The SEC has filed a lawsuit against a broker-dealer and the head of one of its offices claiming that they made material misrepresentations and unsuitable recommendations in connection with selling structured CDO investments to 5 school districts.  The SEC charges that the firm knew that the school districts were conservative and unsophisticated investors looking to fund employee benefit liabilities.  The SEC alleges that the firm sold them leveraged CDO transactions that ultimately failed by misrepresenting risk and default rates.  The SEC has charged violations of the 1934 Act's various anti-fraud rules and seeks disgorgement and penalties.  The SEC's Director of Enforcement Robert Khuzami, warned: "Let this be a teaching moment for sellers of complex financial products."

 

OUR TAKE: This case reads more like a suitability action than a securities fraud case, even though the SEC alleges misrepresentation about default rates (although the SEC does not address the disclosure in the relevant offering documentation).  However, it does not appear that FINRA was involved in the investigation or the action.