The Securities and Exchange Commission has announced the that two Miami Brokers, Fabrizio Neves and Jose Luna have been charged with defrauding two Brazilian Pension Funds and a Colombian investor by using a markup scheme. In total, the SEC claim that the fraud amounted to $36 million in markups, which accounted for a little over 50% of the total structured notes purchased by these funds which totaled $70 million. Neves and Luna perpetrated their alleged scheme while being employed by the now defunct broker-dealer LatAm Investment, LLC.
The SEC is alleging that the scheme took place between 2006 and 2009, and allowed those involved to receive millions in ill-gotten gains as a result of the markups they performed. The scheme was simple in nature. In the early days of 2006, LatAm would purchase structured notes directly from the issuers and place them in their riskless principal account, and then promptly resell them the same day to the Brazilian Funds with markups somewhere in the neighborhood of 18% to 36%. The scheme evolved in complexity to allow for higher markups. By Mid 2008 LatAm was purchasing the notes but then allegedly sold to shell companies controlled by Mr. Neves or one of his assosiates which proceeded to markup the price yet again , and then resell them to LatAm who then would sell them to the Brazilian Funds and the Colombian investors. Neves and Luna would profit not only on the commission they received on the sales, but also from reselling them to LatAm at a marked up price. The SEC alleges that in more complex scheme, Neves and Luna were able to markup prices somewhere between 19% and 67% from the original selling prices from the banks. The scheme was kept secret for so long as a result of Luna, at the instruction of Neves, altering the original term sheets provided by the banks to reflect the marked up prices. He did so by simply using either white out or by using a computer, according to the SEC.
All in all, the scheme resulted in an estimated $36 million dollars in undisclosed excessive fees, which broke down to $24 million being paid by the two Brazilian funds and $12 million by the Colombian investor. The Miami Herald has reported that Luna “has settled the charges, agreeing to pay $923,704.85, prejudgment interest of $241,643.51, and a penalty amount to be determined. Luna neither admitted nor denied the allegations in the SEC’s complaint”, but he has agreed to be barred from all “association with any broker, dealer, investment advisor, municipal securities dealer, municipal advisor, transfer agent, or credit rating agency the SEC said”. The case is still pending in regards to Neves, who the SEC alleges was the mastermind in the scheme.