On Feb. 14, for instance, the SEC charged the cryptocurrency lender BlockFi Lending with failing to register itself. BlockFi agreed to pay a $50 million penalty.

Other cases involved individual advisors. In one example cited by the SEC, the investment advisor Scott Adam Brander of the Little Silver, New Jersey-based firm Buckman Advisory Group agreed on Sept. 13 to a settlement of nearly $1.2 million for an alleged cherry-picking scheme that saw gains from profitable trades steered into Brander's own accounts rather than his clients. Other cases concerned everything from the SEC's first-ever enforcement of its Regulation Best Interest standard to the misuse of WhatsApp and other messenger services by advisors.

Read more:

NASAA warns of promissory notes in sobering annual report

SEC enforces Reg BI

The SEC adopted its Regulation Best Interest rule in 2020 to generally require brokers to put their clients' interests first while stopping short of barring all conflicts of interest. But it wasn't until June of this year that the agency brought a case alleging violations of Reg BI, as the regulation is known for short.

The defendant in the case is Pasadena, California-based Western International Securities. Along with five of its registered representatives, Western International was charged with violating Reg BI for recommending and selling $13.3 million worth of an unrated and illiquid securities known as L Bonds to retirees and other retail investors. Among other things, the SEC is accusing Western International of recommending the bonds to seven investors without having reason to believe the securities were in those clients' best interests.

The case is now in the U.S. District Court for the Central District of California.

Read more:

SEC levies record $6.5 billion in fines in 2022

Message app misuse

The SEC went after 16 large banks, their affiliates and other financial services for using WhatsApp and similar messaging services in violation of securities laws' recording-keeping provisions.

The firms, which included big names like Goldman Sachs, Morgan Stanley and Bank of America, agreed to pay $1.1 billion in total to settle the allegations. The Commodity Futures Trading Commission went after 11 of the same institutions on similar charges, levying $710 million worth of fines.

The SEC found that, from January 2018 to September 2021, employees of the firms routinely used text messaging on their personal devices to communicate with each other about business matters. The firms violated federal law by failing to keep records of what was being said through these channels.

Besides Goldman, Morgan Stanley and Bank of America, players in the case included Barclays Capital, Citigroup Global Markets, Credit Suisse Securities, Deutsche Bank Securities and UBS Securities. Also involved were affiliates of those institutions along with the financial firms Jefferies, Nomura Securities International and Cantor Fitzgerald.

The charges followed on a $125 million penalty levied against J.P. Morgan Securities in December 2021. Regulators have since warned that they'll be looking for similar violations at smaller companies.

Read more:

Goldman, Morgan Stanley, BofA, UBS among 16 firms to pay more than $1.8 billion over record-keeping failure

Elder abuse on the rise

Sadly, older Americans continued to be among the most susceptible to investment scams in 2022. This was highlighted in two cases in which internal anti-fraud controls at large wealth management firms failed to detect fraud brokers were committing against clients.

In one instance, Raymond James agreed to pay the SEC a $500,000 civil penalty after its broker Fred Stow confessed to defrauding a 98-year-old World War II veteran. A branch manager at the firm had questioned some of the broker's dealings with the client, but her concerns were ignored. Besides the SEC penalty, Raymond James also paid more than $1.4 million in restitution to the client's family.

The case bore several similarities to another in which the SEC alleges LPL Financial advisor Bradley Goodbred bilked a 97-year-old woman, who has since been diagnosed with dementia, out of $1.3 million. NASAA has reported that cases of elderly abuse are often online. There were 1,428 cases of suspected exploitation in 2021, up by 35% from 2020 and 118% from 2019. Besides unscrupulous advisors, online scams involving poorly understood assets like cryptocurrency are often to blame.

Read more:

Seniors lose nearly $72,000 on average to fraud. Regulators want advisors to help.

Fallen stars

FTX founder Samuel Bankman-Fried wasn't the only one-time superstar to suffer disgrace in 2022.

Edward Turley, a J.P. Morgan broker who had won praise from CEO Jamie Dimon, was barred by the Financial Industry Regulatory Authority on Nov. 17 amid allegations that he had recommended unsuitable investments and caused clients massive losses. FINRA, the brokerage industry's self-regulator, later granted $50 million in arbitration awards to former J.P. Morgan clients hurt in the scandal.

Turley once generated about $30 million a year from the $1.6 billion in assets he had under management for his clients. He was accused of placing a client's money in risky fixed-income investments consisting of high-yield junk bonds, foreign securities, preferred stocks, master limited partnerships and other products without gaining the formal required discretion to do so.

Read more:

Ex-J.P. Morgan Advisors rep barred after clients seek $150M in damages

Only bad options

Both Morgan Stanley and UBS ended up in regulators' crosshairs for cases involving stock trading options.

In the Morgan Stanley case, the investment bank agreed to pay a retired dentist $11.66 million in costs and damages over an investing strategy involving technology stocks. Morgan Stanley brokers were using what's known as a "covered call," a short-term hedging tactic for long-term investors who sell call options on an underlying security they already own. The approach seeks to generate income during periods of minor increases or decreases in value while the investor holds onto the asset for longer-term gains. The case hinged on allegations that Morgan Stanley had engaged in the strategy without clients' consent.

In a similar case, UBS agreed to pay $25 million to the SEC for its marketing and sale of a so-called yield enhancement strategy to clients who didn't fully understand the risks. The Swiss firm's UBS Financial Services unit was accused of failing to provide adequate training and instruction to money managers and clients.

Options are a frequent subject of concern identified by regulators and experts, remaining one of the most common matters cited in FINRA arbitration.

Read more:

Morgan Stanley to pay $11M over claims of unauthorized options trades

A rare win

The regulators didn't always win in 2022.

In one notable case, the CapWealth Advisors founder Tim Pagliara and his associates were acquitted by a jury of various fraud charges. The SEC had accused them of placing clients in high-priced mutual fund investments without adequately explaining their financial incentives. Those decisions allegedly cost investors roughly $450,000 in avoidable fees.

CapWealth Advisors, based in Franklin, Tennessee, was able to argue that its clients actually paid lower overall expenses through a tax strategy. In a subsequent interview, Pagliara contended that everything he and his colleagues had done had been in the best interest of clients.

The case was unusual not only because the SEC lost but also because the defendant was willing to take his fight to court. Most enforcement actions brought by the SEC are settled without ever going before a judge or jury. That tendency has given rise to complaints in the industry that federal regulators are making rules through enforcement.

Read more:

How an RIA scored a rare win over SEC fraud charges