A.G. Schneiderman Announces Multi-million Dollar Settlement With Banco Espírito Santo S.A. Over Unregistered Recommendation And Sale Of Securities
Portuguese Financial Institution Will Offer To Repurchase Securities Sold, Disgorge All Profits From Conduct, And Pay $975K For Failing To Register Under The Martin Act
Schneiderman: My Office Will Continue to Protect Investors And The Integrity Of New York’s Global Financial Markets
NEW YORK – Attorney General Eric T. Schneiderman today announced a multi-million dollar agreement with Banco Espírito Santo S.A. (BES) to settle an investigation into the solicitation and sale by BES and its affiliates of securities to BES’s U.S. customers without registering itself or any of its affiliates as a securities broker-dealers or investment advisers, or any of their employees as salesmen, as required under New York’s Martin Act.
Under the agreement, BES will cease and desist from any further violations of the Martin Act and Executive Law § 63(12), offer to make its customers whole for all securities it unlawfully sold them, disgorge all profits derived from its unlawful conduct, and pay $975,000 to the State of New York in penalties, fees and costs.
“Today’s announcement sends a clear message that soliciting and selling securities in New York without registering as required under the Martin Act will not be tolerated under any circumstances,” Attorney General Schneiderman said. “My office will continue to protect investors and the integrity of New York’s global financial markets at all costs.”
From November 2004 through November 2009, BES and certain of its affiliates inside and outside the U.S. sold to BES’s U.S. banking customers, including customers in New York, a variety of investment products that are qualified as securities under U.S. federal and state law, including under the Martin Act.
BES and its affiliates conducted these securities transactions through a call center in Lisbon, BES branches in Portugal and Madeira, solicitation by direct mail and by two dedicated Portugal-based U.S. relationship managers assigned to higher net-worth U.S. customers, a money transmitter located in New Jersey, and seven other BES affiliates based in Portugal and other locations outside the U.S.
Ultimately, BES sold more than $110 million of securities to 524 residents of the State of New York without registering to do so.
The Martin Act requires any entity that recommends, solicits or effectuates the purchase or sale of securities, or that provides investment recommendations, to be registered with the Attorney General as a broker-dealer or investment adviser, and any individual who executes securities transactions to be registered as a salesman. BES and its affiliates and their employees solicited and effectuated securities transactions, and provided investment advice. However, none of the BES entities involved were at any time registered with the Attorney General, or anywhere in the U.S., as a securities broker-dealer or investment adviser. Nor were any of their employees registered with the Attorney General, or anywhere in the U.S., as salesmen or broker-dealer agents.
Moreover, the Office’s investigation revealed that senior BES executives consciously chose to carry on BES’s securities-related activities in the U.S. without complying with federal or state registration requirements, even after those requirements were called specifically to their attention.
The Attorney General’s Office launched its investigation in May 2010, after BES self-reported the findings of an internal investigation performed by its outside counsel. BES also provided cooperation to the Attorney General as part of its ongoing efforts to address its failures to comply with the applicable laws, and committed to compensate any U.S. customers affected.
In announcing today’s settlement, the Attorney General joined the Northeast Regional Office of the U.S. Securities and Exchange Commission (“SEC”), which simultaneously announced the settlement of a parallel investigation it conducted of the same conduct by BES.
The Attorney General thanked the staff of the SEC’s New York Regional Office for their cooperation in bringing this matter to an appropriate resolution. The Attorney General settled simultaneously with the SEC, in part, because both settlements are the first to require BES to disgorge the profits it made from its unregistered activities. The Attorney General’s settlement allows BES’s disgorgement of nationwide sales commissions to the SEC to offset such amounts owed to the State of New York.
The Attorney General cannot overestimate the importance of registration under the Martin Act, or the severity of BES’s infraction in flouting the registration requirements of New York and other U.S. jurisdictions. Along with its failure to register, BES failed to report investor complaints to regulators as would be required had BES followed the law. Such reporting is essential to the ability of the Attorney General and his federal and sister state colleagues to accomplish the goal of investor protection, and underscores the importance of complying with the registration requirements for broker dealer agents and investment advisers.
Attorney General Schneiderman credits BES’s self-reporting and significant cooperation with his office’s investigation, its making proactive remedial changes to its management and operations directed toward preventing such conduct in the future, and its commitment at the outset to compensate the customers affected.
BES is a Euronext stock exchange-listed commercial bank headquartered in Lisbon, Portugal with more than 700 branches throughout Portugal and elsewhere, including New York. BES and its affiliates offer a variety of financial products, such as banking, investment, retirement and insurance, to its customers worldwide, including customers in the U.S. As of December 31, 2010, BES’s total assets were approximately €105 billion, or $140 billion.
The investigation was conducted by Assistant Attorney General Armen Morian under the supervision of Investor Protection Bureau Chief Marc. B. Minor and Executive Deputy Attorney General for Economic Justice Karla G. Sanchez.