Posted On: October 31, 2011

MF Global Holdings Ltd. Files for Bankruptcy While Its Broker-Dealer Faces Liquidation and Securities Lawsuit by SIPC

In U.S. Bankruptcy Court in Manhattan, MF Global Holdings Ltd. has filed for Chapter 11 bankruptcy. The holding company for broker-dealer MF Global Inc., which faces liquidation, has listed assets of $41 billion and debt of $39.7 billion.

This is the fifth-largest financial industry public company bankruptcy when measured according to assets. Larger ones were those involving Lehman Brothers Holdings Inc., Conseco Inc., CIT Group Inc., and Washington Mutual Inc. Per, of any public company, it is the eight largest bankruptcies by assets.

Meantime, the Commodity Futures Trading Commission and the Securities and Exchange Commission says that they were notified by MF Global Holdings Ltd. that there might be some deficiencies with certain customer accounts. The regulators are trying to determine whether approximately under $700 million has gone missing.

in U.S. District Court in Manhattan, Securities Investor Protection Corp. is suing MF Global. SIPC wants the united liquidated for the protection of customer assets. Because MF Global is a broker-dealer, it cannot seek bankruptcy protection and either has to liquidate or sell its assets. Sale negotiations have faltered. Potential buyers had included Jeffries & Company and Interactive Brokers. The latter was about to seal the deal but backed out after finding out about the missing monies.

Jon Corzine, who was the former co-chair of Goldman Sachs Group Inc. (GS), runs MF GLOBAL INC. . It owns $6.3 billion of Portuguese, Italian, Irish, Belgian, and Spanish debt. Worries that in light of Europe’s debt crisis it might lose money on the holdings, regulators urged it to raise capital, issue margin calls, make credit downgrades, and file for bankruptcy, which was ultimately determined to be the safest course of action for customers’ protection.

The CFTC reports that as of the end of August, MF Global had $7.2 billion of customer funds in segregated accounts. The broker dealer of equity, derivatives, commodities, and foreign exchange belongs to over 70 financial exchanges and was one of the main dealers allowed to trade US government securities with the New York Fed.

For now, Corzine and MF Global have not been accused of any wrongdoing. Regulators are still trying to determine whether sloppy internal systems caused the money from client accounts to become misallocated or if something more intentional was at play. While it isn’t rare for some funds to be MIA when a financial firm falters, the mount of money missing from the broker-dealer is disturbing.

Unsecured creditors for MF Global include JPMorgan ( less than $80 million of the debt), Headstrong Services LLC, ($3.9 million) , Sullivan & Cromwell LLP ($596,939), CNBC (845,397), Bloomberg Finance LP ($276,064), and Oracle Corp. (302,704).

Related Web Resources:
Regulators Investigating MF Global for Missing Money, NY Times, October 31, 2011

Corzine's B-D could be liquidated, Investment News, November 1, 2011

More Blog Posts:
Shareholder Securities Lawsuit Against China North East Petroleum Holdings Ltd., is Dismissed by District Court, Institutional Investor Securities Blog, October 30, 2011

Money Laundering Charges Filed Against of Houston Criminal Defense Lawyer Accused of Defrauding Defendants of Over $1M, Stockbroker Fraud Blog, October 28, 2011

UBS Fined $12M for Supervisory Failures and Regulation SHO Violations in Securities Short Sales, Institutional Investor Securities Blog, October 25, 2011

Continue reading " MF Global Holdings Ltd. Files for Bankruptcy While Its Broker-Dealer Faces Liquidation and Securities Lawsuit by SIPC " »

Posted On: October 30, 2011

Shareholder Securities Lawsuit Against China North East Petroleum Holdings Ltd., is Dismissed by District Court

In re China North East Petroleum Holdings Ltd. Sec. Litig., a shareholder complaint against China North East Petroleum Holdings Ltd., (NEP), has been dismissed by the U.S. District Court for the Southern District of New York. The court found that the plaintiffs had not sustained economic losses because of the alleged misrepresentations made by the company. Judge Miriam Goldman Cedarbaum said that this was enough grounds for dismissal.

This is the first shareholder lawsuit dismissed against a U.S.-listed Chinese reverse merger company. An attorney for China North says the case outcome is a reaffirmation that despite “innuendo,” many of these companies are legitimate and have every right to be part of the US markets.

Meantime, the attorney for lead plaintiff Acticon AG, in disagreeing with the Court’s ruling, that the decision rested on issues not connected to the sufficiency of allegations of Defendants' fraudulent misconduct but on whether the plaintiff sustained damages. He believes that the Court misapplied Dura Pharmaceuticals in holding that a short term recovery of the share price after the class period can negate a claim that a Plaintiff sustained economic loss.

Acticon filed its putative class action against China North last year contending that the company had overstated oil reserves and reported earnings (by over $36 million) and failed to account for significant losses. It was just in February 2010 that the company announced that people should not rely on its financial statements for the year ending Dec. 31, 2008 and the first three quarters 2009. Following that announcement, there were numerous director and executive resignations and replacements made.

Per the shareholder lawsuit, Acticon bought about $60,000 China North shares during the class period of 5/15/08-5/26/10 in a number of installments. The court said that Acticon kept the shares for months even though it could have sold them and even after there had been a final allegedly corrective disclosure that was put out in September of last year. It also said that a plaintiff that decides to not take the opportunity to sell at a profit after a corrective disclosure cannot later say that the disclosure caused the later loss of devaluation. For example, Acticon didn’t sell after a 12-day period when China North's shares closed higher than the average price that it had paid for the shares.

There has recently been an increase in federal securities lawsuits filed against companies with significant operations in the People's Republic of China that can be found on US Exchanges. The Securities and Exchange Commission also has identified substantial accounting irregularities among these companies, which have applied the reverse merger strategy to join the US markets.

Court Ruling First to Dismiss Investor Suit Against PRC-Based Reverse Merger Company, BNA, October 17, 2011

Victory in fraud lawsuit for Chinese company, China Daily, October 27, 2011

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Tribune Bondholders Can Sue Shareholders for Over $8.2B, Institutional Investor Securities Blog, April 30, 2011

Securities Lawsuits Expected to Reach Record High in ’11, Says Advisen Ltd. Report, Institutional Investor Securities Blog, April 23, 2011

Continue reading " Shareholder Securities Lawsuit Against China North East Petroleum Holdings Ltd., is Dismissed by District Court " »

Posted On: October 27, 2011

Retirement Fund’s CDO Lawsuit Against Morgan Stanley is Dismissed by District Court

A district court judge has dismissed a securities fraud lawsuit filed by the Employees’ Retirement System of the Government of the Virgin Islands against Morgan Stanley (MS). The investor complaint, submitted in 2009, accused the financial firm of defrauding investors.

The pension fund had purchased the notes as part of a CDO that was marketed and set up by Morgan Stanley. The plaintiffs believe that the financial firm worked with Standard & Poor's and Moody's Investor Services to set up “false and misleading Triple-A credit ratings” for the notes. Because the high ratings, the plaintiffs bought the notes at a price that was inflated. The fund contends that the financial firm knew that in fact Morgan Stanley had insider information that the MBS underlying the notes were a lot riskier than they were led to believe and came from lenders that employed flawed underwriting standards. Many of notes were downgraded to junk by the end of 2007. The plaintiffs said the firm purposely got investors to get behind the CDO because it was taking a short position on underlying assets.

The portfolio, which was 92% residential mortgage-backed securities and was backed by $1.2 billion in assets, was exposed to $100 million from New Century Mortgage Corp. and over $130 million in loans from Option One Mortgage Corp. According to the retirement fund, the two homebuyers had poor credit scores. The Libertas collateralized debt obligation went into credit-default swaps, which referenced specific residential MBS.

Per U.S. District Court for the Southern District of New York, the Virgin Islands government pension fund did not adequately plead that Morgan Stanley misled it about the quality of the MBS that were underlying the Libertas CDO. Judge Barbara S. Jones, said the plaintiffs failed to state a fraud claim because its pleadings were not successful in alleging that Morgan Stanley made misstatements about the credit ratings of notes based on the underlying mortgage-backed securities. Also, the court noted that it wasn’t Morgan Stanley that issued the ratings or the statements in the CDO’s operating memorandum disclosures. Because of this, the court said that the plaintiff could not allege that Morgan Stanley had issued to it a materially false statement.

Shepherd Smith Edwards and Kantas founder and securities fraud attorney William Shepherd said, “Our law firm has been successful in maintaining similar cases in arbitration or state courts. I am curious as to just how and why this case was filed, or otherwise ended-up, in a federal court. Pleading requirements under federal securities laws are problematic, and there are a number of other hurdles one must overcome in federal court proceedings. There is no private right of action available under New York’s securities statute (The Martin Act). Other types of claims may be pursued under NY state law.”

Morgan Stanley Wins Dismissal of Virgin Islands Pension Fund’s CDO Lawsuit, Bloomberg, September 30, 2011

Morgan Stanley sued over failed $1.2 billion CDO, Reuters, December 29, 2009

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Continue reading " Retirement Fund’s CDO Lawsuit Against Morgan Stanley is Dismissed by District Court " »

Posted On: October 25, 2011

UBS Fined $12M for Supervisory Failures and Regulation SHO Violations in Securities Short Sales

UBS Securities has agreed to pay FINRA a $12 million fine over violations that led to millions of short sale orders of securities being mismarked or entered into the market even though there was no reasonable basis for thinking that they could be delivered or borrowed. FINRA says that UBS did not properly supervise the short sales and violated Regulation SHO. In settling, the financial firm is not denying or admitting to the charges. UBS has, however, agreed to an entry of FINRA’s findings.

Per Reg SHO, a broker must have reason to believe that a security can be delivered or borrowed before allowing a short sale order. Financial firms have to document this “locate information” prior to the sale happening so as to decrease the amount of potential failed deliveries. Broker-dealers also are supposed to designate an equity securities sale as either short or long.

Short sales involve sellers that don’t own the security that they are selling. To deliver the security, the short seller has to either borrow or buy it.

FINRA says that UBS had a flawed Reg SHO supervisory system when it came to locates and marking sale orders and that this resulted in supervisory failure, which played a role in serious regulation failures showing up throughout the investment bank’s equities trading business. In addition to putting into the marketplace millions of short order sales without locates (involving supervisory and trading systems, accounts, desks, strategies, the financial firm’s technology operations, and procedures), millions of sale orders were also mismarked—many of them as “long” —which led to more Reg SHO violations. FINRA also claims that “significant deficiencies” involving UBS’s aggregation units could have played a role in more locate violations and significant order-marking.

Because of UBS’s alleged supervisory failures, many of the violations weren’t fixed or detected until after the FINRA probe prompted the financial firm to evaluate its systems and procedures. UBS has since taken steps to upgrade these in an effort to have stricter Reg SHO controls.

Per FINRA Chief of Enforcement Brad Bennett, financial firms are responsible for making sure that they have the proper supervisory and trading systems so that naked short selling that is “potentially abusive” doesn’t happen. He noted that the violations committed by UBS could have hurt the market’s integrity.

Supervisory failures is a type of broker misconduct. It is a brokerage firm’s responsibility to create and execute written procedure that do the job of monitoring its employees’ activities so securities fraud and mistakes don’t happen that can cause investors to suffer losses and/or the market to go into chaos.

FINRA Fines UBS Securities $12 Million for Regulation SHO Violations and Supervisory Failures, FINRA, October 25, 2011

FINRA Fines UBS $12 Million Over Short Sales, AdvisorOne, October 25, 2011


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UBS Trader Charged with Fraud Related to $2B Trading Loss, Stockbroker Fraud Blog, September 23, 2011

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Continue reading " UBS Fined $12M for Supervisory Failures and Regulation SHO Violations in Securities Short Sales " »

Posted On: October 22, 2011

California Investigating Whether Bank of America & Countrywide Financial Used False Pretenses to Sell Mortgage-Backed Securities to Investors

Not long after bowing out of talks over a possible $25 billion dollar settlement between state and federal officials and the country’s largest banks (including Bank of America Corp, Citigroup, and JP Morgan Chase & Co.) over alleged foreclosure abuses, California’s Attorney General’s office has subpoenaed BofA as part of its investigation into whether it and subsidiary Countrywide Financial employed false pretenses to get private and institutional investors to purchase risky mortgage-backed securities. By walking out of the negotiations on the grounds that the banks weren’t offering a big enough settlement, the state of California has given itself the option of arriving at a larger settlement.

California Attorney General Kamala D. Harris has called the proposed settlement “inadequate” for the homeowners in her state. She has also has set up a mortgage fraud strike force tasked with investigating all areas of mortgage fraud.

Countrywide is credited with playing a role in the housing boom and its later collapse because of subprime loans it gave clients with poor/no credit histories, mortgages that let borrowers pay such a small amount that their loan balances went up instead of down, and “liar” loans that were issued without assets and income being confirmed. Also, a lot of the most high-risk loans were bundled up to support private-label securities that became highly toxic for investors and banks.

Meantime, Federal and state officials are trying to get California to rejoin the larger talks. Just this week, they presented the possibility of helping troubled creditworthy owners refinance their loans. California’s involvement is key for any deal because the state so many borrowers that owe more than the value of their homes, are in foreclosure, or are running behind on mortgages.

New York, too, has backed out of the group—a move that proved to be another blow for negotiations, as well as for the Obama Administration. Officials from other states, such as Nevada, Delaware, Minnesota, Massachusetts, and Kentucky, have also expressed worry about the breadth of the settlement and whether all potential misconduct has been investigated.

With its acquisition of Countrywide in 2008, BofA has sustained high losses over settlements as a result of its subsidiary’s loans. According to the Los Angeles Times, these settlements include:

• A promise to forgive up to $3 billion in principal for Massachusetts Countrywide borrowers
• $600 million to former Countrywide shareholders
• Billions of dollars to Freddie Mac and Fannie Mae over buybacks of bad home loans
• $8.5 billion to institutional investors over the repurchase of Countrywide mortgage-backed bonds
• $5.5 billion reserved for mortgage bond investors with similar claims

California reportedly subpoenas BofA over toxic securities, Los Angeles Times, October 20, 2011

California Pulls Out of Foreclosure Talks, Wall Street Journal, October 1, 2011

More Blog Posts:
$63 Million Mortgage-Backed Securities Lawsuit Against Bank of America is Second One Filed by Western and Southern Life Insurance Co. Against the Financial Firm, Institutional Investor Securities Blog, August 29, 2011

Federal Home Loan Banks Say Countrywide Financial Corp Mortgage Bond Investors May Be Owed Way More than What $8.5B Securities Settlement with Bank of America Corp. is Offering, Institutional Investor Securities Blog, July 22, 2011

Bank of America and Countrywide Financial Sued by Allstate over $700M in Bad Mortgaged-Backed Securities, Stockbroker Fraud Blog, December 29, 2010

Continue reading " California Investigating Whether Bank of America & Countrywide Financial Used False Pretenses to Sell Mortgage-Backed Securities to Investors " »

Posted On: October 20, 2011

Citigroup to Pay $285M to Settle SEC Lawsuit Alleging Securities Fraud in $1B Derivatives Deal

Citigroup has consented to pay $285 million to settle a Securities and Exchange Commission complaint accusing the bank of misleading investors in a $1 billion derivatives deal—a collateralized debt obligation called Class V Funding III. It was Citigroup that chose the assets for the portfolio that it then bet against. Investors were not told that Citigroup’s interests were contrary to theirs. The $285 million will go to the deal’s investors.

According to the SEC, Citigroup had significant influence over the $500 million of portfolio assets that were selected. It then took a short position against the assets, standing to profit if they dropped in value. All 15 investors were not made aware of any of this and practically all of their investments (in the hundreds of millions of dollars) were lost when the CDO defaulted in under 9 months after it closed on February 28, 2007. Credit ratings agencies had downgraded over 80% of the portfolio.

Financial instrument insurer Ambac, which was the deal’s biggest investor and had taken on the role of assuming the credit risk, was forced to pay those who bet against the bonds. In 2009, Ambac sought bankruptcy protection.

Meantime, Citigroup made about $126 million in profits from the short position and earned about $34 million in fees. S.E.C.’s division of enforcement director Robert Khuzami says that under the law, Citigroup was required to give these CDO investors “more care and candor.”

Per the SEC’s civil action, Citigroup employee Brian Stoker is the one that mainly put the deal together, while Credit Suisse portfolio manager Samir H. Bhatt was primarily in charge of the transaction. Credit Suisse was the CDO transaction’s collateral manager.

Stoker is fighting the SEC’s case against him. Meantime, Bhatt has settled the SEC’s charges by agreeing to pay $50,000. He has also been suspended from associating with any investment adviser for six months. Credit Suisse Group AG settled for $2.5 million.

As part of this settlement, Citigroup will pay a $95 million fine. It was just last year that the financial firm agreed to pay $75 million over federal claims that it purposely didn’t let investor know that their subprime mortgage investments were losing value during the financial crisis. Citigroup has said that since then, it has revamped its risk management function and gone back to banking basics.

Last year, Goldman Sachs Group Inc. agreed to settle for $550 million allegations that it did tell investors that the hedge fund that helped choose a CDO’s assets also was betting against it. JPMorgan Chase & Co. settled similar allegations earlier this year for $153.6 million.

Citigroup to Pay $285 Million to Settle SEC Claims on Mortgage-Linked CDO, Bloomberg, October 19, 2011

Citigroup to Pay Millions to Close Fraud Complaint, NY Times, October 19, 2011

Related Blog Resources:
Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million, Stockbroker Fraud Blog, July 30, 2010

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

Citigroup Global Markets to Pay Back $95.5M Over ARS Sold to LandAmerica Exchange Fund, Institutional Investors Securities Blog, November 11, 2010

Continue reading " Citigroup to Pay $285M to Settle SEC Lawsuit Alleging Securities Fraud in $1B Derivatives Deal " »

Posted On: October 19, 2011

European Leaders Work to Get a Grip on Debt Crisis

Leaders from all over Europe will meet this Sunday with the intention of coming up with a plan to overcome the sovereign debt crisis. 17 nations, who all share the euro currency, are trying to reach a deal to strengthen its EFSF (European Financial Stability Facility) fund (which has already assisted in bailing out Ireland and Portugal), present a strategy to bolster European banks, and agree on a new aid package for Greece, which is in financial trouble.

This is not the first time euro zone leaders have gathered in the last year and a half to try to solve the debt problem. During their last effort in July, they reached a deal to give Greece about 110 billion euros and aid while the nation’s private creditors were to sustain an approximately 20% loss on their bond holdings. That deal, however, has since fallen apart, which is why there is a summit in Brussels this Sunday. Meantime, in an attempt to make the Sunday gathering a success, Euro-area leaders are meeting in Frankfurt meeting now to try to resolve certain disagreements in advance.

According to the Washington Post, the specter of the Lehman Brothers bankruptcy has been hanging over European leaders, who are committed to not making the same mistakes made by the Federal Reserve and the Bush Administration that led to the US’s economic crisis in 2008. Although that was a domestic emergency here, the ripples were felt globally and the Europeans don’t want that to happen again this time around. Per the Post, when European Central Bank President Jean-Claude Trichet warned US officials against letting Lehman file for bankruptcy, he’d cautioned that doing so would be “something…exceptionally grave.”

Reverberations soon followed. For example, after one market mutual fund’s shares dropped to under $1 because it had invested heavily in short-term loans to Lehman, others then pulled their investments out of money market funds. Because no one knew what other banks might be at risk of failing, lending between them stopped. Global markets then went into upheaval.

US leaders have learned much from the 2008 economic crisis. The Washington Post says that now it is the Obama Administration’s that is pressing Europe to take aggressive action to solve its debt crisis. If Greece fails, Portugal, Ireland, Spain, and France may follow. Who knows what would happen next.

Shepherd Smith Edwards & Kantas LTD LLP founder and Stockbroker Fraud Attorney William Shepherd offers this analysis:

After the financial crash of 1929, U.S. legislation was passed, including securities laws and regulations and the Glass Steagall Act (banks, brokerage and insurance companies were separated). Barriers were enforced to prevent unfair trade acts and policies. For the next seven decades the U.S. economy boomed and our financial system became the envy of the world.

Those changes made in the 1930’s were implemented despite cries that such legislation, regulation and protection for our economy would doom capitalism. Generation after generation of so-called “free-traders” and “free marketers” continued their drones to return to yesteryear - an era in which globalists could do as they pleased in their race to the bottom for the sake of profit for the few at the expense of the rest of us.

By the 1990’s, billions financed a lopsided body of “thought” that a return to the 1920’s would cure world problems and lead us into a new and better future. Wise folks screamed that a return to “deregulation” of the financial system and instantly forcing Western World workers into competition with near-slave labor in third-world nations would lead to dire consequences. But true wisdom was overwhelmed by the bought-and-paid-for-voices that occupied major political parties.

Reversal to the 1920’s … fait accompli. The result was both predictable and predicted. Welcome back the 1930’s … except, where is an “FDR” who can reverse the insanity of the last decade?

Ghost of Lehman Brothers haunts European politicians and bankers, Washington Post, October 18, 2011

Europe's leaders take another swing at debt crisis, Chicago Tribune, October 19, 2011

More Blog Posts:

UBS to Pay $2.2M to CNA Financial Head for Lehman Brothers Structured Product Losses, Stockbroker Fraud Blog, January 4, 2011

Lehman Brothers Lawsuit Claims Its Bankruptcy Was In Part Due to JP Morgan Chase’s Seizure of $8.6 Billion in Cash Reserves, Stockbroker Fraud Blog, June 14, 2010

Claims for Losses at Lehman Brothers and in Investments into Lehman Brothers Financial Instruments Gain New Life as Court Uncovers Stunning New Evidence, Stockbroker Fraud Blog, March 21, 2010

Continue reading " European Leaders Work to Get a Grip on Debt Crisis " »

Posted On: October 16, 2011

SIFMA Offers Up Best Practices for How Financial Firms Can Interact with Expert Networks

The Securities Industry and Financial Markets Association is recommending a number of best practices for financial firms that work with Expert Networks and their Consultants.
According to SIFMA, expert networks are entities that receive a fee to refer industry professionals, known as consultants, to third parties. Although the acknowledges how helpful these networks can be in helping broker-dealers implement and design investment strategies while offering advice, information, market expertise, analysis, or other expertise in making investment decisions, SIFMA General Counsel Ira Hammerman said in a release that these best practices should help with compliance while helping avoid what could like “impropriety.” The government has recently targeted them when investigating insider trading.

Among the recommendations:
1) Establishing policies and procedures for how to use Expert Networks and Consultants. SIFMA is recommending a risk-based approach for figuring out what controls should be put in place.

2) Providing training for associated persons that deal with Expert Networks and Consultants on matters such as insider training, information barriers, confidential information, conflicts of interest, or material, non-public information (MNPI).

3) Ensuring that supervisory oversight is integrated into a financial firm’s use of Expert Networks and associated consultants.

4) Setting up policies and procedure that mandate that financial firms act quickly on “red flags” that may indicate there is a possibility of disclosure of confidential information of conflicts of interest or MNPI.

5) Establishing written agreements with Expert Networks over arrangements that are substantial or repeating in nature, such as those involving making sure that Consultants are checked for securities law violations, preventing Consultants from revealing MNPI or Confidential Information, requiring that Consultants undergo periodic training or communication about certain restrictions, and requiring that Consultants are periodically certified as to the adherence of these limits.

6) Setting up procedures on how to advice Expert Networks-affiliated Consultants about Confidential Information and MNPI.

7) Establishing procedures for getting non-confidential, relevant information from an Expert Network or one of its Consultants about employment and arrangements where a Consultant may have access to Confidential Information or MNPI, as well as setting up appropriate controls for assessing risks of dealing with Consultants that work with Expert Networks that have Confidential Information or MNPI.

In providing these best practices, however, SIFMA wants to make clear that these are only intended as guidance and are not mandates for how financial firms must work with Expert Networks and Consultants.

If you are an investor that has suffered losses you believe were caused by broker misconduct, you should talk to a securities fraud attorney right away.

More on the SIFMA best practices, SIFMA

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Micah S. Green, Expected New CEO of Largest Securities Industry Group, Resigns During Scandal, Stockbroker Fraud Blog, May 18 2007

Continue reading " SIFMA Offers Up Best Practices for How Financial Firms Can Interact with Expert Networks " »

Posted On: October 13, 2011

SEC Issues Emergency Order to Stop $26M “Green” Ponzi Scam

The Securities and Exchange Commission has received an emergency order to stop a Ponzi scam that bilked victims of about $26 million. Investors in PermaPave Companies were promised significant returns if they would place their money behind water-filtering natural stone pavers. According to the SEC, which has filed a securities complaint, Eric Aronson, a convicted felon, is the mastermind behind the scheme.

Aronson, who pleaded guilty to fraud in another case more than 10 years ago, is now accused of persuading about 140 people to buy promissory notes from PermaPave Companies and promising up to 33% in returns. Between 2006 and 2010, Aronson and company executives Robert Kondratick and Vincent Buonauro Jr., allegedly used new investor money to pay older clients while spending some of the Ponzi funds on gambling trips to Las Vegas, jewelry, and expensive cars. He also allegedly misappropriated about $2.6 million to repay victims of the earlier securities scam to which he entered a guilty plea.

Some of the investors’ funds that went into the Ponzi scam were also allegedly used to buy Interlink-US-Network, Ltd., which was a publicly traded company. Interlink later put out a Form 8-K falsely stating that LED Capital Corp. had said it would put $6 million into it. LED Capital did not have the money and never made such an agreement.

The SEC says that when investors began demanding that they be paid the money they were owed, Aronson accused them of committing a felony because they lent PermaPave Companies money at interest rates that were exorbitant—even though he was the one who promised them such high percentages. The Commission is accusing both Aronson and attorney Frederic Aaron of making false statements to get investors to change their securities into ones that would defer payments owed for several years.

U.S. District Court Judge Jed S. Rakoff is granting the SEC’s request that the defendants and relief defendants’ assets be frozen. Meantime, the Commission wants to bar Aronson, Buonauro, and Kondratick from being able to work as directors and officers of public companies and keep them from taking part in penny-stock offerings. The SEC also wants permanent and preliminary injunctions against the defendants, the return of illicit profits plus prejudgment interest, and civil monetary penalties.

Aronson, Kondratick, and Buonauro have been arrested in connection with the Ponzi scam.

Ponzi Scams
To succeed, Ponzi schemes need to bring in new clients so that their money that they invest can be used to pay older clients their promised returns. Unfortunately, with hardly any legitimate earnings, Ponzi scams can fall apart when it becomes a challenge to recruit new investors or too many investors ask to cash out.

SEC Files Emergency Action to Halt Green-Product Themed Ponzi Scheme,, October 6, 2011

3 New York Men Arrested In Alleged Landscaping Ponzi Scheme, The Wall Street Journal, October 6, 2011

SEC Claims Author Used Ponzi Scheme to Repay Prior Fraud Victims, Bloomberg Businessweek, October 6, 2011

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SEC Chairman Criticized For Allowing Ex-Commission Official that Benefited from the Bernard Madoff Ponzi Scam to Help Craft Policy Regarding Victims’ Compensation, Institutional Investor Securities Blog, September 23, 2011

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Merrill Lynch Faces $1M FINRA Fine Over Texas Ponzi Scam by Former Registered Representative, Stockbroker Fraud Blog, October 10, 2011

Continue reading " SEC Issues Emergency Order to Stop $26M “Green” Ponzi Scam " »

Posted On: October 12, 2011

SEC Says Former United Commercial Bank Executives Concealed Millions of Dollars in Losses that Caused Bank’s Failure

The Securities and Exchange Commission has filed securities fraud charges against former United Commercial Bank executives accusing them of concealing loss from assets and loans from auditors that resulted in UCBH Holdings Inc., its public holding company, to understate its operating losses in 2008 by at least $65 million. As the bank’s loans continued to go down in value, the financial firm went on to fail and the California Department of Financial Institutions was forced to shut it down. This resulted in a $2.5 billion loss to the Federal Deposit Insurance Corporation’s insurance fund.

Per the SEC’s complaint, former chief operating officer Ebrahim Shabudi, chief executive officer Thomas Wu, and senior officer Thomas Yu were the ones that hid the bank’s losses. All three men are accused of delaying the proper recording of the loan losses and making misleading and false statements to independent auditors and investors and concealing from them that there had been the major losses on a number of large loans, property appraisals had gone down, property appraisals had been reduced, and loans were secured by worthless collateral.

Also accused of securities fraud by the SEC is former United Commercial Bank chief financial officer Craig On. The Commission said that he aided in the filing of false financial statements and misled outside auditors. To settle the SEC charges, On has agreed to pay a $150,000 penalty. He also agreed to an order suspending him from working before the SEC as an accountant for five years. He is permanently enjoined from future violations of specific recordkeeping, reporting, anti-fraud, and internal controls provisions of federal securities laws.

Criminal charges have also been filed against Shabudi and Wu. A grand jury indicted both men of conspiring to conceal loan losses, misleading regulators and investors, and lying to external auditors. Wu and Shabudi allegedly used accounting techniques and financial maneuvers, including concealing information that would have shown its decline, understating loan risks, and falsifying books, to hide the fact that that the bank was in trouble.

This is the first time such charges have been made against executives who worked at a bank that obtained government money—$298 million from TARP—to keep it running during the economic collapse.

Prior to its demise, United Commercial Bank, which was the first US bank to acquire a bank in China was considered a leader in the industry. It amassed assets of up to $13.5 billion in 2008. However, it also soon $67.7 million—way down from its $102.3 million profit in 2007. East West Bank acquired United Commercial Banks after regulators took it over in 2009.

Meantime, the FDIC is taking steps to bar 10 former United Commercial Bank officers from ever taking part in the banking industry.

SEC Charges Bank Executives With Hiding Millions of Dollars in Losses During 2008 Financial Crisis, SEC, October 11, 2011

Read the SEC Complaint (PDF)

Feds file charges against execs of failed United Commercial Bank, Mercury News, October 11, 2011

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Continue reading " SEC Says Former United Commercial Bank Executives Concealed Millions of Dollars in Losses that Caused Bank’s Failure " »

Posted On: October 7, 2011

Don’t Create Uniform Fiduciary Standard for Broker-Dealers and Investment Advisers, Say Some Republicans to the SEC

House Financial Services subcommittee Chairman Scott Garrett (R-N.J.) is encouraging the Securities and Exchange Commission to refrain from rulemaking for establishing a uniform fiduciary standard that would apply to both broker-dealers and investment advisers unless the federal agency can come up with adequate evidence to support this action. Garrett made his views known at a Subcommittee on Capital Markets and Government Sponsored Enterprises oversight hearing. Committee Chairman Spencer Bachus (R-Ala.) and Rep. Ed Royce (R-Calif.) also echoed these same sentiments.

Says Shepherd Smith Edwards & Kantas LTD LLP Founder and Securities Fraud Attorney William Shepherd, “Washington is again bowing to Wall Street pressure to exempt them from liability for their wrongful acts. It is incredible that, considering the unmitigated investment fraud perpetrated on the American public in the last decade, Congress would even consider thwarting the very investors who elected them from receiving the justice they deserve!”

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 913, the SEC has the authority to start up the rulemaking for this uniform fiduciary standard but is under no obligation. Earlier this year, the SEC put out a report recommending that it take up this rulemaking.

While Garrett questioned whether “hard factual data” existed demonstrating that a suitability standard is not enough to protect investors, others noted that it is a fiduciary standard and not a suitability standard that addresses cost, which impacts investors’ long-term performance. The majority of those that testified at the hearing also supported a uniform fiduciary standard that would apply to both investment advisers and broker-dealers. Consumer Federation of America director of investor protection Barbara Roper said that investors lose money when the person giving them investment advice must only meet a suitability standard and not a fiduciary one.

Meantime, while financial industry representatives have expressed support for a uniform fiduciary standard for investment advisers and broker-dealers, they don’t believe that it could be properly executed under the 1940 Investment Advisers Act.

Securities Industry and Financial Markets Association senior managing director and general counsel Ira Hammerman has said that the Act is unable to work with the business models for broker-dealer, while Financial Services Institute government affairs director and general counselor David Bellaire said that imposing a 1940 Act fiduciary duty on broker-dealers would decrease investor choice and decrease services, which would all significantly affect the market.

Currently, broker-dealers have to abide by a suitability standard, which is more lenient than the fiduciary duty standard for investment advisers. SEC Chairman Mary Schapiro has told staff that they need to recommend a proposal before the year is over.

Also up for discussion was the draft that Senator Bachus released last month mandating that there be at least one self-regulatory organization tasked with overseeing investment advisers. The Financial Industry Regulatory Authority is a top candidate for the role and has expressed interest in taking on this new responsibility. However, not everyone is a supporter of FINRA becoming SRO.

Republicans Urge SEC Not to Take Up Rulemaking on Uniform Fiduciary Standard, BNA, September 14, 2011

More Blog Posts:

Most Investors Want Fiduciary Standard for Investment Advisers and Broker-Dealers, Say Trade Groups to SEC, Stockbroker Fraud Blog, October 12, 2010

Fiduciary Standard in Securities Industry Doesn't Need New Definition, Stockbroker Fraud Blog, November 26, 2010

FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO, Stockbroker Fraud Blog, April 8, 2011

Continue reading " Don’t Create Uniform Fiduciary Standard for Broker-Dealers and Investment Advisers, Say Some Republicans to the SEC " »

Posted On: October 4, 2011

Govt.'s Mortgage-Backed Securities Case Against JPMorgan Case Leads to Lawsuit Against 23 Former Washington Mutual Employees

The federal government has filed a securities lawsuit against 23-ex Washington Mutual employees and a number of WaMu’s subsidiaries. The complaint contends that these persons signed off on documents that included misleading and false information that was used to sell billions of dollars in mortgage-backed securities. The case stems from the government’s MBS lawsuit against JPMorgan Chase, which acquired nearly all of WaMu’s banking assets and liabilities a few years ago. That securities complaint is one more than a dozen brought by the Federal Housing Finance Agency last month against the large banks that packaged and sold MBS at the height of the housing boom.

In this latest lawsuit, the government contends that when Fannie Mae and Freddie Mac bought their 35 issues of securities worth $12.9 billion during the bubble, they depended on the registration statements, prospectuses, and other documents that WaMu and its subprime unit Long Beach Mortgage had filed. Unfortunately, the documents that Fannie and Freddie depended on included omissions and misstatements that misrepresented that the underlying mortgage loans were in compliance with certain underwriting standards and guidelines, including representations that “significantly overstated” the borrowers’ ability to pay back their mortgage loans.

One example cited involves the LBMLT 2006-1, which is a subprime security. Standard & Poor’s and Moody’s had both given it an AAA rating and the offering document noted that almost 73% of the underlying mortgages had an 80% or lower loan-to-value ratio. Less than 25% were supposedly on non-owner occupied homes.

The government is now saying, however, that WaMu pressed appraisers to raise property values so that these lower LTV ratios could be obtained and that, in fact, only 50% of underlying loans in LBMLT 2006-1 had LTV ratios of 80% or lower. Also, the government believes that almost one third of LBMLT 2006-1 loans were on nonowner occupied homes and not the lower percentage that was quoted. Close to 56% of LBMLT 2006-1 have since defaulted, gone into foreclosure, or become delinquent.

Most of the ex-WaMu and Long Beach officers named in the complaint, save for ex-chief financial officer Thomas Case and ex-Home Loans group head Craig Davis, were midlevel employees. It was just earlier this year that the Federal Deposit Insurance Corp. sued three ex-WaMu executives for allegedly gambling billions of the bank’s money on risky home loans while they lined their own pockets.

Defendants named then were ex-Chief Executive Kerry Killinger, ex-Chief Operating Officer Stephen Rotella, and ex-WaMu home loans division president David Schneider. The three men are accused of earning $95 million in compensation between 2005 and 2008.

US banking regulators have sued over 150 bank officials in their efforts to get back at least $3.6 billion in losses linked to the 2007-2009 economic crisis.

If you are an investor that suffered losses related to mortgage-backed securities when the housing bubble burst, you might have grounds for a securities fraud case.

23 ex-WaMu employees named in federal suit, The Seattle Times, September 8, 2011

Ex-WaMu Execs Sued By FDIC For Gross Negligence Over Bank's Collapse - READ The Lawsuit, Huffington Post, March 17, 2011

More Blog Posts:

$63 Million Mortgage-Backed Securities Lawsuit Against Bank of America is Second One Filed by Western and Southern Life Insurance Co. Against the Financial Firm, Institutional Investor Securities Blog, August 29, 2011

NCUA Sues Goldman Sachs for $491M Over $1.2B of Mortgage-Back Securities Sales That Caused Credit Unions’ Failure, Institutional Investor Securities Blog, August 23, 2011

Continue reading " Govt.'s Mortgage-Backed Securities Case Against JPMorgan Case Leads to Lawsuit Against 23 Former Washington Mutual Employees " »

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