Thirteen Firms Sanctioned for Improperly Selling Puerto Rico Junk Bonds in Violation of New Retail Investor Protection Law

By Daniel Wolfe

On November 3, 2014, the Securities and Exchange Commission (SEC) brought sanctions against 13 firms for improperly selling Puerto Rico municipal bonds. The violations stem from a relatively new rule entitled Municipal Securities Rulemaking Board (MSRB) Rule G-15(f), which has established what’s called a “minimum denomination requirement” that must be followed when selling municipal bonds.

The minimum denomination requirement sets a threshold on the number of bonds dealers may sell in a single transaction to a single investor. The rule is not an upper limit, but a rather a lower limit meaning that the rule prevents dealers from selling below a certain threshold of bonds.

The requirement is designed to deter retail investors from purchasing risky, “junk” bonds because retail investors typically purchase securities in small amounts. Thus, by implementing a threshold above which retail purchasers would not typically buy, and preventing dealers from selling below that threshold, the rule reduces the likelihood that retail investors will purchase these bonds. Consequently, the only purchasers who would be buying above this threshold would be those purchasers who have the capacity to make larger investments and therefore bear a higher risk.

In early 2014, the Commonwealth of Puerto Rico set a $100,000 minimum denomination requirement on a $3.5 billion dollar offering of municipal “junk” bonds in accordance with MSRB Rule G-15(f). An SEC investigation revealed that on 66 separate occasions, dealers sold these Puerto Rico bonds below the $100,000 minimum. Not only did this violate Rule G-15(f), but the SEC orders also reveal a violation of Section 15(B)(c)(1) of the Securities Exchange Act of 1934 that basically prohibits the violation of any MSRB rule.

The 13 firms responsible for these improper sales include the following: Charles Schwab & Co., Hapoalim Securities USA, Interactive Brokers LLC, Investment Professionals Inc., J.P. Morgan Securities, Lebenthal & Co., National Securities Corporation, Oppenheimer & Co., Riedl First Securities Co. of Kansas, Stifel Nicolaus & Co., TD Ameritrade, UBS Financial Services, and Wedbush Securities.

Although not explicitly admitting blame, each firm agreed to settle the charges by paying penalties between $54,000 (Hapoalim Securities USA) and $130,000 (Riedl First Securities Co. of Kansas).

The SEC has not completed its investigation as of yet. Joseph Chimienti, Sue Curtin, Heidi M. Mitza, Jonathon Wilcox, and Kathleen B. Shields are behind the investigation.

SEC Files Charges Against Fraudsters who Utilized Social Media to Attract Investors

By Jordan Hadley

On November 12, 2014, the Securities and Exchange Commission (“SEC”) announced that it would bring charges against Pankaj Srivastava and Nataraj Kavuri, two operators of a high-yield investment scheme that targeted investors using social media.

The SEC alleges that from April 2013 until February 2014, the two individuals operated a website called (“Profits Paradise”), which offered investors three investment plans based on the amount the investor deposited, and each with a term of 120 days. The fraudsters promised investors that they would receive a profit between 1.5-2% daily based on the three investment plans advertised on Profits Paradise. Not only were the advertisements described highly speculative, the returns described equated to a yield of above 180% of the original investment.

Profits Paradise was vaguely described to investors as an investment company that was involved in various areas of the financial market. Investors were lead to believe that their funds would be pooled together and then invested in stock and other investment options. The two fraudsters convinced investors that by pooling money, Profits Paradise could provide them access to investments that they would not normally be able to access. However, investors did not realize that Profits Paradise also contained a clause that allowed them to only withdraw up to the 2% earned interest a day, essentially blocking investors from ever withdrawing their full principal. Investors were also told that by referring others to invest in Profits Paradise, they would receive additional bonuses and commissions.

Srivastava and Kavuri both have experience in the software industry, which may have contributed to their ability to carry out this particular scheme. The SEC states that Srivastava was the mastermind behind the scheme, and that he convinced Kavuri to create, design, and market the Profits Paradise website. The two individuals utilized Facebook, YouTube, and other forms of social media to lure investors to their website. During the website’s lifespan, as many as 4,000 people a day visited.

In order to carry out their fraud, Srivastava and Kavuri created the pseudonyms “Paul Allen” and “Nathan Jones,” created fake email addresses for correspondence, and registered as a United States company with the popular web domain, The SEC stated that Srivastava and Kavuri targeted US investors; however, as the SEC began to research Profits Paradise, the website was taken down.

The SEC has charged Srivastava and Kavuri with violations of 17(a)(1) and (3) of the Securities Act. Section 17(a)(1) of the Securities Act makes it unlawful for a person to “employ any device, scheme, or artifice to defraud” in connection with the offer or sale of securities. Section 17(a)(3) makes it unlawful for a person to “ engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.” The matter is set to appear in front of an administrative judge in the near future.

The SEC has noted that the internet serves an attractive forum for fraudsters, because it allows them to reach many investors at a low-cost. Additionally, because those behind these types of schemes usually remain anonymous, it is particularly hard to track down account holders. The SEC has stated that investors can protect themselves by 1) being wary of unsolicited offers; 2) looking out for red flags, such as guarantees or offers that are too good to be true; and 3) determining if the investment only targets a subset of the particular community (minority or religious groups, etc.). As with any investment, it is important to perform adequate research prior to getting involved.