Posted On: November 30, 2011

Former US Treasury Secretary Henry Paulson Told Hedge Funds About Fannie Mae and Freddie Mac Bailouts in Advance

According to, former US Treasury Secretary Henry Paulson told a number of Wall Street executives in advance that the government was planning on Taking Control of Freddie Mac and Fannie Mae. This information, reportedly delivered to them at the Eton Park Capital Management LP offices on July 21, 2008 when Paulson was still in office, came just one day after he told the New York Times that the Office of the Comptroller of the Currency and the Federal Reserve were inspecting both mortgage giants’ books and that he expected that this would give the markets a sign of confidence.

There were about a dozen people present at the Eton Park gathering, including the hedge fund’s founder Eric Mindich, at least five former Goldman Sachs Group Inc. alumni, Lone Pine Capital LLC founder Stephen Mandel, Och-Ziff Capital Management Group LLC’s Daniel Och, TPG-Axon Capital Management LP’s Dinakar Singh, Kynikos Associates Ltd.’s James Chanos, GSO Capital Partners LP co-founder Bennett Goodman, Evercore Partners Inc.’s Roger Altman, and Quadrangle Group LLC co-founder Steven Rattner.

Paulson reportedly spoke about placing Freddie Mac and Fannie Mae into “conservatorship,” which would then allow the firms to stay in business. He said that the two government-sponsored enterprises’ stock, as well as numerous classes of preferred stock, would be eliminated. One fund manager who was there that day said he was surprised at Paulson’s wiliness to reveal such details.

Paulson did not do anything illegal when he gave out this insider information. However, any of the executives who were there today could have traded on this inside information. Whether anyone did is a mystery, seeing as firm-specific short stock sales cannot be tracked with public documents.

The US government seized Frannie and Freddie a couple of weeks after the Eton Park gathering and control of the firms was handed over to the Federal Housing Finance Agency.

At the time, Paulson said that the failure of Freddie and Fannie was not an option—considering that over $5 trillion in mortgage-backed securities and debt that the two of them had issued belonged to central banks and other investors throughout the world.

Last year, the Los Angeles Times reported that taxpayer loss from the government takeover could go as high as almost $400 billion. The FHFA said it was looking to offset some of this by getting billions of dollars back from banks that sold Fannie and Freddie bad loans. By September of 2010—two years after the seizure—the cost of the bailouts had already hit $148.2 million and concerns arose when the Obama Administration announced that it was raising the $400 billion cap on the government’s commitment to the two mortgage giants through 2012.

Our securities fraud lawyers represent clients though sustained severe losses when the housing market collapsed. Unfortunately, broker misconduct contributed to a number of these losses.

How Paulson Gave Hedge Funds Advance Word of Fannie Mae Rescue,, November 29, 2011

Losses from Fannie Mae, Freddie Mac seizures may near $400 billion, Los Angeles Times, September 16, 2011

U.S. Seizes Mortgage Giants, Wall Street Journal, September 8, 2008

Related Web Resources:

MF Global Shortfall May Be More than $1.2B, Says Trustee, Stockbroker Fraud Blog, November 26, 2011

Bonds Defeat Stocks For the First Time Since Prior to the Civil War, Institutional Investor Securities Blog, November 26, 2011

Wells Investment Securities Agrees to $300,000 Fine by FINRA for Alleged Use of Misleading Marketing Materials for REIT Offerings, Institutional Investor Securities Blog, November 23, 2011

Continue reading " Former US Treasury Secretary Henry Paulson Told Hedge Funds About Fannie Mae and Freddie Mac Bailouts in Advance " »

Posted On: November 29, 2011

Sale of Interest in Private Placement Offerings by Medical Capital Holdings, Provident Royalties DBSI Leads to FINRA Order that Investors Get $3.2M in Restitution

The Financial Industry Regulatory Authority has ordered another 10 individuals and 8 financial firms to pay $3.2M in restitution to clients who were sold interest in risky private placements that were issued by DBSI, Inc., Medical Capital Holdings, Inc., and Provident Royalties, LLC. The parties that were sanctioned allegedly sold the interests without having reasonable grounds to recommend the securities to customers. The SRO believes there were inadequate supervisory systems in place.

FINRA fined the following parties for allegedly failing to reasonably investigate the private placement offerings to ensure that the firms making the sales were fulfilling their obligation to customers.

• NEXT Financial Group, Inc.: $2 million in restitution and a $50,000 fine. VP Steven Lynn Nelson was fined $10,000 related Provident Royalties private placements sales.

• Investors Capital Corporation: About $400,000 in restitution over Provident Royalties private placement sales and a CIP Leveraged Fund Advisors-offering.

• Garden State Securities, Inc.: $300,000 related to a Medical Capital private placement. Kevin John DeRosa was fined $25,000. Vincent Michael Bruno, who is chief compliance officer, will pay a $10,000 fine.

• Capital Financial Services: Clients will get $200,000. Ex-principal Brian W. Boppre is fined $10,000. Private placements from both Medical Capital and Provident Royalties were involved.

• National Securities Corporation: $175,000 in restitution related to the sale of Provident Royalties and Medical Capital private placements. Director Matthew G. Portes was suspended and fined $10,000.

• Equity Services, Inc.: Nearly $164,000 in restitution and a $50,000 fine. Sr. VP Stephen Anthony Englese was fined $10,000 while representative Anthony Paul Campagna must pay $25,000.

• Securities America, Inc.: Fined $250,000.

• Newbridge Securities Corporation: A $25,000 fine related to private placements sold by DBSI and Medical Capital. Ex-Chief Compliance Officer Robin Fran Bush was fined $15,000.

• Former Meadowbrook Securities CEO and President of LLC Leroy H. Paris II must pay a $10,000 fine related to the sale of Medical Capital and Provident Royalties private placements.

• Michael D. Shaw was barred from the securities industry. He was previously associated with VSR Financial Services, Inc.

Between ’01-’09, Medical Capital Holdings was able to raise about $2.2 billion through the private placement offerings of promissory notes. Over 20,000 investors participated. Meantime, from September ’06 to January ’09, Provident Asset Management, LLC sold and marketed limited partnerships and stock in 23 private placements issued by Provident Royalties. More than $485 million was raised from over 7,700 investors who made their purchases through over 50 retail broker-dealers. Last year, however, a number of the private placement deals soured, causing a number of broker-dealers that sold them to shut down, while the investors sustained financial losses.

FINRA Sanctions Eight Firms and 10 Individuals for Selling Interests in Troubled Private Placements, Including Medical Capital, Provident Royalties and DBSI, Without Conducting a Reasonable Investigation, FINRA, November 29, 2011

FINRA fines eight firms for private placement sale, Reuters, November 29, 2011

More Blog Posts:
FINRA Wants Brokers Selling Regulation D Private Placements to Take Part in Tougher Due Diligence Process, Stockbroker Fraud Blog, June 7, 2011

Boogie Investment Group Inc. Fails Because of Fraudulent Private Placements by Provident Royalties LLC and Medical Capital Holdings Inc., Stockbroker Fraud Blog, October 27, 2011

Ban on Private Securities Offerings Solicitations Could Be Revised by SEC or Congress, Says Ex-Official, Institutional Investor Securities Blog, July 11, 2011

Continue reading " Sale of Interest in Private Placement Offerings by Medical Capital Holdings, Provident Royalties DBSI Leads to FINRA Order that Investors Get $3.2M in Restitution " »

Posted On: November 28, 2011

FINRA May Put Forward Another Proposal About Possible SEC Rule Regarding Fiduciary Duty

According to FINRA CEO and Chairman Richard G. Ketchum, the SRO may put out a second concept proposal about its stance regarding disclosure obligations related to a possible Securities and Exchange Commission rulemaking about formalizing a uniform fiduciary duty standard between broker-dealers and investment advisers. Currently, the 1940 Investment Advisers Act defines the investment advisers’ fiduciary obligation to their clients, while broker-dealers are upheld to suitability rules that will be superseded next August by two FINRA rules regarding broker-dealer suitability standards.

The Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 913, however, said that it is SEC’s responsibility to determine whether these current regulatory and legal standards s are still effective and if any regulatory shortcomings that exist need to be filled. In July 2010, the SEC asked stakeholders for feedback about this mandates. After receiving over 3,000 public comments, it issued a study recommending that there be a uniform fiduciary standard for both types of representatives when giving advice to retail clients. The SEC could put out its proposed rule by the end of this year.

FINRA is working with the Commission on this and plans to stay involved in the process. It was just last year that the SRO put out a concept proposal seeking public comment about the idea that broker-dealers should have to provide retail investors with certain disclosures at the start of a business relationship. These clients would be required to give a written statement detailing the kids of services and accounts they provide, any conflicts of interests, and limits on duties that they are entitled to expect. FINRA said that regardless of what a unified fiduciary standard would look like, retail investors would benefit from getting this disclosure document at the start and that such a mandate is an “outright necessity.

Regard this proposed fiduciary standard rule, Shepherd Smith Edwards and Kantas founder and stockbroker fraud lawyer William Shepherd said: “The goal is to lower the duties of Wall Street. The term “fiduciary duty” was defined by courts centuries ago. Since passage of the Investment Advisor’s Act of 1940 – 71 years ago – no special definition of the “fiduciary duty” of financial advisors has been necessary. Current law does not exempt stockbrokers from a fiduciary duty when the circumstances arise in which the broker has assumed the role of a fiduciary. Example: ‘I will take care of you and properly invest your money for you.’ What is being currently proposed is nothing more than a “safe harbor” for brokerage firms to disclose their conflicts, etc. Is it time to occupy Wall Street?”

Our securities fraud attorneys are committed to helping our institutional investor clients recoup their losses from negligent broker-dealers and investment advisers.

Disclosure of Services, Conflicts and Duties, FINRA, October 2010

Study on Investment Advisers and Broker-Dealers, SEC (PDF)

More Blog Posts:

Don’t Create Uniform Fiduciary Standard for Broker-Dealers and Investment Advisers, Say Some Republicans to the SEC, Institutional Investor Securities Blog, October 7, 2011

SEC’s Proposal on Implementing Whistleblower Rule Draws Mixed Reactions, Institutional Investor Securities Blog, January 3, 2011

Advisory Performance Fee Rule Limit Adjusted by the SEC, Stockbroker Fraud Blog, July 30, 2011

Posted On: November 26, 2011

Bonds Defeat Stocks For the First Time Since Prior to the Civil War

According to, the largest gains in bonds in nearly 10 years have overtaken returns on stocks over the last 3 decades. This is the first time that this has occurred since before the American Civil War. Bonds reportedly have become assets to buy because the US inflation rate had a 1.5% average this year and the Federal Reserve made the decision to keep target interest rates for overnight loans between banks at close to 0 through 2013.

Bianco Research reports that long-term government bonds have added 11% annually on average over the last thirty years—defeating the S & P 500’s 10.8% rise. Prior to this last 30-year period, stocks had been outperforming bonds over every 3-decade period since 1861.

More 2011 facts as reported by Bloomberg:

• Per Bank of America Merrill Lynch indexes, fixed-income investments moved forward 6.25%--nearly 3 times the 2.18% increase in the Standard & Poor’s 500 Index through the second to the last week of October.
• Debt markets are on target to return 7.63%--the most in 9 years.
• Bank of America Merrill Lynch’s U.S Master Treasury index reports that US government debt has risen 7.23%.
• There has been an 8.17% return on municipal securities
• Corporate notes have experienced a 6.24% gain
• Mortgage bonds have gone up 5.11%
• There has been a .25% return on the S&P GSCI index of 24 commodities

Meantime, there continues to be resistance to purchasing debt. According to Bloomberg, the bears did not predict that Americans would continue to boost savings while paring debt. A lot of that cash ended up in fixed-income markets while investors and banks continue to look for high quality-debt as unemployment stayed constant. Meantime, Europe’s own financial crisis appears ready to send the world’s economy into another meltdown.

While the US savings rate has tripled since 2005 at approximately 3.6% and averaging 5.1% since December 2008, debt mutual funds have brought in $789.4 billion. Since the end of last year, banks have upped up the holdings of government-backed mortgage securities and Treasuries to $1.68 trillion. Foreign investors have also upped their investment in Treasuries ($4.57 trillion in August). Meanwhile, government bonds are expected to experience their largest gains since 2009 with defaults dropping last quarter and states and cities lowering their expenses rather than missing making debt payments.

Over the last few years, our stockbroker fraud attorneys have witnessed many investors sustain financial losses, many of which were incurred as a result of broker misconduct and other acts of securities fraud that contributed to the economic collapse. Shepherd Smith Edwards and Kantas LLP represents institutional and individual investors throughout the US. We also represent a number of clients abroad.

Say What? In 30-Year Race, Bonds Beat Stocks, Bloomberg, October 31, 2011

More Blog Posts:
Wells Investment Securities Agrees to $300,000 Fine by FINRA for Alleged Use of Misleading Marketing Materials for REIT Offerings,Institutional Investor Securities Blog, November 23, 2011

Morgan Stanley Faces $1M FINRA Fine for Excessive Markups and Markdowns on Corporate and Municipal Bond Transactions, Institutional Investor Securities Blog, September 17, 2011

Former Texan and First Capital Savings and Loan To Pay $4.5M for Alleged Foreign Currency Ponzi Scheme, Stockbroker Fraud Blog, November 11, 2011

Posted On: November 23, 2011

Wells Investment Securities Agrees to $300,000 Fine by FINRA for Alleged Use of Misleading Marketing Materials for REIT Offerings

To settle FINRA accusations that it used misleading marketing materials when selling Wells Timberland REIT, Inc., Wells Investment Securities, Inc. has agreed to pay a $300,000 fine, as well as to an entry of the findings. However, it is not denying or admitting to the securities charges.

FINRA claims that as the wholesaler and dealer-manager of the non-traded Real Estate Investment Trust’s public offering, Wells approved, reviewed, and distributed 116 sales and marketing materials that included statements that were misleading, exaggerated, or unwarranted.The SRO contends that not only did most of the REIT’s sales literature and advertisements neglect to disclose the meaning of Wells Timberland's non-REIT status, but also it implied that Wells Timberland qualified as an REIT during a time when it didn’t. (Although its initial offering prospectus reported that it planned to qualify as an REIT for the tax year finishing up at the end of 2006, it did not qualify until the one ending on December 31, 2009.) Also, FINRA believes that Wells Timberland’s communications about portfolio diversification, redemptions, and distributions included misleading statements and that the financial firm lacked supervisory procedures for making sure the proprietary data and sensitive customer information were properly protected with working encryption technology.

While non-traded REITs are usually illiquid for approximately 8 years or longer, certain tax ramifications can be avoided if specific IRS requirements are met. FINRA says that the Wells ads failed to ensure that investors clearly understood that an investment that is not yet an REIT couldn’t offer them those tax benefits.

Last month, FINRA put out an alert notifying investors about the risks of public non-traded REITs. Non-exchange traded real estate investment trusts are not traded on a national securities exchange. Early redemption is usually limited and fees related to their sale can be high, which can erode one’s overall return. Risks involved include:

• No guarantee on distributions, which can exceed operating cash flow.
• REIT status and distributions that come with tax consequences
• Illiquidity and valuation complexities
• Early redemption that is limited and likely costly
• Fees that can grow
• Unspecified properties
• Limited diversification
• Real Estate risk

FINRA wants investors considering non-traded REITs to:

• Watch out for sales literature or pitches giving you simple reasons for why you should invest.
• Find out how much the seller is getting in commissions and fees.
• Know how investing in this type of REIT will help you meet your goals.
• Carefully study the accompanying prospectus and its supplements.

Finra Fines Wells Investment Securities For Alleged Misleading Marketing Materials, The Wall Street Journal, November 22, 2011

Public Non-Traded REITs—Perform a Careful Review Before Investing, FINRA

More Blog Posts:
Chase Investment Services Corporation Ordered by FINRA to Pay Back $1.9M for Unsuitable Sales of Floating-Rate Loan Funds and UITs, Institutional Investor Securities Blog, November 19, 2011

Morgan Stanley Faces $1M FINRA Fine for Excessive Markups and Markdowns on Corporate and Municipal Bond Transactions, Institutional Investor Securities Blog, September 17, 2011

Citigroup Global Markets Inc. Sues Two Saudi Investors in an Attempt to Block Their FINRA Arbitration Claim Over $383M in Losses, Stockbroker Fraud, October 22, 2011

Continue reading " Wells Investment Securities Agrees to $300,000 Fine by FINRA for Alleged Use of Misleading Marketing Materials for REIT Offerings " »

Posted On: November 21, 2011

Ex-AIG CEO Sues Government For $25B Over 2008 Takeover of Insurance Giant

Maurice R. “Hank” Greenberg, the former CEO of American International Group Inc., is suing the federal government for taking over the insurance giant in 2008. Greenberg is seeking $25 billion.

Greenberg’s Star International, which was AIG’s largest stakeholder when the government rescue took place, filed his lawsuit in the U.S. Court of Federal Claims. He contends that the government bailout and takeover of AIG was unconstitutional. The amount of damages he is seeking was arrived at from the value of the 80% AIG stake that the government got for its $182 billion bailout.

The money let AIG pay off Goldman Sachs and other counterparties, as well as compensate its executives with $182 million in bonuses. The public, however, was outraged when AIG executives were still awarded excessive compensation packages—especially considering that AIG lost $61.7 during the fourth quarter of 2008 alone. The insurer had to sell off some assets to repay the government, and Greenberg’s stake in the company suffered as a result.

Now, he is claiming that the federal government used AIG to get money to the insurance company’s trading partners. He contends that by obtaining an almost 80% stake in the insurer for bailing it out, the government took valuable property from AIG shareholders and that this violates the Fifth Amendment, which prevents the taking of private property for public use without appropriate compensation.

Greenberg’s opposition to the government bailout comes as no surprise. Earlier this year, he wrote in the Wall Street Journal that the government overstepped when it took preferred stock with the option to change these into common stock. Such transactions were performed without the approval of shareholders, which he believes violates Delaware law. AIG was incorporated there.

Last year, the Treasury Department upped its stake in AIG to 92.1% when it turned preferred shares into common shares. However, it sold some of its shares to investors in May so its ownership percentage in AIG is now at 77%. It is still trying to recover over $41 billion from the sale of the rest of its stake.

AIG Bailout
The government seized control of AIG not long after it became clear that Lehman Brothers Inc. was going to have to shut down. Per the terms of the agreement, the Fed said it would lend AIG $85 billion, and the government was given the substantial equity stake. The takeover came on the heels of the government also seized Freddie Mac and Freddie Mae as they stood on the brink of collapse. Merrill Lynch & Co, which was also in trouble, agreed to let Bank of America Corp. buy it.

Starr Sues Over AIG Bailout, Insurance Networking, November 21, 2011

Former AIG chief sues U.S. for $25 billion, MSNBC, November 21, 2011

U.S. to Take Over AIG in $85 Billion Bailout; Central Banks Inject Cash as Credit Dries Up, The Wall Street Journal, September 16, 2008

Continue reading " Ex-AIG CEO Sues Government For $25B Over 2008 Takeover of Insurance Giant " »

Posted On: November 19, 2011

Chase Investment Services Corporation Ordered by FINRA to Pay Back $1.9M for Unsuitable Sales of Floating-Rate Loan Funds and UITs.

FINRA says that Chase Investment Services Corporation will pay back investors for losses sustained from the unsuitable recommendation made that they buy floating rate loan funds and unit investment trusts. In addition to paying back clients $1.9M, Chase must also pay a $1.7M fine.

According to FINRA, brokers with Chase recommended these financial instruments to clients even though the investments were not suitable for them—either because they had hardly any investment experience or only wanted to take conservative risks. The SRO also says that the Chase brokers had no reasonable grounds to think the financial products would be a right fit for these investors.

FINRA believes that Chase failed to properly train its brokers or give them guidance about the suitability of floating-rate loan funds and UITs, as well as the risks involved. For example, there were UITs that contained a significant portion of assets in closed-end funds with high-yield or junk bonds. Yet, despite the risks involved, brokers from Chase made about 260 recommendations that were not suitable for clients who had little (if any) investment experience or were averse to high-risk investments. These investors ended up losing about $1.4 million.

Also subject to substantial credit risk and illiquidity were the floating-rate loan funds. Despite the fact that concentrated positions in the fund were unsuitable for specific clients, FINRA says that Chase brokers still recommended these to clients who wanted low risk, very liquid investments or preferred to preserve principal. Because of these allegedly unsuitable recommendations, investors lost almost $500K.

FINRA says that WaMu, Investments Inc., also recommended that customers by floating-rate loan funds, even though these were not appropriate for the investors. The financial firm, which had merged with Chase in 2009, is also accused of not properly training or supervising its employees that sold the investments.

More About UITs
Unit investment trusts involve diversified securities baskets that may contain high-yield bonds. While junk bonds can make greater returns for investors than investment-grade bonds, they also come with a high degree of risk.

More About Floating-Rate Loan Funds
These mutual funds are invested in short-term bank loans for companies with a below investment grade crediting rating. What investors earn will fluctuate depending on what interest rates the banks happen to be charging on the loans.

In the wake of the allegations against Chase, FINRA Executive Vice President and Chief of Enforcement Brad Bennett said that it was key that financial firms provide the proper guidance and training to brokers about product sales while supervising sales practices.

JPMorgan unit fined $1.7M over investment sales, Bloomberg Business Week/AP, November 15, 2011

FINRA Orders Chase to Reimburse Customers $1.9 Million for Unsuitable Sales of UITs and Floating-Rate Loan Funds, FINRA, November 15, 2011

More Blog Posts:
Morgan Stanley Faces $1M FINRA Fine for Excessive Markups and Markdowns on Corporate and Municipal Bond Transactions, Institutional Investor Securities Blog, September 17, 2011

Wedbush Ordered By FINRA Panel To Pay $3.5M to Trader Over Withheld Compensation, Institutional Investor Securities Blog, July 16, 2011

Bank of America Merrill Lynch to Settle UIT Sales-Related FINRA Charges for $2.5 Million, Stockbroker Fraud Blog, August 22, 2010

Continue reading " Chase Investment Services Corporation Ordered by FINRA to Pay Back $1.9M for Unsuitable Sales of Floating-Rate Loan Funds and UITs. " »

Posted On: November 17, 2011

Morgan Stanley Investment Management Settles SEC Charges Over Allegedly Inappropriate Fee Deal for Over $3.3M

The Securities and Exchange Commission says Morgan Stanley Investment Management (MSIM) set up a fee arrangement that charged a fund (as well as its investors) for services that they weren’t actually getting from another party. MSIM has agreed to pay over $3.3M to settle the charges that it violated securities laws.

As the main investment adviser to The Malaysia Fund, MSIM told the fund’s board of directors and investors that a sub-adviser, an AM Bank Group subsidiary, had been contracted to provide research, advice, and support even though according to the SEC, the sub-adviser did not actually provide these services. Rather, AMMB issued just two monthly reports stemming from information that was available to the public. MSIM did not ask for the reports nor did it use the data provided to manage the fund. Still, the fund’s board renewed the contract with this sub-adviser each year from 1996 to 2007 and this cost investors $1.845 million.

The SEC contends that MSIM failed in its obligation to let board members know information that could help them properly assess the terms of the fund’s contract with the sub-adviser. The Commission also says that MSIM’s involvement and oversight with AMMB was inappropriate. Not only did the investment adviser lack the written procedures to properly oversee its sub-advisers, but also, it lacked the procedures to review the work that AMMB did.

The SEC also claims that since no advisory services were actually provided by AMMB, MSIM ended up submitting false information in its semi-yearly and yearly reports. Per the Commission’s order, MSIM violated sections of the Investment Company Act and Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder.

By agreeing to settle, MSIM isn’t denying or agreeing to the SEC’s findings. It has, however, agreed to a cease and desist from future violations of both acts and Rule 206(4)-7 thereunder. Of the $3.3 million settlement, $1.5 million is a penalty.

The Malaysia Fund is a closed-end company belonging to Morgan Stanley’s funds complex. MSIM and the Fund entered into a written advisory agreement in 1987. MSIM gives the Fund investment management services, as well as serves as Fund administrator.

Per Section 15(a) of the Investment Company Act, no person can act as a registered investment company’s investment adviser without a written contract that meets certain requirements and has been approved by most voting securities. The original contract can continue to be renewed as long as the Board or most of the outstanding voting securities approves it.

SEC Charges Morgan Stanley Investment Management for Improper Fee Arrangement, SEC, November 16, 2011

SEC charges Morgan Stanley Investment Management with violations, Miami Herald, November 16, 2011

More Blog Posts:
Retirement Fund’s CDO Lawsuit Against Morgan Stanley is Dismissed by District Court, Institutional Investor Securities Fraud, October 27, 2011

Morgan Stanley Faces $1M FINRA Fine for Excessive Markups and Markdowns on Corporate and Municipal Bond Transactions, Institutional Investor Securities Fraud, September 17, 2011

Morgan Stanley Smith Barney Employee Fined and Suspended by FINRA Over Unauthorized Signatures, Stockbroker Fraud Blog, September 19, 2011

Continue reading " Morgan Stanley Investment Management Settles SEC Charges Over Allegedly Inappropriate Fee Deal for Over $3.3M " »

Posted On: November 15, 2011

Jefferson County, Alabama Declares Municipal Bankruptcy

In the biggest municipal bankruptcy in this country to date, Alabama’s Jefferson County has sought Chapter 9 bankruptcy protection. The filing comes after the failure of state lawmakers to support an agreement with JPMorgan Chase & Co. (JPM) and other creditors to lower its over $3B debt tied to a sewer system. Now, Jefferson County’s creditors must contend losses in the hundreds of millions of dollars. There is also once more the worry that defaults may go up in the municipal bond market. This sewer-debt crisis has stalled economic progress in Alabama.

The accord that had been tentatively reached with creditors offered $1.1 billion in concessions and yearly sewer-raises of up to 8.2% for the first three years. Lawmakers, however, worried that these terms would take a toll on the poor, while creditors wouldn’t commit in writing to the agreement.

Jefferson County’s leading unsecured creditors are Bayerische Landesbank, a JPMorgan unit, and Depository Trust Co. In addition to sewer debt, the county owes approximately $1 billion. This includes $801M in school-construction bonds and $201M in general-obligation securities.

JPMorgan, which had over $1.2B of the county’s sewer debt as of May, didn't want Jefferson County to file for Chapter 9. It was just two years ago that the financial firm consented to pay $722M to settle SEC charges that its bankers issued payments to people affiliated with Jefferson County politicians to garner business. Larry Langford, a former county commissioner, was even convicted of receiving bribes.

It is up now to Jefferson County to demonstrated to a federal judge that it cannot cover its bills. It must also set up a plan for how to fulfill its commitments.

Municipal bankruptcies are different from corporate ones in that creditors are not allowed to sell or seize the county’s assets. A trustee also cannot be appointed to run the county. Just recently, Harrisburg, Pennsylvania also filed for bankruptcy. The state capital noted that it had millions of dollars in late bond payments linked to a trash-to-energy incinerator. In August, Central Falls Rode Island filed for bankruptcy protection. The city has nearly $21 million in outstanding debt, not to mention unaffordable pension costs.

Although municipal bankruptcies don’t happen as often as corporate bankruptcies, Jefferson County is the eleventh one this year. Prior to this bankruptcy, the largest one was in 1994 when $1.7B in interest-rate bets losses and approximately $2.2 billion in outstanding debt promoted Orange County, California to file in 1994.

Our securities fraud attorneys are committed to fighting institutional investor fraud by helping municipalities and other clients that have sustained losses recoup their losses.

Jefferson County, Alabama, Votes to Declare Biggest Municipal Bankruptcy,, November 9, 2011

Jefferson County, Alabama to file for largest municipal bankruptcy, CNN, November 9, 2011

More Blog Posts:
Jefferson County, Alabama Votes to Settle its $3.14B Bond Debt with JPMorgan and Other Creditors, Institutional Investor Securities Blog, September 7, 2011

UBS Financial Reaches $160M Settlement with the SEC and Justice Department Over Securities Fraud, Antitrust, and Other Charges Related to Municipal Bond Market, Institutional Investor Securities Blog, May 16, 2011

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

Continue reading " Jefferson County, Alabama Declares Municipal Bankruptcy " »

Posted On: November 11, 2011

UBS Settles for $8M SEC Charges Over the Inaccurate Recordkeeping of Short Sales

Less than a month after UBS Securities, LLC agreed to pay $12M to settle Financial Industry Regulatory Authority claims of supervisory failures and violating regulation SHO in securities short sales, the broker-dealer has now consented to an $8M penalty to settle Securities and Exchange Commission charges over poor recordkeeping related to the short sales.

Under Regulation SHO, broker-dealers have to accurately record how it has given out locates. A locate is a determination of that broker-dealer’s representation that it has set up to borrow, already borrowed, or reasonably believes it is able to borrow the security to settle a short sale. The SEC contends that UBS employees regularly attached a lender’s employee name to such locates even though that person had never been contacted to confirm availability. Thousands of locates were sourced this way.

The Commission also claims that at least for the last four years, UBS’s “locate log” inaccurately showed which locates came from direct confirmation with lenders and which ones were based on electronic feeds. (Although broker-dealers employees usually can access the electronic availability feed that lenders send to broker-dealers, they can’t always depend on the feeds and need to get directly in touch with lenders to confirm the security’s actual availability.) The SEC’s probe found that UBS employed practices made it hard to determine whether it had reasonable grounds for granting locates.

While the Commission’s order did not find that the broker-dealer executed short sales without a reasonable grounds for thinking that it could borrow the stock to complete its settlement obligations, it did find that UBS violated sections of Regulation SHO and the Exchange Act. SEC Director George S. Canelllos noted that it is important that regulators be able to know that a firm’s records are accurate and can serve as evidence that the financial firm is complying with the law in addition to safeguarding “against illegal short selling.” With short sales, the security being sold doesn’t belong to the seller. The short seller must either buy or borrow the security to deliver it.

In addition to the $8M penalty, UBS greed to hire an independent consultant that will review the UBS Securities Lending Desk’s policies, practices, and procedures regarding locate requests. By settling, the broker-dealer is not denying or admitting to wrongdoing.

Regulation SHO
Under Regulation SHO, broker-dealers cannot accept short-sale orders in equity securities or a effect a short sale in one unless the dealer or broker has borrowed the security, become involved in an arrangement to borrow it, or has reasonable grounds to believe it can borrow the security to be delivered when due. Documented compliance must come with this requirement. A “locate” shows that the broker-dealer has fulfilled these requirements. It is fairly common for customers to ask for locates from broker-dealers.

With the FINRA case, the SRO contended that it was supervisory failures that allowed UBS’s employees to commit the Regulation SHO violations. Significant deficiencies with UBS aggregation units were also believed to be factors resulting in locate violations and order-marking.

SEC Charges UBS With Faulty Recordkeeping Related to Short Sales, SEC, November 10, 2011

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

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

UBS Financial Services Fined $2.5M and Ordered to Pay $8.25M Over Lehman Brothers-Issued 100% Principal-Protection Notes, Stockbroker Fraud Blog, April 12, 2011

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

Continue reading " UBS Settles for $8M SEC Charges Over the Inaccurate Recordkeeping of Short Sales " »

Posted On: November 9, 2011

Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rakoff

In Federal District Court today, Judge Jed S. Rakoff expressed concerns about the $285M securities settlement that Citigroup had reached with the Securities Exchange Commission. The financial firm was accused selling $1B in high-risk mortgage-linked collateralized debt obligation that it allegedly knew were at risk of failing. A federal judge must approve the settlement.

Rakoff is the same judge that wouldn’t approve Bank of America’s $33M securities settlement with the SEC for allegedly misleading investors. He later approved a revised settlement of $150 million.

At today’s hearing over the Citigroup deal, Rakoff said the settlement raises issues of concerns about the SEC’s enforcement practices. Approving the agreement would close the case on regulators’ claims that the financial firm.

While Rakoff has not yet made a decision about whether he will approve the settlement, he did question whether the SEC had any genuine desire to find out exactly what happened rather than just settling up. The SEC allows parties to settle without denying or admitting to any wrongdoing. Rakoff also raised concerns about the banks often break the promise they make when settling that they won’t violate securities laws in the future. This is the fifth time that Citigroup has settled securities claims with the SEC over alleged civil fraud. Rakoff also raised questions about why the bank’s settlement involves just a $95 million penalty when investors’ are estimated to have lost $700 million on the CDO.

Even though Citigroup didn’t jump into subprime mortgage loan packaging, it got involved in the housing boom just as that was reaching its heights As the market collapsed, Citigroup sustained over $30 billion in losses, and the government had to bail the bank out twice.

Last year, the financial firm consented to pay $75 million over allegations that it intentionally didn’t notify investors that their investment in the subprime mortgage market were declining in value when the financial crisis hit. Citigroup has since reorganized its risk management function

Citigroup’s $285M Settlement
The SEC claims Citigroup misled clients over a $1 billion derivatives deal involving Class V Funding III, which is a collateralized debt obligation. Not only did the financial firm select the portfolio but it also bet against it. Investors were not told of Citigroup’s conflicting allegiances and they sustained huge losses. Meantime, Citigroup made $126 million from taking a short position against the CDO’s assets, as well as another $34 million in fees.

Judge in Citigroup Mortgage Settlement Criticizes S.E.C.’s Enforcement, NY Times, November 9, 2011

Judge Dredd may scotch $285M Citi settlement: Attorney, Investment News, November 8, 2011

More Blog Posts:
Citigroup to Pay $285M to Settle SEC Lawsuit Alleging Securities Fraud in $1B Derivatives Deal, Institutional Investor Securities Blog, October 20, 2011

FDIC Objects to Bank of America’s Proposed $8.5B Settlement Over Mortgage-Backed Securities, Stockbroker Fraud Blog, August 30, 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 " Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rakoff " »

Posted On: November 5, 2011

Banco Espirito Santo S.A. Settles for $7M SEC Charges Alleging Violations of Investment Adviser, Broker-Dealer, and Securities Transaction Registration Requirements

Without denying or admitting to wrongdoing, Banco Espirito Santo S.A. a banking conglomerate based in Portugal, has consented to pay nearly $7M in disgorgement, prejudgment interest, and civil penalties to settle Securities and Exchange Commission allegations that it violated securities transaction, investment adviser, and broker-dealer registration requirements. The bank has also agreed to a bar from future violations, as well as an undertaking that it pay a minimum interest rate to US clients on securities bought through BES.

According to the SEC, between 2004 and 2009 and while not registered as an investment adviser or broker-dealer in the US, BES offered investment advice and brokerage services to about 3,800 US resident clients and customers. Most of them were immigrants from Portugal. Also, allegedly the securities transactions were not registered even though they did not qualify for a registration exemption.

The SEC says that by acting as an unregistered investment adviser and broker-dealer BES violated sections of the Exchange Act and the Advisers Act. The bank violated the Securities Act when it allegedly sold and offered securities in this country without registration or the exemption.

The SEC says BES used its Department of Marketing, Communications, and Customer Research in Portugal to send out marketing materials to clients outside the country. Customers in the US ended up getting materials not specifically designed for US residents. BES also worked with a customer service call center to service its US customers. Via phone, these clients were offered securities and other financial products. The representatives were not registered as SEC broker-dealers and had no US securities licenses even though they serviced US clients. US Customers were also offered brokerage services through ESCLINC, which is a money transmitter service in Rhode Island, Connecticut, and New Jersey. ESCLINC acted as a contact point for the investment and banking activities of BES’s US clients.

Registration Provisions
The SEC has set registration provisions in place to help preserve the securities markets’ integrity as well as that of the financial institutions that serve as “gatekeepers,” said SEC New York regional office director George S. Canellos. He accused BES of “brazenly” disregarding these provisions.

State securities laws and US mandate that investment advisers, brokers, and their financial firms be registered or licensed. You should definitely check to make sure that whoever you are investing with or seeking investment advice from his properly registered. It is also important for you to know that doing business with a financial firm or a securities broker that is not registered can make it hard for you to recover your losses if that entity were to go out of business and even if the case is decided in your favor (whether in arbitration or through the courts.)

Banco Espirito Santo To Pay Nearly $7 Mln To Settle SEC Charges, The Wall Street Journal, October 24, 2011

Portugese Bank Agrees to $7M Settlement With SEC Over Alleged Registration Breaches, BNA Broker-Dealer Compliance Report

More Blog Posts:
President Obama Supports Senate Bill Raising SEC Registration Exemption to $50M, Institutional Investor Securities Blog, September 16, 2011

Dodd-Frank Reforms Will Lower Deficit by $3.2B Over the Next Decade, Estimates CBO, April 8, 2011

EagleEye Asset Management LLC Sued by SEC and CFTC for Alleged Forex Trading Scam, Stockbroker Fraud Blog, September 28, 2011

Continue reading " Banco Espirito Santo S.A. Settles for $7M SEC Charges Alleging Violations of Investment Adviser, Broker-Dealer, and Securities Transaction Registration Requirements " »

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