Posted On: February 29, 2012

US Sentencing Commission is Open to Public Comment on Proposed Amendments that Could Impact Insider Trading Convictions

The U.S. Sentencing Commission is welcoming public comment on amendments that have been proposed to its sentencing guidelines, which would ramp up the offense level for certain insider trading cases. Also, there are other proposals, related to amendments to the guidelines that get specific about determining loss in fraud cases, dealing with the rehabilitative efforts of offenders, and assessing the harm related to bank and mortgage fraud.

The proposed amendment to Section 2B1.4 of the US Sentencing Guidelines calls for an offense-level enhancement if the defendant accused of insider training had occupied a position of trust (four levels) or used sophisticated means (two levels), with the latter requiring a minimum base offense level of 12. Right now, insider trading’s base offense level is eight.

Under the proposed amendment, the term “sophisticated” would mean a very complex offense conduct as it relates to hiding or executing the offense. Factors that courts would take into account to determine whether sophisticated means were applied by the inside trader include how many transactions were made, the monetary value of each transaction, the number of securities involved, the duration of time that the offense took place for, whether shell companies, fake entities, or offshore accounts were used to hide the transactions, and if auditing mechanisms, internal compliance policies, and compliance and ethics programs were undermined to cover up the insider trading scam.

The proposed amendment as it relates to mortgage fraud and other financial institution-related frauds would deal with foreseeable pecuniary harm (including costs the lending institution involved with foreclosure on the mortgaged property would have to pay), as long as the institution had applied due diligence during initiation, monitoring, the processing of the loan, and collateral disposal.

The US Sentencing Commission also wants to look at making clear what method or methods would be used to figure out securities fraud losses. Commission members are hoping this will stop sentencing disparities from occurring. Methods that have been used to figure out loss have included the modified rescissory method, the simple rescissory method, the market-adjusted method, and market capitalization.

Modified rescissory method: Concentrates on the difference between the average security price after market disclosure and the average security price while the fraud was occurring.

Simple rescissory method: Looks at the price paid for the security and what that was after the fraud was uncovered.

Market-adjusted method: Can turn according to changes in the values of the securities (but doesn’t include changes related to external market forces.)

Market capitalization: Looks at the difference between the price after disclosure and beforehand.

The commission is looking into providing a loss-causation standard not unlike the one for civil securities fraud cases.

Proposed amendments to the US Sentencing Guidelines (PDF)

Proposed Amendments to Guidelines Would Increase Stakes for Insider Trading, Bloomberg/BNA, February 20, 2012

More Blog Posts:

Senate Passes Bill Banning Congressional Insider Trading, Institutional Investor Securities Blog, February 8, 2012

Insider Trading: Former FrontPoint Partners Hedge Fund Manager Pleads Guilty to Criminal Charges, Institutional Investor Securities Blog, August 20, 2012

$78M Insider Trading Scam: "Operation Perfect Hedge” Leads to Criminal Charges for Seven Financial Industry Professionals, Stockbroker Fraud Blog, January 18, 2012

Continue reading " US Sentencing Commission is Open to Public Comment on Proposed Amendments that Could Impact Insider Trading Convictions " »

Posted On: February 28, 2012

Democrats Want to Volcker Rule to Be Clear About Banks Being Allowed to Invest in Venture Capital Funds

With regulators tasked with finalizing the Volcker rule, Democratic lawmakers want them to make sure that the rule makes clear that banks are allowed to invest in venture capital funds. The proposed rule is geared toward lowering financial system risk by not letting banks to take part in proprietary trading, while limiting how much they can invest in private equity and hedge funds.

The lawmakers, 26 of whom have written to the federal agencies working on the rule, noted that venture capital firms are not as high risk as private equity and hedge funds. The Volcker rule would be an implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 619. Once finalized, it will go into effect on July 21.

Meantime, European Union Council of Ministers President Margrethe Vestager wants to make sure that the Volcker rule treats non-U.S. sovereign debt and US government securities the same. Vestager wrote to Federal Reserve Chairman Ben Bernanke making her case that the federal agencies need to make sure the extraterritorial application of the Volcker rule doesn’t happen. Vestager is concerned that otherwise the competition for non-US banks would be impeded.

She called on Bernanke to make sure the demarcation between proprietary trading and market-making that is beneficial is made clear so markets can keep working effectively and properly and banks don’t have to curb their market-making. Vestager said that currently, the proposed rule takes US government securities out of its scope, but that non-US government securities remain within. She says this would create an uneven playing field where US treasury bonds would have the advantage over EU sovereign debt in the sovereign debt markets. She also expressed worry that the rule’s proprietary trading ban would impact non-US banks if their trades were to occur through US counterparties and exchanges. Similar concerns have been expressed by European Commissioner for Internal Markets and Services, Michel Barnier. Speaking at a US Chamber of Commerce event, he said that it wouldn’t be acceptable for US rules to so widely impact foreign capital markets and other countries especially with a lack of “international coordination.” Asian governments have also expressed concerns about the rule’s potential reverberations.

Local US governments have also taken issue with the Volcker Rule. Local and state officials are worried that the rule could make it more costly for them to raise funds from investors. Municipalities have also expressed concern that it could limit banks’ buying of their bonds while raising the interest rates that bond issues could end up paying to bring in investors.

Shepherd Smith Edwards and Kantas, LTD LLP represents institutional and individual investors with securities fraud claims and lawsuits.

Local, state and foreign officials attack Volcker Rule, The Washington Post, February 28, 2012

Volcker Rule Must Allow Banks to Invest In Venture Capital Funds, Democrats Urge, BNA Banking Daily, February 23, 2012

EU Urges Equal Treatment for US Bonds, Foreign Sovereign Debt Under Volcker Rule, Bloomberg/BNA, February 24, 2012

Read Vestager's Letter (PDF)

More Blog Posts:

SEC Seeks to Impose Tougher Penalties for Securities Fraud, Institutional Investor Securities Blog, December 29, 2011

SEC Issues Emergency Order to Stop $26M “Green” Ponzi Scam, Institutional Investor Securities Blog, October 31, 2011

SEC Warning to Investors: Watch Out for Fraudsters Posing As Regulators, Stockbroker Fraud Blog, February 27, 2012

Posted On: February 28, 2012

Investment Adviser Roundup: Two Firms Pay Over $47M For Alleged Failure to Properly Disclose Allegations, District Court Allows Claims Involving Excessive Mutual Fund Fees, and Conn. Firm to Settle CDO Misrepresentation Allegations for $1.62M

Investment Advisory Firms Settle SEC’s Failure to Disclose Mutual Fund Risk Allegations for Over $47M
Claymore Advisors LLC and Fiduciary Asset Management LLC have agreed to pay over $47 million to settle SEC proceedings related to the roles that they allegedly played in failing to properly disclose the risky derivative strategies of a closed-end mutual fund. The strategies are partially to be blame for the collapse of the
Fiduciary/Claymore Dynamic Equity Fund (HCE) during the economic crisis. The two firms are resolving the claims without denying or admitting to wrongdoing, and some of the money will go toward reimbursing shareholders.

However, the securities case will proceed against two of the fund’s portfolio managers, Timothy Swanson and Mohammed Riad. The two of them allegedly made misrepresentations about the way the strategies contributed to the fund’s performance and about fund exposure to downside risk. (Allegedly, the two strategies HCE had implemented to improve returns actually upped risk exposure and resulted in over $45M in losses over two months in 2008. In 2009, the fund liquidated.

Hartford Investment Financial Services LLC Must Face Claims Over Excessive Mutual Fund Fee Charges
The U.S. District Court for the District of New Jersey says that Hartford Investment Financial Services LLC (HIFSCO) must contend with some of the claims in a securities lawsuit accusing the investment advisory concern of charging excessive fees to mutual funds. The plaintiffs, who filed the securities fraud lawsuit for several mutual funds, claim that the unreasonable fees violate the 1940 Investment Company Act Section 36(b).

Pointing out that per relevant case law, an investment adviser has to charge a fee “so disproportionately large” it has no reasonable relationship bearing to the services issued and could not have been the result of “arm’s length bargaining” for liability to be faced under Section 36(b), the district court, which had partially dismissed a previous version of this securities complaint, said that if, per the plaintiffs’ allegations, HIFSCO charges about three times the cost to provide investment management services, then plaintiffs have brought up plausible inference that the fees are excessive under Section 36(b). The court therefore denied HIFSCO’s motion to dismiss Count I in the latest version of this securities case but granted dismissal of its motion related to Count II, which accuses the investment advisory concern of charging excessive 12b-1 fees to certain of the funds’ shareholders.

Aladdin Capital Management to Settle Allegations it Misrepresented CDO Co-Investments with $1.62M Settlement
Without denying or admitting wrongdoing, Aladdin Capital Management LLC will pay about $1.62 million to settle SEC allegations that it told clients it had “skin-in-the-game” and was co-investing along with them in two collateralized debt obligations. This supposed co-investment was a key selling feature of its Multiple Asset Securitized Tranche, which was an advisory program involving collateralized loan obligations and CDOs. Marketing collateral touted this selling point for why to invest in CDOs and CLOs that were sponsored by Aladdin. Yet in truth, contends the SEC, the investment adviser was not co-invested in either CDO.

Aladdin Capital LLC, an Aladdin Capital Management affiliate, and ex-principal Joseph Schlim also settled related allegations.

In re Claymore Advisors LLC, SEC (PDF)

Kasilag v. Hartford Investment Financial Services (PDF)

In re Aladdin Capital Management LLC, SEC (PDF)

More Blog Posts:
District Court in Texas Dismisses Securities Fraud Case Against Sports Franchisor, Stockbroker Fraud Blog, December 15, 2012

SEC Intends to Examine 25% of Investment Advisers That Had To Register, Per Dodd-Frank Act, by End of 2014, Stockbroker Fraud Blog, December 26, 2012

GAO Says Most Financial Regulators Don’t Have the Procedures/Policies to Coordinate Dodd-Frank Rules, Institutional Investor Securities Blog, December 24, 2012

Posted On: February 27, 2012

SEC Chairwoman Defends ‘No Wrongdoing’ Settlements

Securities and Exchange Commission Chairwoman Mary L. Schapiro said that the agency’s practice of reaching settlements with financial firms without them having to admit wrongdoing has “deterrent value” despite the fact that some of these firms have been charged more than once for violating the same securities laws. Schapiro noted that the commission ends up bringing a lot of the same kinds of securities cases so that people don’t forget their obligations or that they are being watched by an entity that will hold them responsible.

The SEC will often settle securities fraud cases with a financial firm my having the latter pay a fine and not denying (or admit) that any wrongdoing was done. Expensive court costs are avoided and a resolution is reached.

The SEC has said that financial firms won’t settle if they have to acknowledge wrongdoing because this could make them liable in civil cases filed against them over the same matters. Schapiro says the SEC only settles when the amount it is to receive by settling is about the same as it would likely get if the commission were to win the lawsuit in court.

As settlements often come with an agreement that the financial firm will overhaul its compliance, Schapiro considers there to be a “deterrent effect.” She also noted that settling allows investors to recoup their losses sooner rather than later, which would be the likely scenario if, and only if, the SEC were to win by going through litigation.

However, not everyone agrees that this “deterrent effect” actually does take place or that settling without denying or admitting does a lot of good. It was just last November that US District Judge Jed Rakoff turned down the SEC’s proposed $285 million mortgage-backed securities settlement with Citigroup and insisted that the securities fraud case be resolved through trial. Rakoff questioned why Citigroup was being allowed to settle without having to admit or deny wrongdoing even though the financial firm made $160M while investors lost more than $700 million. The SEC had accused Citigroup of selling collateralized debt obligations to investors even as the financial firm bet against the CDOs.

The New York Times, which analyzed enforcement cases, says that almost all large Wall Street financial firms have settled fraud cases multiple times by promising not to violate a law that they weren’t supposed to violate to begin with. A number of the settlements also repeatedly gave these companies exemptions from punishments that regulators and Congress had set up so as to prevent multiple violations.

Also among The New York Times’ findings:
• At least 51 fraud cases at 19 Wall Street firms in the past 15 years involved alleged violations of antifraud laws that the companies had previously agreed not to break.
• In almost 350 instances, the SEC let financial firms get around certain sanctions that should have been imposed.

Obtaining financial recovery can be tough—especially if you go for it without an experienced securities fraud law firm representing you. At Shepherd Smith Edwards and Kantas, LTD, LLP, we have helped thousands of investors recoup their losses.

Responding to Critics, S.E.C. Defends ‘No Wrongdoing’ Settlements, The New York Times, February 22, 2012

Judge Rakoff Squashes Citi's $285 Million SEC Settlement, Forbes, November 28, 2011

More Blog Posts:
Citigroup’s $285M Settlement With the SEC Is Turned Down by Judge Rakoff, Stockbroker Fraud Blog, November 28, 2011

Citigroup Woes Continue With FINRA Order to Pay Financial Adviser Team $24M Over Inadequate Compensation, Institutional Investor Securities Blog, January 28, 2012

Citigroup Request to Overturn $54.1M Municipal Bond Arbitration Ruling Denied by Judge, Institutional Investor Securities Blog, December 27, 2011

Posted On: February 25, 2012

Private REITs: The Need for Tougher Oversight?

Our institutional investment fraud lawyers have reported often on real estate investment trusts (REITs). Today we’d like to talk about private REITs.

An REIT is a trust, corporation, or association that owns income-producing real estate. Investors’ capital is pooled by REITs to buy a portfolio of properties. There are public REITs, which include ones traded on a national securities exchange and those that are not traded but are publicly registered. Then there are non-traded REITs, which cannot be found on a national securities exchange, but may be traded in a limited capacity in a secondary market. There is also another kind of REIT known as the private-placement, or private, REIT.

Private REITs, like their non-traded counterparts, are not traded on an exchange. They also come with significant risks. They are not subject to the disclosure requirements that public non-traded REITs have to honor. The fact that they are unlisted makes them difficult to value and insufficient disclosure documents makes it challenging for investors to make educated choices about their investment.

Only accredited investors generally can buy private REITs. According to, these buyers are generally told that prices and high-yields won’t change. Other challenges surrounding private unlisted REITs are that they usually involve higher fees, inadequate transparencies, and net asset values that may have gone down significantly from what the broker had initially promised. Also, private REITs may be extremely liquid, making it very hard or costly for an investor to get out.

While the Financial Industry Regulatory Authority has thought about cracking down on private REITS, says that the SRO hasn’t done a lot in this respect. Already, there have been in problems. FINRA filed a complaint against David Lerner & Associates last year for allegedly failing to determine whether a non-traded REIT was appropriate for investors and giving out misleading information about the Apple REIT Ten. David Lerner has denied the allegations. The financial firms claims it took care of the necessary due diligence and that all disclosures were not only in compliance with regulatory requirements, but also were accurate.

Over seven years the financial firm had earned over $600M in commissions and fees and five Apple REITs earned over $6B in proceeds. The REITs had been presented as safe for conservative investors. In June 2011, investors filed a securities fraud lawsuit over $6.8B in REIT underwriting and sales of Apple Real Estate Investment Trusts shares.

If you have suffered losses by investing in an REIT and you feel that you weren’t fully apprised of the risks involved or that a broker recommended that you invest even though this was unsuitable for you, contact our securities fraud law firm today.

For future reference, FINRA has advised that investors considering REITs:
• Find out how much the seller will get in commissions and fees for selling you the REIT.
• Watch out for sales material or pitches presenting you with simple reasons to invest in an REIT.
• Make the person soliciting you tell you why the REIT is an appropriate investment for you and explain will help you achieve your investment goals.
• Find out about fees related to the REIT.
• Make sure you are told how the distribution is being funded and whether part of that is the return of investor capital.
• Be clear about the risks involved in an REIT investment.
• Look over the prospectus and any supplements.

David Lerner Associates Is Sued by Investors Over $6.8 Billion REIT Sale, Bloomberg, June 20, 2011

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

When Will FINRA Get Serious About Unlisted REITs?, Forbes, February 17, 2012

More Blog Posts:
Investor Complains to FINRA About Behringer Harvard Holdings, LLC-Related Real Estate Investment Losses, Institutional Investor Securities Blog, January 24, 2012

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

David Lerner & Associates Ignored Suitability of REITs When Recommending to Investors, Claims FINRA, Stockbroker Fraud Blog, June 8, 2011

Posted On: February 23, 2012

$698M MBS Lawsuit Seeking Damages from Goldman Sachs Group Can Take on Class Action Status, Says District Judge

U.S. district judge says that Public Employees' Retirement System of Mississippi v. Goldman Sachs Group Inc., a securities fraud lawsuit, may proceed as a class action case. Some 150 investors would fall under this class plaintiff category as they seeking damages related to a $698 million mortgage-backed securities offering.

According to the complaint, loan originator New Century Financial Corp. did not abide by its own underwriting standards and overstated what the value was of the collateral backing the loans. The plaintiffs are accusing Goldman Sachs of failing to conduct the necessary due diligence when it purchased the loans seven years ago. The financial firm then structured, issued, and sold the mortgage pass-through certificates in a single offering.
Goldman attempted to fight certification on the grounds of numerosity, typicality, commonality, statute of limitations, typicality, and alleged conflicts involving buyers of different tranches, what investors knew, and other claims.

Judge Harold Baer Jr. turned down the defendants’ contention that class claims wouldn’t predominate due to individual investors’ knowledge of possibly false statements that may have been made in the offering documents when the acquisition took place. The defendants also had argued that class status should not be granted because investors, who conducted their own research and due diligence, interacted directly with loan originators, as well as had access to data that gave them information about New Century’s practices and the loan pool.

The court also turned down the defendants’ claim revolving around investors’ relying on asset managers and the change in information that was made publicly available over time. The court said that determining whether individual or common issues predominate is reliant upon whether putative class members took part in or knew about the alleged behavior and that likelihood of knowledge is not enough.

Public Employees' Retirement System of Mississippi had been seeking to certify as a Class any entity or person that bought or otherwise publicly acquired offered certificates of GSAMP Trust 2006-S2 and, as a result, sustained damages. Not included in the Class are defendants, respective officials, directors, affiliates, these parties’ immediate relatives, heirs, legal representatives, successors, assigns, and any entity that defendants had or have controlling interested in.

Goldman Sachs Mortgage-Backed Securities Suit Granted Class-Action Status, Bloomberg, February 3, 2012

$698 Million Class Can Sue Goldman, Courthouse News Service, February 7, 2012

More Blog Posts:
Goldman Sachs CEO Hires Prominent Defense Attorney in the Wake of Justice Department Probe into Mortgage-Backed Securities, Institutional Investor Securities Fraud Blog, August 24, 2011

Mortgage-Backed Securities Lawsuit Against Bank of America’s Merrill Lynch Now a Class Action Case, Stockbroker Fraud Blog, June 25, 2011

Two Ex-Credit Suisse Executives Plead Guilty to Mortgage-Backed Securities Fraud, Institutional Investor Securities Fraud Blog, February 7, 2012

Continue reading " $698M MBS Lawsuit Seeking Damages from Goldman Sachs Group Can Take on Class Action Status, Says District Judge " »

Posted On: February 22, 2012

Not All Municipal Bond Issuers Are Adjusting Well to the SEC’s Efforts to Make the Market More Transparent

According to The New York Times, the Securities and Exchange Commission is attempting to make the municipal bond market less “opaque.” One way it is doing this is by adding more disclosure requirements. For example, muni bond issuers now have to publish bond rating changes, financial statements, and other material on the Municipal Securities Rulemaking Board’s EMMA data site in a timely manner. However, the Times reports that not all 55,000 muni bond issuers are adjusting well to this era of greater transparency.

The newspaper cites the West Penn Allegheny Health System, which has been the target of an SEC probe for more three years after an earnings restatement in July 2008. The examination turned into a formal probe in 2009. (The multi-hospital system is one of the largest municipal bond issuers, with nearly $740 million bonds outstanding.)

Although West Penn posted $1.6B of revenue for fiscal year 2011, during the last six months of the year, it lost $56M. The company’s pension plan is underfunded by $200M. Last year, Fitch Ratings and Moody’s downgraded the West Penn bond rating so that it’s well in the junk category. Also, as of December 31, 2011, the system was in possession of just 58-days worth of cash. Meantime, as West Penn is awaiting the approval of a partnership with health insurer High Mark Inc., which said it would commit up to $475M over three years to support West Penn hospitals, the union has garnered the attention of the Justice Department’s antitrust division. Also, the SEC has been asking for information about West Penn’s financial statements.

The Times says that West Penn has not told bond holders, who are calling for more information about its turn around plan, about this probe. A West Penn spokesperson said the system continues to be in complete compliance with all “disclosure obligations” and that, in fact, management had met with the bond trustee and its advisers.

Investors that purchase muni bonds are lending cash to bond issuers in return for a promise of the return of principal, as well as of regular interest payments. While there are benefits, including (in general) exemption from federal income tax for the bonds and possibly even exemption from local and state taxes for those residing where the bond was issued, there are risks. The SEC’s Office of Investor Education and Advocacy has put out a bulletin to investors to familiarize them more with muni bonds. Risks involved include: Call risk, credit risk, inflation risk, interest rate risk, and liquidity risk.

Shepherd Smith Edwards and Kantas, LTD LLP represents investors throughout the US. Contact our securities fraud law firm to ask for your free case evaluation. We represent individual and institutional clients.

Investor Bulletin: Focus on Municipal Bonds,

A Fog Warning, Again, for Municipal Bonds, The New York Times, February 18, 2012

More Blog Posts:

Despite Tougher Investigations, SEC is Still Letting Wall Street Firms Avoid Punishments for Financial Fraud, Institutional Investor Securities Blog, January 29, 2012

Citigroup Request to Overturn $54.1M Municipal Bond Arbitration Ruling Denied by Judge, Institutional Investor Securities Blog, December 27, 2011

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

Posted On: February 17, 2012

US Supreme Court Once Again Upholds Enforcement of Arbitration Agreements

In Marmet Health Care Center, Inc. v. Brown, the US Supreme Court has issued a ruling holding that federal and state courts have to follow the Federal Arbitration Act and support any arbitration agreement that is covered under the statute. The Court said that the FAA pre-empts a state law that doesn’t allow the enforcement of this type of agreement, which requires that personal injury and wrongful claims against nursing homes be resolved outside of court. By holding, the Supreme Court was reaffirming its holding in AT&T Mobility v. Concepcion that FAA displaces conflicting rule when state law doesn’t allow the arbitration of a certain kind of claim.

In this latest ruling, the Court examined three nursing home negligence lawsuits filed by the relatives of patients that died at assisted living facilities. Each family had a signed agreement noting that any disputes, except for those regarding non-payment, would be dealt with via arbitration. Although the trial court rejected the plaintiffs’ claims because of the arbitration agreements, the West Virginia Supreme Court decided to reverse the court’s ruling, holding that public policy of the state prevented a pre-occurrence arbitration agreement in an admission contract for a nursing home that mandated that a negligence claim over wrongful death or personal injury be resolved through arbitration.

By issuing this decision the state’s Supreme Court was rejecting the way the US Supreme Court interpreted the FAA on the grounds that Congress would not have meant for the Act to be applicable to civil claims of injury or death that are tangentially connected to a contract—especially when needed service is a factor.

The US Supreme Court, however, reversed that decision, staying with its own interpretation of the FAA being controlling and a lower court not being able to ignore precedent. The Court sent the case back to state court where inquiry into whether the provision allowing only for arbitration can’t be enforced under state common law principals not specifically addressing arbitration and therefore the FAA wouldn’t pre-empt.

At Shepherd Smith Edwards and Kantas, LTD, LLP, our stockbroker fraud law firm represents individual and institutional investors with securities fraud claims and lawsuits. We have helped thousands of investors recoup their losses via arbitration and through the courts.

With securities fraud, the majority of claims have to be resolved through arbitration. One reason for this is that most investors that sign up for accounts through brokerage firms almost always end up agreeing to binding arbitration clauses.

Read the Supreme Court's ruling in Marmet Health Care Center, Inc. v. Brown (PDF)

The Federal Arbitration Act

More Blog Posts:

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With Confirmation of Richard Cordray as Its Director, The Consumer Financial Protection Bureau Can Finally Get to Work, Institutional Investor Securities Blog, January 4, 2012

SEC and SIPC Go to Court to Over Whether SIPA Protects Stanford Ponzi Fraud Investors, Stockbroker Fraud Blog, February 6, 2012

Continue reading " US Supreme Court Once Again Upholds Enforcement of Arbitration Agreements " »

Posted On: February 15, 2012

SEC Examines the Private Equity Industry

The Securities and Exchange Commission has started to take a broad look at the private equity industry, which until now hasn’t been subjected to much regulatory scrutiny. The industry consists of several thousand firms with over $1 trillion in assets under management. Now, the federal agency wants to know more about these financial firms’ business practices.

According to the New York Times, the Commission’s enforcement unit has sent a letter to a number of private equity funds as part of its informal look. The SEC, however, has been quick to stress that none of the firms are suspected of any wrongdoing and that it merely wants more information to be able to look into possible securities law violations. For example, the Commission wants to examine whether some private equity funds are overstating their portfolios’ value to bring in investors for future funds. Regulators also want to know about the ways in which private equity companies value investments and report performance.

The SEC’s inquiry is being conducted by its Asset Management enforcement division, which has been taking more aggressive actions to eliminate misconduct in the financial industry. At a private equity conference last month, the division’s co-chief Robert B. Kaplan talked about the need for more oversight over the industry. reports that according to a person that knows about the inquiry, so far, it is the smaller private equity companies that are being scrutinized while some of the largest companies, including privately trading ones, are, for now, being overlooked. For example, Blackstone Group LLP, which is the largest private equity company, didn’t receive the letter the SEC sent out in December. KKR & Co. also didn’t get the letter.

The SEC decided to take a closer look at the private equity industry after the financial crisis and firms having to mark down holdings. Since then, those demanding better regulation from the agency have called for more oversight. While the SEC is tasked with policing public securities offerings and transactions it typically hasn’t looked at areas involving private placements that don’t have to register with it and sophisticated investors. That said, the Commission has still been allowed to enforce the fiduciary duties of private equity managers to the funds.

Now, per the Dodd-Frank Wall Street Reform and Consumer Protection Act, the majority of private equity companies will need to register with the SEC by the end of next month. Some 750 advisers will have to disclose “census-like” information about employees, investors, assets under management, activities beyond fund advising, and possible conflicts of interest.

Private Equity Industry Attracts S.E.C. Scrutiny, New York Times, February 12, 2012

SEC Review of Private Equity Said to Focus on Smaller Firms, Bloomberg, February 13, 2012

More Blog Posts:
SEC Gets Initial Victory in Lawsuit Against SIPC Over Payments Owed to Stanford Ponzi Scam Investors, Institutional Investor Securities Blog, February 10, 2012

Pressure from Regulators and Investors Prompts Carlyle Group to Drop Arbitration Clause from its IPO Filing, Institutional Investor Securities Blog, February 9, 2012

Senate Passes Bill Banning Congressional Insider Trading, Institutional Investor Securities Blog, February 8, 2012

Continue reading " SEC Examines the Private Equity Industry " »

Posted On: February 10, 2012

SEC Gets Initial Victory in Lawsuit Against SIPC Over Payments Owed to Stanford Ponzi Scam Investors

U.S. District Court Judge Robert Wilkins says that the Securities and Exchange Commission doesn’t need to go through a full civil trial in order to make the Securities Investor Protection Corp. start liquidation proceedings to compensate the victims of Allen Stanford’s $7B Ponzi scam for their losses. This ruling is a partial victory for the SEC, which has been trying to get the brokerage industry-funded nonprofit to help the investors recoup their losses. The dispute between the two groups has centered around the interpretation of the SIPC’s mission and whether or not it supports the SEC’s efforts to protect investors.

SIPC had been pushing for a trial. However, Wilkins said that a trial doesn’t comport with the agency’s purpose, which is to give immediate, summary proceedings upon the failure of a securities firm. Wilkins is mandating a “summary proceeding” that would be fully briefed by the end of this month. However, in regards to the SEC claim that it should be able to determine when the SIPC has failed to fulfill its duties, Wilkins said that this was for the court to decide.

SIPC has a reserve fund that is there to compensate investors that have suffered losses because a brokerage firm has failed. Under SIPC protections, customers of a broker that has failed can receive up to $500,000 in compensation ($250,000 in cash). Although not intended as insurance against fraud, SPIC covers the financial firm’s clients but not those that worked with an affiliate, such as an offshore bank. For example, Stanford International Bank is an Antiguan bank, which means that it should fall outside SIPC-provided protections. However, Stanford Group Company, which promoted the CDs to the investors, is a member of SIPC. (Also, SEC has maintained that Stanford stole from the brokerage firms’ clients by selling the CDs, which had no value, and that this was not unlike the Bernard L. Madoff Ponzi scam that credited $64B in fake securities to client accounts.)

Meantime, Stanford has been charged by both federal prosecutors and the Commission with bilking investors when he and his team persuaded them to buy $7B in bogus CDs from Stanford International Bank. He then allegedly took billions of those dollars and invested the cash in his businesses and to support his lavish lifestyle. Stanford’s criminal trial is currently underway.

Wilkins noted that even if the SEC’s lawsuit against SIPC succeeds, this wouldn’t mean that Stanford’s victims would get their money right away. It would still be up to a Texas court to decide on claims filed by former Stanford clients.

Judge Hands SEC Initial Victory In Suit Against Insurance Fund, The Wall Street Journal, February 9, 2012

Securities Investor Protection Corporation
Compensating Stanford’s Investors, NY Times, June 20, 2011

More Blog Posts:

SEC and SIPC Go to Court to Over Whether SIPA Protects Stanford Ponzi Fraud Investors, Stockbroker Fraud Blog, February 6, 2012

SEC Sues SIPC Over R. Allen Stanford Ponzi Payouts, Stockbroker Fraud Blog, December 20, 2011

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

Continue reading " SEC Gets Initial Victory in Lawsuit Against SIPC Over Payments Owed to Stanford Ponzi Scam Investors " »

Posted On: February 9, 2012

Pressure from Regulators and Investors Prompts Carlyle Group to Drop Arbitration Clause from its IPO Filing

Carlyle Group will no longer be including a controversial arbitration clause initial public offering filing. The private equity giant had filed its IPO documents last year but has since been pressed by regulators and investors to drop the clause, which would have prevented company shareholders from submitting class action lawsuits and instead require that they go through a confidential arbitration process.

There had been concern from the Securities and Exchange Commission, lawmakers, and investors that the clause would prevent shareholders from bringing claims against the Carlyle Group in the event of wrongdoing. Earlier this month, the private equity group’s spokesperson Christopher W. Ullman said that after talking with the SEC and its investors, the Carlyle Group was withdrawing the proposed provision. Ullman was also quick to clarify that the original intent of the clause was to make the process for potential claims more cost-effective for everyone involved.

However, there is also the possibility that if the company had chosen not to withdraw the arbitration clause, the SEC may not have allowed the IPO to go forward. Senators Robert Menendez (D-NJ), Al Franken (D-Minn.), and Richard Blumenthal (D-Conn.) had even recently written to SEC chairwoman Mary L. Schapiro asking the SEC to block the IPO offering if the clause, which they believed would take away investors’ rights, wasn’t removed.

In their letter, the senators reminded the SEC that private securities litigation remains an “indispensable tool” that allows defrauded investors to get back their losses without needing to depend on the government. They cited the Exchange Act’s Section 10(b), which establishes an investor’s private right of action to file a lawsuit against an insurer for deceitful/fraudulent statements and actions allegedly committed when selling securities. The senators also said that making individuals only be able to go through the confidential arbitration process for shareholder claims would limit their ability to enforce their rights under the Exchange Act’s Section (10b), which would then violate the Act’s Section 29(a)’s statutory language.

The Senators wrote about how they believed that private arbitration significantly limits or doesn’t allow for pretrial discovery, which can then make complex securities claims impossible to prove. They also said that the private arbitration system generally favors the companies that retained their services as opposed to the individual shareholder with a claim. (Ullman said the Carlyle Group decided to take the arbitration clause out even before the senators had sent their letter to Schapiro.)

The Carlyle Group is shooting for its IPO to happen during the first half of the year. Last year, the firm revealed that about 36% of its assets are in private equity funds. Approximately 21% are in the areas of energy and real estate, while approximately 29% are in funds of funds. Carlyle Group has over 1,400 hundred investors in more than 73 nations. Its executives have gotten up to 60% of their compensation based on how the funds they focus on perform—the remaining amount is based on the performance of the firm. The filing says that once Carlyle becomes a public company, it executives will obtain about 45% of their compensation from their own funds’ returns, which is more in line with the industry average.

Our institutional investment fraud attorneys represent clients throughout the US. We also have clients abroad with securities fraud claims and lawsuits against financial firms in the US.

Carlyle Drops Arbitration Clause From I.P.O. Plans, New York Times, February 3, 2012

Carlyle Drops Forced Arbitration Clause In IPO, The Wall Street Journal, February 3, 2012

Private equity giant Carlyle files for IPO, Reuters, September 6, 2011

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SEC and SIPC Go to Court to Over Whether SIPA Protects Stanford Ponzi Fraud Investors, Stockbroker Fraud Blog, February 6, 2012

Continue reading " Pressure from Regulators and Investors Prompts Carlyle Group to Drop Arbitration Clause from its IPO Filing " »

Posted On: February 8, 2012

Senate Passes Bill Banning Congressional Insider Trading

Two days after the US Senate votes 92 to 2 to take up a measure that would ban Congressional members from engaging in insider trading, the legislation has passed by a 96 to 3 vote. The bill, which bars members of Congress from using confidential information obtained as a result of being in public office to trade stock, had temporarily become entangled in the proposals of over two dozen amendments, with some of the amendments seeking to strengthen the bill and others looking to weaken it.

One of the amendments that passed by a 58-41 vote would extend the new rules of the bill to cover members of the executive branch. Per the bill, Congressional members, senior administration officials, and top aides would have 30 days instead of a year to disclose financial transactions.

President Barack Obama is a supporter of the Stop Trading on Congressional Knowledge (STOCK) Act. During his State of the Union address last month, he said that if Congress placed their signatures of approval on the bill he would sign it into law right away. There is currently a companion bill making its way through the House that has over 255 co-sponsors and still must be put to a vote.

Authored by Senators Scott Brown (R-Mass.) and Kirsten Gillibrand (D-N.Y.), the STOCK Act is derived from two bills authored respectively by both of them. It was Senate Homeland Security and Government Reform Committee Chairman Joe Lieberman (I-Ct.) that combined the two bills.

Originally introduced in 2006, the STOCK Act started to generate a lot more interest from lawmakers after the CBS news program 60 minutes reported that members of Congress bought stock in companies while debating on laws that could impact the businesses. These investments were not illegal.

Other provisions of the combined bill include making it illegal for Congress members to tip off others, which would become a crime and a violation of congressional rules. However, the bill does not ban lawmakers from doing political favors for companies that they have stock in as long as they don’t actually sell the stock.

As our securities fraud law firm mentioned in an earlier blog post, the Securities and Exchange Commission grew worried that placing this kind of insider trading ban on lawmakers affect the scope of existing laws. The SEC instead wanted there to be a fiduciary duty barring members of Congress from revealing confidential information and using what they know for personal gain.

The use of confidential insider information to make a trading profit is wrong—even if some consider it a victimless crime.

As Congress moves on insider trading bill, lawmakers remain exempt from several federal laws, Washington Post/Associated Press, February 2, 2012

Lure of a Senate Bill Attracts Amendments, Some of Them Relevant, The New York Times, February 1, 2012

STOCK Act: Insider Trading Bill To Receive Senate Vote Next Week, Huffington Post, January 26, 2012

More Blog Posts:
Insider Trading: Former FrontPoint Partners Hedge Fund Manager Pleads Guilty to Criminal Charges, Institutional Investors Securities Blog, August 20, 2011

Ex-Goldman Sachs Board Member Accused of Insider Trading with Galleon Group Co-Founder Seeks to Have SEC Administrative Case Against Him Dropped, Institutional Investors Securities Blog, April 19, 2011

$78M Insider Trading Scam: "Operation Perfect Hedge” Leads to Criminal Charges for Seven Financial Industry Professionals, Stockbroker Fraud Blog, January 18, 2012

Measure Banning Insider Trading Gains Support of Congress Members, Stockbroker Fraud Blog, September 24, 2011

Continue reading " Senate Passes Bill Banning Congressional Insider Trading " »

Posted On: February 7, 2012

Two Ex-Credit Suisse Executives Plead Guilty to Mortgage-Backed Securities Fraud

Salmaan Siddiqui and David Higgs have pled guilty to conspiracy to commit wire fraud and conspiracy to falsify books in the mortgage-backed securities fraud case against them. Higgs was former a Credit Suisse managing director while Siddiqui had been vice president.

The US Securities and Exchange Commission and the Justice Department have been conducting coordinated enforcement efforts against Higgs, Siddiqui, and Kareen Serageldin. They are charged with fraudulently inflating asset-backed bonds’ prices during late 2007 and early 2008. The bonds consisted of commercial mortgage-backed securities and subprime residential mortgage-backed securities in Credit Suisse’s trading books. Their alleged manipulation of the bond prices resulted in the financial firm getting a $2.65B write-down of its end of the year financial results for 2007. Meantime, seeing as trading book profitability determines bonuses, the three defendants obtained hefty ones.

In addition to the three men, the SEC is also suing Faisal Siddiqui as a fourth defendant. In its securities fraud complaint, the Commission accused the men of being involved in a scam to fraudulently overstate the prices of over $3B of subprime bonds. Recorded phone calls document their fraudulent actions.

Serageldin, who was Credit Suisse’s Structured Credit Trading global head, reportedly initiated the MBS fraud while Higgs, who was with the financial firm’s Hedge Trading, oversaw the operation. The Siddiquis, who are not related to each other, were brokers that allegedly falsely processed the bonds’ prices.

In August 2007, the defendants reportedly started pricing the bonds in a way that would benefit them, rather than recording the fair value. The MBS scam would continue to accelerate as the credit markets faltered. By the end of the year, they were pricing the bonds at falsely high levels. Higgs would later on get the bond prices raised beyond their year-end levels to gain favorable P & L results at the end of January.

In February, Credit Suisse reported having a 2007 net income of $7.12 billion and fourth quarter earnings of $1.16B. Seeing as these figures incorporated the false gains, the information was materially misleading and false. Their scam fell apart when Credit Suisse senior management realized that specific bonds that the defendants’ controlled had been priced abnormally high.

MBS Pricing by Credit Suisse Traders
Credit Suisse traders must price the securities that they hold at fair value, which is determined by current market price or the current price for a similar liability or asset. When there is no liquid market, the traders have to refer to other indicia to determine their assets’ fair value. Credit Suisse brokers know that the ABX indices are the benchmark for specific securities backed by home loans and that they must refer to it when placing a price on RMBS bonds and related products.

Ex-Credit Suisse bond players plead guilty to MBS fraud, Housing Wire, February 2, 2012

Manhattan U.S. Attorney and FBI Assistant Director in Charge Announce Charges Against Two Former Credit Suisse Managing Directors and Vice President for Fraudulently Inflating Subprime Mortgage-Related Bond Prices in Trading Book, FBI, February 2012

SEC Charges Former Credit Suisse Investment Bankers in Subprime Bond Pricing Scheme, SEC, February 1, 2012

More Blog Posts:

District Court in Texas Decides that Credit Suisse Securities Doesn’t Have to pay Additional $186,000 Arbitration Award to Luby’s Restaurant Over ARS, Stockbroker Fraud Blog, June 2, 2011

Credit Suisse Group AG Must Pay ST Microelectronics NV $431 Million Auction-Rate Securities Arbitration Award, Stockbroker Fraud Blog, April 5, 2012

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

Continue reading " Two Ex-Credit Suisse Executives Plead Guilty to Mortgage-Backed Securities Fraud " »

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