U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22462 / August 29, 2012
Securities and Exchange Commission v. Fabrizio Neves, et al., Civil Action No. 1:12-cv-23131 (S.D. Fla.)
SEC Charges Brokers for Defrauding Brazilian Public Pension Funds in Markup Scheme
The Securities and Exchange Commission today filed a civil fraud action in the United States District Court for the Southern District of Florida against two former brokers in Miami for overcharging customers approximately $36 million by using hidden markup fees on structured note transactions.
According to the SEC's complaint, from 2006 to 2009, Fabrizio Neves conducted the markup scheme while working at the broker-dealer LatAm Investments LLC, which is no longer in business. He was assisted by Jose Luna. The pair defrauded two Brazilian public pension funds and a Colombian institutional investor that purchased from LatAm the structured notes issued by major U.S. and European commercial banks. Instead of purchasing the notes for his customers' accounts for prices around the banks' issuance amounts - which totaled approximately $70 million - in most transactions Neves first traded the notes with one or more accounts in the name of offshore nominee entities that he and Luna controlled. Neves then sold the notes to his customers with undisclosed markups as high as 67 percent. Neves had no reasonable basis to mark up the prices that significantly.
The SEC alleges that to conceal the excessive markups that Neves charged customers, Neves directed Luna to alter the banks' structured note term sheets in half of the transactions by either whiting out or electronically cutting and pasting the markup amounts over the actual price and trade information, and then sending the forged documents to customers.
The SEC further alleges that as a result of the markup scheme, the Brazilian funds overpaid by approximately $24 million and the Colombian institutional investor overpaid by approximately $12 million due to the undisclosed, excessive fees. Neves enjoyed a financial boon from the scheme as LatAm paid him millions of dollars in inflated sales commissions for the structured note transactions that he made at inflated prices. Luna received hundreds of thousands of dollars in inflated salary and commissions from LatAm and tens of thousands of dollars in additional compensation from a company that Neves controlled.
As alleged in the SEC's complaint, Neves and Luna violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and aided and abetted LatAm's violations of Section 15(c) of the Exchange Act. The SEC's complaint seeks disgorgement of ill-gotten gains, financial penalties, and injunctive relief against Neves and Luna to enjoin them from future violations of the federal securities laws.
Luna has agreed to the entry of a judgment ordering him to pay disgorgement of $923,704.85, prejudgment interest of $241,643.51, and a penalty amount to be determined. The judgment permanently enjoins him from violations of the antifraud provisions of the federal securities laws. Luna neither admitted nor denied the allegations in the SEC's complaint. Luna also agreed to settle a related SEC administrative proceeding by agreeing to be barred from association with any broker, dealer, investment advisor, municipal securities dealer, municipal advisor, transfer agent, or credit rating agency.
The SEC's investigation was conducted in the Miami Regional Office by Laura R. Smith, Senior Counsel, and Fernando Torres, Senior Regional Accountant, under the supervision of Jason R. Berkowitz, Assistant Regional Director. Edward D. McCutcheon, Senior Trial Counsel, will lead the SEC's litigation.
The SEC acknowledges the assistance of the Financial Industry Regulatory Authority (FINRA) and Brazil's Comissão de Valores Mobilários (CVM) in this matter.