Institutional Investor Securities Blog

Pointing to the US Supreme Court’s ruling in Morrison v. National Australia Bank Ltd., the U.S. District Court for the Northern District of Illinois dismissed the SEC’s allegations that a group of entities and persons violated broker-dealer registration requirements in an alleged $44 million international boiler room scam. The broker fraud case is SEC v. Benger.

Claiming the transactions were extraterritorial and not within the scope of the regulator’s reach, defendants sought summary judgment even though a lot of the allegedly fraudulent activity is said to have happened in the US. The district court, however, found that investors became irrevocably bound in their countries upon submission of buying offers even though they turned those offers in to escrow agents in this country. Moreover, the issuer became irrevocably bound in Brazil when accepting the purchase offers, and when the sale went through the titled passed either there or the countries where investors got the stock certificates regardless that the agents that served as middlemen were located here.

In Morrison, the Supreme Court determined that the 1934 Securities Exchange Act’s key federal securities antifraud provision is only applicable to securities transactions that can either be found on U.S. exchanges or that took place domestically. Following that decision, and seeking to give back exterritorial reach to both Justice Department and the SEC, Congress issued the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 929P, which gives federal courts jurisdiction over enforcement actions involving conduct that took place in the US that played a part in significantly furthering a violation/behavior taking place abroad that will have a likely effect domestically.

The Commission believes that, in effect, Dodd-Frank, overturned Morrison.
Speaking at a DC panel-hosted cross-border securities litigation panel, the SEC's Office of International Affairs Director Jacobs said that Morrison’s transactional test doesn’t succeed in reducing the regulator ability to go after federal securities law cross border violations. She said that the agency is still deciding what to do in the wake of the district court’s ruling in Benger and that the regulator has a full docket of investigations that it is continuing to move forward on.

Meantime, some commenters have suggested that Dodd-Frank’s efforts have been incomplete. Private litigants have had problems with Morrison’s test, with federal district courts turning down plaintiffs’ efforts to file securities actions involving non-US investments. However, in an effort to get around Morrison, big institutional investors have brought their non-US securities cases to state courts instead, as well as to foreign courts. They have also attempted to file related lawsuits involving their American Depositary Receipts.

If you are an institutional investor that has suffered losses because of securities fraud, please contact our stockbroker fraud law firm right away.

Morrison v. National Australia Bank Ltd. (PDF)

SEC v. Benger (PDF)

More Blog Posts:
SEC Submits Request for Data on Whether to Make Brokers & Investment Advisers Abide by Uniform Fiduciary Standard, Stockbroker Fraud Blog, April 4, 2013

Stakeholders With $55M Securities Fraud Case Against Government Over AIG Bailout Get Class Action Certification, Institutional Investor Securities Blog, March 19, 2013

New York Fed Bailed Out Bank of America Over Mortgage-Backed Securities Sold to AIG, Institutional Investor Securities Blog, February 20, 2013

Hedge fund billionaire Philip Falcone and his Harbinger Group (HRG) have reached an $18 million securities fraud settlement, an agreement in principle, with the SEC over allegations that he fraudulently took a $113 million loan from one of his funds to cover his taxes, manipulated the market, and gave preference to certain clients, including Goldman Sachs (GS). Falcone, who will personally pay $4 million, is settling the financial fraud case without admitting or denying wrongdoing. Although he can remain has CEO of his group and stay associated with Harbinger Capital Partners, he is barred from raise new money or using his hedge funds to make investments for two years.

The ban, however, doesn’t apply to the nine investment advisers that Falcone runs through the company. (This, some say, is so that Falcone can unwind the hedge fund without hurting investors.) The pending deal is once again raising questions about whether the SEC is doing enough to take action against wrongdoers in the industry.

For instance, Harbinger Group’s business that involves Falcone acting as a private equity investor in different companies is not really impacted by the SEC settlement. Also, the independent monitor selected by the SEC to watch the firm is one who was on a list that Falcone recommended.

The SEC’s commissioners still have to approve this settlement. Apparently an agreement for resolution had stalled until now because Falcone refused to allow the SEC to apply an injunction against fraud. Because the regulator dropped that bid, Falcone not only settled but he is willing to pay more than previously.

If you suspect that your financial losses are a result of securities fraud, contact our institutional investment fraud law firm today and ask for your free case assessment.

Philip Falcone Settles With SEC, Agrees to Two-Year Ban, CNBC, May 9, 2013

Billionaire Hedge Fund Manager Phil Falcone's Sweet Deal With The SEC, Forbes, May 9, 2013

More Blog Posts:
AIG Wants to Stop Former CEO Greenberg From Naming It as a Defendant in Derivatives Lawsuit Against the US, Stockbroker Fraud Blog, April 13, 2013

Federal Records Act Lawsuit Seeking to Make the SEC Reconstruct About 9,000 Enforcement-Related Documents is Dismissed, Institutional Investor Securities Blog, February 5, 2013

The SEC is suing four traders affiliated with brokerage firm Direct Access Partners for their alleged involvement in a financial scam that involved millions of dollars paid in illicit bribes to a Venezuelan banking official to obtain that bank’s bond trading business.

According to the regulator, DAPs’ global markets group made fixed income trades for clients in foreign sovereign debt, generating revenue of over $66M from markup/markdown transaction fees on principal trade executions in Venezuela bonds sponsored by the state for BANDES (Banco de Desarrollo Económico y Social de Venezuela). The bank’s finance VP, María de los Ángeles González de Hernandez is accused of allegedly authorizing the illicit trades and receiving part of the revenue.

The securities scam is said to have taken place between October 2008 and at least June 2010. Because of the purported kickbacks paid to Gonzales, DAP was given the bank’s profitable trading business, while she was provided with incentives to get into trades with DAP at significant markdowns and markups regardless of the prices that BANDES paid. The traders are also accused of fooling DAP’s clearing brokers, inter-positioning one broker-dealer to cover up their involvement in the transactions, performing internal wash trades, and taking part in huge roundup trades to bulk up revenue.

Per the Commission regarding the trades: Thomas Bethancourt executed the trades that were fraudulent and kept track of the illicit markdowns/markups; Iuri Bethancourt was given over $20M in illicit proceeds through his shell company, which would pay Gonzales; Hurtado, who allegedly earned over $6M in kickbacks, was the one who paid Gonzales and acted as her intermediary with the traders; and Hurtado’s wife, Haydee Pabon, purportedly was given about $8M in markdowns/markups on BANDES trades under the guise of finders’ fees.

Read the Complaint (PDF)

More Blog Posts:
SEC Commissioner Aguilar Calls For the Abolishment of Mandatory Arbitration Agreements, Stockbroker Fraud Blog, April 21, 2013

Federal Records Act Lawsuit Seeking to Make the SEC Reconstruct About 9,000 Enforcement-Related Documents is Dismissed, Institutional Investor Securities Blog, February 5, 2013

Continue reading "SEC Sues Traders Over Alleged Scam Involving Bribe Paid to Venezuelan Official to Get Bond Trading Business" »

Ex-Commission Officials, Others Want DC Circuit to Grant Stanford Ponzi Scam Victims SIPC Protection
Former SEC Officials, law professors, and trade groups are among those pressing the U.S. Court of Appeals for the District of Columbia Circuit to reject the regulator’s bid to compel Securities Investor Protection Corporation coverage for the investors who were bilked in R. Allen Stanford’s $7 billion Ponzi scam. Inclusion under the Securities Investor Protection Act would allow the fraud victims to obtain reimbursement for losses.

However, SIPC, which is a federally mandated non-profit corporation, doesn’t believe that the Stanford investors, who purchased certificates of deposit from Stanford International Bank Ltd. in Antigua, fall under this protection. Following a failure to act on the SEC’s request to initiate liquidation proceedings for brokerage firm Stanford Group Co., the regulator asked the court for a novel order that would make the organization comply.

Last year, the district court rejected the SEC’s application, finding that Stanford’s investors were not, for Securities Investor Protection Act purposes, covered. The agency then went to the DC Circuit.

Now, in an amicus brief filing, the academics and ex-SEC officials, including Paul Atkins and Joseph Grundfest, are arguing that the appeals court should turn down the regulator’s bid to expand who is “covered through SIPC” because it would not be in line with statutory history, “contravenes” the statute’s “plan language,” and is in conflict with over four decades of judicial precedent.

SEC Division of Trading and Markets Address Credit Default SwapsPortfolio Margin Program Questions
In other SEC news, its Division of Trading and Markets recently addressed questions related to temporary approvals that were given to several brokerage firms/ futures commission merchants that allow their involvement in a program that would mix and position portfolio margin customer positions in cleared credit default swaps.

The SEC is now granting conditional exemptive relief from certain 1934 Securities Exchange Act requirements related to a program that would portfolio and mix margin customer positions in certain cleared CDSs. In March, the Commission gave conditional approval to Goldman Sachs & Co. (GS), J.P. Morgan Securities LLC (JPM), and five other banks to take part in the program. They now can temporarily determine the portfolio margin figures for client positions in commingled CDs according to a model created by ICE Clear Credit, the largest credit default swaps clearing house in the world, while division staff assess the financial firms’ margin methodologies.

Now, ICE Clear Credit participants have questions. They want to know what is the margin treatment of a portfolio that has just single-name CDS positions as well as what is the clearing participants' affiliates’ margin treatment. Responding, SEC division staff said that a FCM/BD client account that has just single-name CD positions would be subject to applicable margin requirements per FINRA Rule 4240. They also said that BD/FCM clearing participants have to deal with affiliates’ single-name CD positions as if they were “customer positions” for margin purposes. SEC staff said that this is in line with FINRA and Commission broker-dealer financial responsibility rules regarding how affiliates are to be treated.

Read the SEC's Response to Questions About CDS Portfolio Margin Program (PDF)

Read the Amicus Filing to the DC Circuit

More Blog Posts:
Medical Capital Fraud Lawsuit Against Wells Fargo Must Proceed, Institutional Investor Securities Blog, April 10, 2013

FINRA Bars Former Wells Fargo Advisors Broker that Bilked Child with Cerebral Palsy, Stockbroker Fraud Blog, April 26, 2012

Standard & Poor’s Seeks Dismissal of DOJ Securities Fraud Lawsuit Over RMBS and CDO Ratings Issued During the Financial Crisis, Institutional Investor Securities Blog, May 9, 2013

US Senators John Thune (R-SD), Richard Burr (R-NC), and Tom Coburn (R-Okla) have introduced a bill that would mandate that public pension plans reveal more information about the way they calculate liabilities and assets or place at risk the favorable tax treatment for bonds that are issued by the states and cities. S. 799 is a companion legislation to a bill that was recently unveiled in the US House of Representatives.

Like S. 799, SRLR 710 would make pension plans notify the Treasury Department about what assumptions and methods they use to determine assets, debt, and liabilities. Failure to abide by these tougher disclosure requirements would lead to the revocation of tax exemptions for specific bonds put out by municipalities and states. The senators’ bill also would prohibit federal bailout for any public pension funds.

Another Republican, Rep. Ann Wagner from Missouri, recently presented HR 1626, which would prohibit the Securities and Exchange Commission from being able to make companies reveal their political spending. The legislation, co-sponsored by Rep. Scott Garrett (R-N.J.), would amend the 1934 Securities Exchange Act.

It was nearly two years ago that a group of law professors petitioned the SEC to mandate the disclosure of how much companies allot toward political spending. Many have called on the Commission to push such rulemaking forward. However, some Republicans believe that ordering this type of disclosure exceeds the bandwidth of the SEC’s mission, which they say doesn’t include discretionary rules.

Political spending by companies is also an issue that Rep. Michael Capuano (D-Mass.) and Sen. Robert Menendez (D-N.J.) are tackling. Their bills, HR 1734 and S. 824, would mandate that companies get majority shareholder approval before they can use funds for political contributions and notify the SEC of such spending. Corporate shareholders would have to approve an “overall political budget.”
Both men introduced similar bills during the 112th Congress with no success.

In other news, Rep. Louise Slaughter (D-N.Y.) is requesting that law firm Greenberg Traurig LLP to disclose what its relationships are in the political intelligence industry because of allegations that the firm may have communicated market-moving data about Medicare Advantage to Height Securities, a political intelligence firm. Height Securities then allegedly passed the information on to certain clients and several insurers’ shares reportedly went soaring.

Slaughter, who introduced the original draft of the Stop Trading on Congressional Knowledge Act in 2006, made the request to Greenberg Traurig CEO Richard Rosenbaum in writing. A spokesperson for the law firm says that it no longer has a relationship with Height and that Greenberg Traurig has since concluded that providing government relations services to those in political intelligence can lead to unintended use of such services.

Meantime, Representatives Carolyn Maloney from New York and Maxine Waters from California, two other Democratic lawmakers, are asking the lawmakers tasked with appropriations to make sure that the funding the SEC receives for the next fiscal year is $1.674 billion, which is what President Barack Obama also wants. Their letter, signed by 51 other lawmakers, noted how it is imperative that Congress “fully fund” the regulator so that effective rulemaking and proper oversight of the securities market can happen.

Shepherd Smith Edwards and Kantas, LTD, LLP is a securities fraud law firm that represents institutional investors throughout the US.

Greenberg Traurig law firhttp://www.govtrack.us/congress/members/ann_wagner/412548m at the center of ‘political intelligence’ case, Washington Post, May 6, 2013

S. 779: Public Employee Pension Transparency Act

HR 1626: Focusing the SEC on Its Mission Act

Democrats Urge Appropriators to Fully Fund SEC, Committee on Financial Services-Democrats, April 23, 2013

More Blog Posts:
Texas Securities Fraud: IMS Securities Settles FINRA Case Alleging Inadequate Supervision of Wholesale Representatives, Stockbroker Fraud Blog, March 27, 2013

Goldman Sachs Execution and Clearing Must Pay $20.5M Arbitration Award in Bayou Ponzi Scam, Upholds 2nd Circuit, Institutional Investor Securities Blog, July 14, 2012

Annuity Assets are Hot Commodities Among Investment Managers Private-Equity Groups, and Hedge Fund-Controlled Entities, Institutional Investor Securities Blog, October 20, 2012

In the U.S. District Court for the Central District of California, Standard & Poor's Financial Services LLC is asking for the dismissal of a US Department of Justice securities fraud lawsuit accusing the ratings firm of knowing that it was issuing faulty ratings to collateralized debt obligations and residential mortgage-backed securities during the financial crisis. S & P is contending that the claims are against judicial precedent and don’t establish wrongdoing.

The government sued the credit rating giant and its parent company McGraw-Hill Companies Inc. (MHP) earlier this year. It claims that S & P took part in a scheme to bilk investors by wrongly representing that its ratings for collateralized debt obligations and residential mortgage backed securities were independent and objective, purposely giving artificially high ratings to specific securities, and ignoring the risks involved. Submitted under the 1989 Financial Institutions Reform, Recovery, and Enforcement Act, this is the first federal legal action filed against a rating agency related to the economic crisis.

Now, however, S & P is arguing that the DOJ’s RMBS lawsuit does not succeed in alleging fraud. The credit rater says that it shouldn’t be blamed for not having been able to foresee the financial crisis of 2008.

S & P believes that the statements prosecutors rely upon in their case are not actionable, seeing as other courts have struck down similar challenges in past federal cases. The credit rating agency cited the example of Boca Raton Firefighters and Police Pension Fund v. Bahas, in which U.S. Court of Appeals for the Second Circuit’s decision affirmed the tossing out of a pension fund’s securities case against S & P after finding that statements about the “credibility and objectivity” of the agency’s ratings were the type of “puffery” that previously was not considered actionable.

Also, S & P claims the allegations it misled investors about its ratings’ objectivity and accuracy don’t succeed in this CDO lawsuit. Rather, they demonstrate that during what proved to be the start of an economic meltdown, there was debate within the agency about how complex financial instruments might fare moving forward.

Read the Complaint (PDF)

Boca Raton Firefighters and Police Pension Fund v. Bahash

More Blog Posts:
US Justice Department Sues Standard and Poor's Over Allegedly Fraudulent Ratings of Collateralized Debt Obligations, Stockbroker Fraud Blog, February 5, 2013

Standard & Poor’s Misled Investors By Giving Synthetic Derivatives Its Highest Ratings, Rules Australian Federal Court, Institutional Investor Securities Blog, November 8, 2012

In light of the US Supreme Court’s decision in Kiobel v. Royal Dutch Shell Petroleum Co., the attorney for GE Energy (USA) wants the Court of Appeals for the Fifth Circuit to dismiss would-be whistleblower Khaled Asadi’s appeal to have his lawsuit, contending that his firing violates the protections provided to him under the 2010 Dodd-Frank Act, reinstated. Asadi filed his complaint against the company last year claiming that his former employer had violated the whistleblower anti-retaliation provisions. The dual Iraqi and US citizen says that he was let go from his job after he told GE Energy’s ombudsman and his supervisor about a hiring situation that could violate the Foreign Corrupt Practices Act.

A district court, however, threw out his case, finding that, per the Supreme Court’s ruling in Morrison v. National Australia Bank Ltd., applying the anti-retaliation provisions to behavior that happened abroad is precluded. Asadi then went to the Fifth Circuit, arguing that Dodd-Frank protects employees that report violations of any rule, law, or regulation that is under SEC jurisdiction. He claims that these protections extend to US citizens who work abroad and report information about securities violations.

Asadi believes that the way Dodd-Frank incorporates the FCPA supports his claim that the whistleblower protections do have “extraterritorial applicability.” He noted that the anti-corruption statute has a “clear statement rule” that is applicable to individuals and companies outside the US.

In the Kiobel ruling, the justices voted to affirm the dismissal of the Alien Tort Statute claims submitted by Nigerian nationals against certain British, Nigerian, and Dutch companies over the alleged aiding and abetting of the Nigerian government in numerous law of nations violations, including torture and extrajudicial killings. Chief Justice Roberts wrote that the presumption against extraterritoriality can apply to ATS claims and that there is nothing in the statute that successfully counters this presumption. Now, GE Energy’s legal representation contends that like the Supreme Court’s ruling in Kiobel, the district court’s decision in this case also depended on the presumption against extraterritoriality.

Please contact our institutional investment fraud law firm to find out whether you have a securities case.

Asadi v. G.E. Energy (USA)

Morrison v. National Australia Bank

More Blog Posts:
Fifth Circuit To Hear Appeal Over Whether Dodd Frank’s Whistleblower Statute Covers Informants that Report FCPA Violations, Stockbroker Fraud Blog, April 12, 2013

Galleon Group Founder’s Brother Pleads Not Guilty to Insider Trading, Institutional Investor Securities Blog, April 2, 2013

Investor Korine Brown is seeking class action status on behalf of those that also participated in General Motors Inc.'s Personal Savings Plan for hourly employees in her securities case against Fidelity Investments Institutional Operations Co. Inc. and Fidelity Management and Research Co. She is alleging breach of fiduciary duty. This is just the latest investment fraud case over Fidelity’s handling of money that came from planned assets, as well as against other 401k providers.

As of the end of 2011, the plan Brown has been a participant in contained about $46 billion in assets for over 100,000 account holders. The plaintiff claims that Fidelity Research breached its duty when it invested float income into Fidelity funds found in the plan menu.

Float income is money generated from redemptions, contributions, and transfers of planned assets when they are briefly put in in interest bearing accounts. Brown believes that Fidelity Investments Institutional Operations breached its duty when it used the float income, which she says is a plan asset, to take care of operating costs. She claims that Fidelity didn’t let participants and the fiduciaries tasked with administrating the plan know about how the float income was being used.

Her securities lawsuits says that the two Fidelity units had a fiduciary duty because they possessed discretion over plan assets. Rather than putting the float income into its own funds or using the money to pay for business expenses, it should have moved the money to the plan. Brown is alleging self-dealing that violates the Employee Retirement Income Security Act of 1974.

Meantime, a Fidelity spokesperson maintains that Fidelity’s practices comply with ERISA guidelines and that float income was not retained and the company did not get fees from managing the float.

The float income lawsuits against Fidelity started coming in after a federal judge ruled that ABB Inc., a retirement plan, was in breach of fiduciary duty when Fidelity paid bank fees with float income. Fidelity was told to pay $1.7 million, while ABB was ordered to shell out $35.2 million to pay for participant losses. They are appealing that ruling.

Another investor sues Fidelity over use of temporary funds, Investment News, April 30, 2013

Brown v. Fidelity Management and Research Company et al, Justia.com

Brown v. Fidelity Management and Research Company et al, The Complaint (PDF)

More Blog Posts:
Not All Municipal Bond Issuers Are Adjusting Well to the SEC’s Efforts to Make the Market More Transparent, Institutional Investor Securities Blog, February 22, 2012

Former Fidelity Brokerage Reps Says They Were Pressured to Make Sales That Conflicted With CFP Ethic Codes, Stockbroker Fraud Blog, April 8, 2009

Fluvanna County, VA Can Sue Over Bond Offering Advice, Says Supreme Court of Virginia
Virginia’s highest court has reinstated a securities fraud lawsuit filed by Fluvanna County, Virginia Board of Supervisors against Davenport & Co. The county claims that the investment concern gave it faulty bond offering advice about the building of a new high school.

The Board said that it depended on this investment advice when deciding to put out standalone bonds that caused it to incur $18 million in excess payments. It then sued Davenport in circuit court, making numerous contentions, including breach of fiduciary duty, gross negligence, and Virginia securities law violations. That court ‘sustained the demurrer with prejudice’ and would not let the board make amendments to pleadings. It said that the separation of powers doctrine won’t let the court resolve the securities case because then it would have to look into the Board’s motives. The latter then appealed.

Now, the Supreme Court of Virginia has waived its common law legislative immunity from civil liability, saying that board of supervisor members/legislatures of a municipality are not within the scope of state and federal Constitutional legislative immunity, and it is allowing the securities case to go forward.

Plaintiff Sues Her Brother for New York Securities Fraud
The U.S. District Court for the Southern District of New York says that plaintiff Judy Soley’s breach of fiduciary claim against her brother, Peter Wasserman, can be tried in front of a jury. Wasserman served as Soley’s financial adviser. He had tried to strike the jury demand from Soley’s New York securities fraud lawsuit. She is accusing him of mishandling her money.

The court found that the breach of fiduciary claim is legal and can get a jury trial. However, Judge Kimba Wood said that the nature of Soley’s claim for an accounting is equitable and has to be tried in court. Soley wants compensatory damages, not restitution.

Ruling That Investment Bank’s Offer to Buy Minority Shares Triggered Company’s First Refusal Rights Is Affirmed
The Pennsylvania Superior Court has decided that investment banking concern Insight’s offer to buy plaintiff TeleTracking Technologies Inc.’s minor stock was bona fide and did trigger the latter’s right of first refusal. This means that the healthcare technology concern did get the right to purchase the interest of the minority shareholders on the same terms under which Insight was willing to buy the stock.

That right is noted under a 1999 shareholder agreement. (TeleTracking Technologies is a privately held corporation. The minority had about 27% of the stock.) In March 2011, the minority shareholders told the company that Insight had agreed to by the minority stock for $37.35 million and that $16,805,762 had been put in an escrow account.

TeleTracking then submitted an action seeking a declaration that its duty to match Insight’s offer for the stock wasn’t activated under the agreement. It contended that the investment concern’s offer wasn’t bona fide and that it would not be able to buy the shares under the conditions and terms that Insight had set in its offer. The trial court, however, said the offer was bona fide and that the company’s matching rights had been triggered. The state’s Superior Court affirmed, noting that, per “pertinent precedent,” additional limits could not be imposed on the ability of the minority shareholders to sell their stock.

Board of Supervisors of Fluvanna County v. Davenport & Co. LLC (PDF)

Soley v. Wasserman (PDF)

Pa. Court: Offer for Minority Shares Triggered Company's First Refusal Rights, Bloomberg/BNA, April 15, 2013

More Blog Posts:
Three Cedar Brook Financial Partners Brokers’ Licenses Are Suspended Over Allegedly False & Misleading Statements About Subprime Mortgage-Backed Security IMH Fund and Medical Capital Holdings Inc., Stockbroker Fraud BLog, April 24, 2013

The 11th Circuit Revives SEC Fraud Lawsuit Against Morgan Keegan Over Auction-Rate Securities, Institutional Investor Securities Blog, May 8, 2012

Oppenheimer & Co. Must Buyback $6M in Auction-Rate Securities from Investor, Says FINRA Arbitration Panel, Institutional Investor Securities Blog, January 11, 2012

The SEC has filed securities fraud charges against the city of Victorville, CA, one of the city’s officials, the Southern California Logistics Airport Authority, and Kinsell, Newcomb & DeDios, which underwrote the bonds. The SEC claims that they bilked investors by inflating valuations of property that secured a 2008 municipal bond offering.

According to the regulator, city official Keith C. Metzler and KND owner Jeffrey Kinsell and VP Janees L. Williams are to blame for misleading and false statements put out in the Airport Authority’s bond offering in April 2008. The SEC is also accusing KND of misusing over $2.7 million in bond proceeds to stay in business.

The Commission says that the Airport Authority took on a number of redevelopment projects and financed them by putting out tax increment bonds, and by April 2008 it had to issue even more bonds to refinance a portion of the debt incurred to keep going with these endeavors.

The principal amount of the new bond put out was based in part on Williams, Kinsell, and Metzler using a $65 million valuation for one of the projects, which involved the construction of airplane hangers (even though they were aware that the county assessor placed a value on the hangers that was less than 50% of that amount.) The inflated figure, however, let the airport authority put out more bonds and raise additional funds. The SEC says this led to investors being given the false information about the value of the security that was there to pay them back.

The regulator believes that the Airport Authority lent KND Affiliates, also owned by Kinsell, over $60 million in bond proceeds for the hangar project and agreed to compensate the latter with a construction management fee that was comprised of 2% of cost that was left on construction. KND Affiliates and Kinsell also allegedly took about $450,000 in fees that weren’t authorized, as well as $2.3 million in fees that the Airport Authority not only didn’t agree to but also never knew about, supposedly as compensation for managing the hangers. (The SEC believes that KND Affiliates and Kinsell concealed these fees not just from the Airport Authority but also from auditors.)

The SEC wants ill-gotten gains (along with prejudgment interest) returned, permanent injunctions, and financial penalties.

If you suspect that your institution is the victim of municipal bond fraud, do not hesitate to email or call securities fraud law firm today to request your free case assessment. Our municipal bond fraud attorneys are here to help institutional investors recoup losses that are a result of a financial scam or negligence. Your consultation with us is free.

Read the SEC Complaint (PDF)

California City, Underwriter Misled Investors, SEC Says, Bloomberg, April 29, 2013

Office of Municipal Securities, SEC

More Blog Posts:
Reform the Municipal Bond Market, Says the SEC, Institutional Investor Securities Blog, July 31, 2012

Not All Municipal Bond Issuers Are Adjusting Well to the SEC’s Efforts to Make the Market More Transparent, Institutional Investor Securities Blog, February 22, 2012

JPMorgan Chase to Pay $211M to Settle Charges It Rigged Municipal Bond Transaction Bidding Competitions, Stockbroker Fraud Blog, July 9, 2011

The Financial Industry Regulatory Authority’s board of governors has a plan that could radically modify the way brokerage firms report illiquid investments’ value on the account statements of clients. The SRO, which wants to give investors more transparency in regards to the actual value of such investments, has been trying to modify its rules about REITs and private placement valuations on client statements for well over a year.

Earlier this month, in changes it is proposing to Rule 2340, the FINRA board presented two reporting alternatives for brokerage firms. With the first option, a brokerage firm wouldn’t need to have the per-share estimated value of an REIT or a private placement that is unlisted included in customers’ account statements. The second choice lets a brokerage firm chose from three options:

• A valuation done by an external service at least one time every three years.
• A valuation performed by a service that performs valuations according the methodology revealed in the prospectus.
• For a couple of years after the initial investment, a “net investment” valuation that is comprised of the offering price without cash that is distributed to investors and “organization and offering expenses” paid for via the offering or borrowing of proceeds.

The majority of nontraded real estate investment trusts sell at $10/share and they generally stay at that value on a client’s account statement until a year and a half has passed since the REIT ceased to raise funds. This means that years may go by without a client being able to see that the nontraded REIT has a value that differs from that $10/share price.

However, when the recent credit crisis hit, some of the biggest nontraded REITs experienced steep drops in valuation each quarter, and advisers and investors found it difficult to figure out how, why, and to what extent the valuation declines occurred. The matter of the way a nontraded REIT should be valued (and a brokerage firm’s duty to make sure that valuation is stated on client account statements) has become a highly charged issued.

Also, to the dismay of FINRA, its examiners, who have studied quite a number of retail sellers of nontraded REITs in the last couple of years, have found that firms selling these instruments didn’t perform much reasonable diligence before selling them or failed to determine whether the product was appropriate for investors. In comments made to a Securities Industry and Financial Markets Association forum last year, FINRA executive vice present of member regulation sales practices Susan Axelrod said that when REITs have gotten into financial trouble, there were usually red flags that brokerage firms could have assessed first before making more sales.

Our REIT lawyers represent investment fraud victims. Contact Shepherd Smith Edwards and Kantas, LTD LLP today.

Finra plan could upend illiquid investment reporting, Investment News, April 24, 2013

Public Non-Traded REIT Tip Sheet

REIT

Why nontraded REITs are in Finra's cross hairs, Investment News, October 1, 2012

More Blog Posts:
Majority of Non-Traded REITs Underperform Compared to Benchmarks, Reports New Study, Stockbroker Fraud Blog, August 25, 2012

Apple REIT Arbitration: FINRA Rules Against David Lerner Associates in First of Hundreds of Cases, Stockbroker Fraud Blog, May 26, 2012

David Lerner Associates Must Pay $14M Over Apple REIT Ten Sales and Allegedly Excessive Markups Involving CMOs and Municipal Bonds—$12M to Go to Investors, Institutional Investor Securities Blog, October 22, 2012

The US Supreme Court’s ruling earlier this year in Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds (and also in Erica P. John Fund, Inc. v. Halliburton Co.) decreases the tools that defendants of federal securities fraud lawsuits have to win against the class certification of weak claims. In Amgen, the Court found that plaintiffs don’t have to prove an alleged misrepresentation’s materiality to certify a class under the fraud-on-the-market theory, while in Halliburton, the Court held that plaintiffs don’t have to prove loss causation to garner class certification.

That said, although the Court’s rulings in recent years often have been considered “pro-plaintiff,” it actually has given securities defendants help in getting rid of the weaker securities fraud cases early on. For example, Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal mandate for plaintiffs to demonstrate that their interpretation of specific facts are plausible and beyond merely possible. Also, even with Amgen and Halliburton decreasing the chances of class certification being defeated on the grounds of loss causation or materiality, these issues can still be addressed in motions for partial summary judgment early on. Such a motion might even be submitted simultaneously as one opposing certification.

Our securities fraud law firm represents institutional and individual investors throughout the US. We believe that filing your own securities case increases your chances of recovering as much of your lost investment back. Over the years, Shepherd Smith Edwards and Kantas, LTD LLP has helped thousands of investors recoup their losses.

Securities Litigation Defense Implications From The Supreme Court's Amgen Opinion, Mondaq/Jones Day, April 17, 2013

Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds (PDF)

Erica P. John Fund, Inc. v. Halliburton Co. (PDF)

More Blog Posts:
Investors Duped in $150M Investment Scam Offering US Citizenship Prospect To Recoup Funds, Says SEC, Stockbroker Fraud Blog, April 25, 2013

MF Global Holdings Bankruptcy Trustee Files Lawsuit Against Ex-CEO Corzine and Other Former Executives, Institutional Investor Securities Blog, April 26, 2013