SEC Charges Florida Brokers for Defrauding Brazilian Public Pension Funds in Markup Scheme
The Securities and Exchange Commission today charged two former brokers in Miami with fraud for overcharging customers approximately $36 million by using hidden markup fees on structured notes transactions.
The SEC alleges that Fabrizio Neves conducted the scheme while working at LatAm Investments LLC, a broker-dealer that 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 commercial banks. 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. Neves and Luna further concealed the egregious markups in most transactions by first purchasing the notes into accounts in the name of nominee entities they controlled in the British Virgin Islands.
"Neves lined his pockets with millions of dollars by charging customers exorbitant, fraudulent markups," said Eric I. Bustillo, Director of the SEC's Miami Regional Office. "Neves and Luna thought they could hide their scheme and evade regulators by using offshore nominee companies and forged documents, but they thought wrong."
The SEC also instituted an administrative proceeding against LatAm's former president Angelica Aguilera, who was the direct supervisor over Neves and Luna. The SEC's Enforcement Division alleges that Aguilera failed reasonably to supervise Neves and Luna and effectively follow or implement LatAm's supervisory policies and procedures to ensure the fairness of markups and markdowns they charged to LatAm customers. As a result, Neves and Luna were able to carry out the fraudulent markup scheme undetected.
According to the SEC's complaint against Neves and Luna filed in U.S. District Court for the Southern District of Florida, Neves negotiated with several U.S. and European commercial banks to structure 12 notes on his customers' behalf from 2006 to 2009. But 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 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.
The SEC's complaint seeks disgorgement of ill-gotten gains, financial penalties, and injunctive relief against Neves to enjoin him 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 Senior Counsel Laura R. Smith and Senior Regional Accountant Fernando Torres under the supervision of Assistant Regional Director Jason R. Berkowitz. Senior Trial Counsel Edward D. McCutcheon 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.