Institutional Investor Securities Blog

Citigroup (C) Settle $3.5B securities lawsuit Over MBS Sold to Freddie Mac, Fannie Mae
Citigroup has settled the $3.5 billion mortgage-backed securities filed with the Federal Housing Finance Agency. The MBS were sold to Freddie Mac and Fannie Mae and both sustained resulting losses. This is the second of 18 securities fraud cases involving FHFA suing banks last year over more than $200B in MBS losses by Fannie and Freddie. The lawsuit is FHFA v. Citigroup.

J.P. Morgan International Bank Ltd. Slapped with $4.64M Fine by UK Regulator
The UK Financial Conduct Authority says that JPMorgan unit (JPM) J.P. Morgan International Bank Ltd. must pay a $4.64 million fine for controls failures and systems involving its retail investment advice and portfolio investment services. Per the agency, financial firms that don’t maintain the proper records not only put their clients at risk of getting involved inappropriate investments, but also they don’t have a way to determine whether the proper advice was given. Fortunately, investors were not harmed despite the risk exposure.

The UK regulator says the problems went on for two years. Among the problems identified: outdated files, insufficient key client data, inadequate record system, inadequate suitability reports, and insufficient communication with clients about suitability. FCA says that it wasn’t until after it identified the problems and notified the JP Morgan unit about them that the necessary modifications were made.

Whistleblower’s Retaliation Action Against UBS Securities Can Go Ahead, Says Court
A district court judge made the decision not to dismiss ex-UBS Securities LLC (UBS) senior strategist Trevor Murray’s retaliatory action against his former employer. Murray was allegedly fired after he told his managers about possible securities law violations.

He contends that he was let go because he refused to write reports about UBS’s commercial MBS that were “more favorable to the financial firm.” Murray sued, arguing that the action violated the Dodd-Frank Act’s whistleblower protection provisions. UBS then tried arguing that Murray wasn’t a whistleblower because he didn’t tell the SEC about the alleged violation, but the judge said that a whistleblower is allowed to report alleged violations to governmental authorities and persons other than the regulator.

Former Goldman Sachs VP Consents to Pay $100K Payment SEC Pay-to-Play Action
Neil M. M. Morrison, an ex-Goldman Sachs & Co. (GS) vice president, will pay $100,000 to resolve an SEC action accusing him of taking part in an alleged pay-to-play scheme involving former Massachusetts state Treasurer Timothy Cahill’s gubernatorial campaign. The Commission said that he solicited the state’s underwriting business while “engaged” in Cahill’s campaign and that his use of the financial firm’s resources and work time are considered campaign contributions. By settling, Morrison is not admitting or denying the allegations.

Meantime, Goldman will pay approximately $12 million to settle the related proceedings against it, as well as $4.5 million to Massachusetts Attorney General Martha Coakley. Even though the firm wasn’t allowed to take part in municipal underwriting business for two years after Morrison’s alleged violations, the SEC says that Goldman still took part in 30 underwriting contracts with issuers in the state and made about $7.5 million in fees.

Citi settles U.S. suit over $3.5 billion in mortgage securities, Reuters, May 28, 2013

U.K. Regulator Fines JPMorgan Unit $4.64M For Failures in Investment Systems, Controls, Bloomberg/BNA, May 28, 2013

Internal Whistleblowing Deserves Protection, Judge Tells UBS, Law360, May 22, 2013

SEC Charges Goldman Sachs and Former Vice President in Pay-to-Play Probe Involving Contributions to Former Massachusetts State Treasurer, SEC, September 27, 2012

More Blog Posts:
FINRA Orders Wells Fargo & Banc of America’s Merrill Lynch Ordered to Pay $5.1M for Floating-Rate Bank Loan Funds Sales, Stockbroker Fraud Blog, June 4, 2013

AIG Drops RMBS Lawsuit Against New York Fed, Fights Bank of America’s $8.5B MBS Settlement, Institutional Investor Securities Blog, June 5, 2013

Two Oppenheimer Investment Advisers Settle for Over $2.8M SEC Fraud Charges Over Private Equity Fund, Institutional Investor Securities Blog, March 14, 2013

The US Court of Appeals for the Second Circuit is denying UBS AG’s (UBSN) bid to dismiss the Federal Housing Finance Agency’s mortgage-backed securities lawsuit accusing the financial firm of misrepresenting the quality of the loans underlying the residential MBS that Freddie Mac and Fannie Mae bought. FHFA is the mortgage financiers’ appointed conservator.

In its appeal, UBS contended that the MBS lawsuit was filed too late under federal law. However, the 2nd circuit, affirming U.S. District Judge Denise Cote’s ruling, determined that the filing period for type of securities case was extended by the Housing and Economic Recovery Act of 2008.

The RMBS lawsuit is one of 17 FHFA cases against large financial institutions over alleged misrepresentations involving over $200 million in mortgage-backed securities. Judge Cote is presiding over 15 of these MBS lawsuits.

Late last year, the lenders, including Citigroup (C), Barclays Plc (BCS), and Bank of America Corp. (BAC), told the 2nd circuit that Cote’s ruling was not only wrong but also that it would increase their exposure to federal and state securities claims. The banks involved in the mortgage-backed securities cases before the judge recently filed a request before the appeals court arguing that Cote’s pretrial rulings establish a litigation framework that they described as “grossly inequitable, clearly erroneous.” They believe that a number of her decisions are “gravely prejudicial” and not only wrongly attempted to deny them the ability to find evidence on may possible legal defenses, but also, they are meant to pressure the banks to settle the securities lawsuits.

Meantime, Securities Industry and Financial Markets Association, which submitted a separate brief, expressed concern that Judge Cote’s decision widened the housing recovery law’s time-limit provisions over what Congress had intended for it to be and that this could lead to “arbitrary decisions” being made. However, the US Justice Department has maintained that it was the lawmakers that “reset” the statute of limitations for filing securities claim. In its briefing, the DOJ said that the Housing and Economic Recovery Act allows for the creation of the FHFA to help remedy the financial problems plaguing Freddie Mac and Fannie Mae after the housing crisis dropped the values of their MBSs.

In the US, contact our MBS fraud law firm today.

UBS Bid to Dismiss FHFA Mortgage-Bond Suit Denied, Stockbroker Fraud Blog, April 5, 2013

UBS Tries Again to Block FHFA Lawsuit, MReport, November 27, 2012

More Blog Posts:
RMBS Lawsuit Against Deutsche Bank Can Proceed, Says District Court, Institutional Investor Securities Blog, April 4, 2013
Mortgage-Backed Securities Lawsuit Against Bank of America’s Merrill Lynch Now a Class Action Case, Stockbroker Fraud Blog, June 25, 2011

A district court judge in Minnesota has ordered a $125 million auction-rate securities arbitration case filed by Allina Health System against UBS (UBS) to proceed.

U.S. District Judge Michael Davis found that claimant Allina is indeed a UBS client even though the financial firm had argued that under Financial Industry Regulatory Authority rules ARS issuers are not underwriter customers. The Minnesota non-profit healthcare system had filed its securities claim over ARS it issued in October 2007 that were part of a $475 million bond issuance to finance renovations and remodeling, as well as refinance debt. UBS was its underwriter.

Allina contends that the market collapsed in 2008 because UBS and other financial firms stopped putting in support bids to keep auctions from failing. The healthcare group says that because of this, it had to pay a great deal of money to refinance the securities and make higher bound payments after losing its bond insurance. Allina claims that UBS did not properly represent the ARS market risks, breached its fiduciary duties, and violated state and federal securities laws.

In his decision, Judge Davis noted other rulings in similar cases that rejected other banks’ contentions that the plaintiff was not considered a customer under FINRA rules. One need only look to last month’s 4th U.S. Circuit Court of Appeals decision to let Carilion Clinic proceed with its ARS arbitration case against Citigroup (C) and UBS. Davis also turned down UBS's claim that agreements it made with Allina mandated that any disputes be submitted to the New York courts or the American Arbitration Association.

Related Web Resources:
British watchdog fines UBS 9.45 mn pounds for mis-selling fund, Advisen/APF, February 12, 2013

UBS Fined $14.7 Million by U.K. on AIG Fund Sale Failings, Bloomberg, February 12, 2013

More Blog Posts:
UBS & Citi Do Have to Arbitrate Auction-Rate Securities Case Filed by Health Care Nonprofit Carilion Clinic, Institutional Investor Securities Blog, January 31, 2013

Despite Her Involvement in Dozens of Securities Cases, Brokerage Firms Continue to Clear Trades of Newport Coast Securities Broker Bambi I. Holzer, Stockbroker Fraud Blog, January 10, 2013

Morgan Stanley Smith Barney Ordered by FINRA Arbitration Panel to Pay $5M Over Allegedly False Promises Made To Brokers Recruited from UBS AG, Stockbroker Fraud Blog, January 22, 2013

According to the U.S. Court of Appeals for the Fourth Circuit, a district court was right when it decided not to stop Carilion Clinic’s arbitration proceeding against Citigroup Global Markets (C) and UBS Financial Services (UBS) for an ARS issuance that proved unsuccessful. The financial firms had served the healthcare nonprofit in a number of capacities, including providing underwriting services.

Carilion had retained UBS and Citi in 2005 to raise over $308M so that it could redo its medical facilities. They are accused of recommending that Carilion put out over $72M of bonds in the form of variable demand rate obligations and $234 million in ARS.

When the auction-rate securities market took a huge dive in February 2008, Citi and UBS ended their policy of supporting the market and the auctions started to fail. As a result, result, Carilion allegedly was forced to refinance what it owed to avoid higher interest rates and it sustained losses in the millions of dollars. The nonprofit later began auction-rate securities arbitration proceedings with FINRA against both firms.

Although arbitration wasn’t provided for in the written agreements, Carilion contended that as the firms’ customer, it was entitled to turn in the dispute to the SRO. The district court concurred, finding that seeing as Citi and UBS provided Carilion with a number of financial services for payment, the nonprofit meets the meaning of the term of having been a ‘customer’ of both Citi and UBS for FINRA arbitration code purposes. The court disagreed that Carilion gave up being able to arbitrate when it consented to the mandatory forum selection clause that lets the court litigate such disputes.

Now, the appeals court is affirming the district court’s findings about both the term “customer” and the forum selection clause.

If you believe that your company has been the victim of institutional investment fraud, you should consult with an experienced securities law firm right away. Your case evaluation should be free.

UBS Financial Services V. Clinic (PDF)

Citi, UBS Must Arbitrate Dispute With Nonprofit, 4th Circuit Affirms, Alacra Store, January 24, 2013

More Blog Posts:
Despite Her Involvement in Dozens of Securities Cases, Brokerage Firms Continue to Clear Trades of Newport Coast Securities Broker Bambi I. Holzer, Stockbroker Fraud Blog, January 10, 2013

Judge that Dismissed Regulators’ Claims Against Morgan Keegan to Rule on ARS Lawsuit Again After His Ruling Was Reversed on Appeal, Institutional Investor Securities Blog, November 27, 2012

US Supreme Court to Hear Appeals of Petitioners Over Stanford Ponzi Lawsuits, Stockbroker Fraud Blog, January 5, 2013

The U.S. Court of Appeals for the First Circuit has reinstated the shareholder derivative claims filed by two Puerto Rican pension funds against UBS Financial Services Inc. (UBS) Judge Kermit Lepez said that following de novo review—a district court had dismissed the case on the grounds that a failure to properly plead demand futility was subject to such an examination—it seemed to him that the plaintiffs’ allegations sufficiently show reasonable doubt about six fund directors’ ability to assess the former’s demand to bring this action with the independence and disinterest mandated by Puerto Rican law.

The two pension funds are the owners of shares in closed-end funds that made investments, which were not successful, through UBS entities. Their investment adviser and fund administrator is UBS Trust, which is a UBS Financial affiliate.

According to the court, UBS Financial, which has been Puerto Rico’s Employee Retirement System (ERS) financial adviser for more than five years, underwrote $2.9B of ERS-issued bonds. Meantime, the UBS Trust bought approximately $1.5B of the ERS bonds and then sold them to funds. At issue is about $757M in bonds that the two Puerto Rican funds purchased.

Unfortunately, within a year of when they were issued, the bonds value dropped 10%, lowering the funds’ value. They then went on to file their lawsuit against UBS Trust, UBS Financial, and the director of the funds claiming that the defendants took part in a manipulative trading scam to make it look as if there was market interest when the point was to raise prices so that other investors would buy.

The defendants sought to have the case dismissed, claiming that the directors of the funds did not get a presuit demand first while the plaintiffs neglected to note why there was no point to submitting this type of demand. The lower court granted their motion. Now, however, the appeals court says that the securities case can proceed.

Union de Empleados De Muelles De Puerto Rico PRSSA Welfare Plan v. UBS Financial Services Inc., Ca1.USCourts.gov

More Blog Posts:
Dismissal of Double Derivative Delaware Securities Lawsuits Over The Bank of America-Merrill Lynch Merger is Affirmed by the Second Circuit, Stockbroker Fraud Blog, December 22, 2012

Amerigroup Shareholders Claim Goldman Sachs Advisers’ Had Conflicts of Interest That Influenced $4.5B Sale of Company to WellPoint, Institutional Investor Securities Blog, August 21, 2012

Shareholder Lawsuit Against Goldman Sachs CEO and Other Financial Firm Executives is Dismissed, Institutional Investor Securities Blog, August 18, 2012

Anti-fraud and police in Britain have made three arrests related to the global interest rate rigging scandal involving the London Interbank Offered Rate (LIBOR). The three men are Thomas Hayes, an ex-Citigroup Inc. (C) and UBS AG (UBSN.VX) trader, and James Gilmour and Terry Farr, who both worked at RP Martin, an interdealer broker. All of them are British nationals.

The Canadian Competition Bureau regulator claims that Hayes and others tried to manipulate yen Libor, which is the average interbank interest rates that banks are willing to lend in unsecured funds that are in Japanese yen denominations to each other. The regulator is also accusing Hayes of reaching out to traders at other banks in London and trying to persuade them to manipulate yen rates.

Regulators and prosecutors in Europe, Canada, the US, and Japan have been probing how traders have been able to rig interbank lending rates, including LIBOR, and whether banks may have changed submissions that are supposed to set benchmarks so they could make money off interest-rate derivatives-related bets or make lenders appear more financially healthy.

Dozens of people are under investigation related to the scandal, which broke out this summer after Barclays (BARC.LN) admitted that some of its traders had attempted to manipulate both LIBOR and Euribor, which is its Euro counterpart, between 2005 and 2009 and how during the economic problems of 2007 and 2008 the bank had low-balled rates. (Barclays settled with regulators both here and in the UK for $450 million.)

Now, over a dozen other banks are being examined for possible involvement in rate rigging. This has raised a number of questions, such as whether banks have been honest about the actual costs tied to borrowing and if regulators either allowed the manipulation or failed to stop it.

Settlements are also expected to be reached with Royal Bank of Scotland Group (RBS.LN) and UBS. Royal Bank of Scotland Group, which the UK government has 81% ownership stake in, has had to contend with claims that it had manipulated not just LIBOR rates but also other rates. While the bank is willing to settle, the terms of any such agreements are taking awhile because the US CFTC, UK’s FSA, the US Department of Justice, and authorities in Asia and Europe are all involved.

As for UBS, Bloomberg is reporting that according to a source that knows about the settlement talks, the bank is close to reaching deals with regulators here and in the UK and it will likely pay $466 million in fines over allegations that it attempted to manipulate global interest rates. Regulators have been looking into whether UBS traders were in collusion with other banks to manipulate rates for profits. The bank has obtained conditional community from certain antitrust authorities, such as the Swiss Competition Commission, and the Canadian Competition Bureau, and well as the US Justice Department, for being among the first to self-report wrongdoing.

Three British men arrested in UK Libor probe, Yahoo, December 11, 2012

RBS Seeks Pact on Libor, The Wall Street Journal, November 2, 2012

UBS nears deal with United States, UK over Libor, Reuters, December 3, 2012

More Blog Posts:
LIBOR Oversight-Related Changes Announced by FSA Chief, Institutional Investor Securities Blog, October 2, 2012

Barclays LIBOR Manipulation Scam Places Citigroup, Credit Suisse, Deutsche Bank, JP Morgan Chase, and UBS Under The Investigation Microscope, Institutional Investor Securities Blog, July 16, 2012

$1.2 Billion of MF Global Inc.’s Clients Money Still Missing, Stockbroker Fraud Blog, December 10, 2011

Kweku Adoboli, an ex-UBS (UBS) trader, has been convicted of fraud over bad deals he made at the Swiss Bank that resulted in $2.2 billion in losses. He has been sentenced to 7 years behind bars.

Adoboli, who had pled not guilty to the criminal charges, is accused of booking bogus hedges and storing profits in a secret account to hide the risks related to his trades and dealings involving exchange traded funds, commodities, bonds, and complex financial products that track stocks. Not only did he go beyond his trading limits but also he did not cover his losses.

Meantime, Adoboli had argued in his defense that the trading losses happened not because of fraudulent or dishonest conduct on his part but because he and other traders were asked to accomplish too much without sufficient resources and in a very volatile market. Adoboli said his manager pressured traders to take too many risks and that breaking the rules was a common occurrence at UBS’s London office. He also testified that he had been acting to help the investment bank stay in operation after the $52 billion in losses it had suffered during the global economic crisis. Adoboli was arrested in 2011 after he sent out an email admitting to making the unauthorized trades on US and German futures.

Although the 10-member jury was unanimous in its guilty verdict of one count of fraud against him, they couldn’t come to unanimous rulings on the other five counts. Eventually given the option to issue a 9-1 decision, Adoboli was found guilty of a second count of fraud going as far back as 2008. (According to one UBS investment bank executive who testified during the criminal trial last month, losses from the unauthorized trades Adoboli had made could have hit $12 billion).

In the wake of the still massive massive trading loss, at least 11 employees were either let go or resigned from UBS, including ex-CEO Oswald Gruebel, global equities co-heads Francois Gouws and Yassine Bouhara, Adoboli coworkers Simon Taylor, John Hughes, and Christopher Bertrand, and his ex-managers John DiBacco and Ron Greenidge.

The way this trading loss was able to come about shows that there are problems with UBS’s risk controls. However, it appears as if UBS is not taking on too much of the blame brunt—again.

“Once again, a soldier is sent to the penitentiary while the generals who looked the other way don’t face charges,” said Shepherd Smith Edwards & Kantas, LTD LLP Founder and Securities Lawyer William Shepherd. “The big boys of the world of finance are exempt from punishment as they call their employees ‘rogues.’ Justice is very select in the financial community.”

Prosecutors are calling this the largest fraud in UK banking history. Adoboli’s conviction comes just months after JPMorgan Chase (JPM) suffered at least $5.8 billion in losses from bad trades made at its office in London.

UBS rogue trader Kweku Adoboli found guilty of 2 counts of fraud for $2.2 billion loss, The Washington Post/AP, November 20, 2012

Kweku Adoboli Convicted, UBS 'Rogue Trader,' Convicted of Fraud Over $2.3 Billion Loss, Huffington Post, November 20, 2012

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

JPMorgan Chase $2B Trading Loss Leads to Probes by the SEC, Federal Reserve, and FBI, Institutional Investor Securities Blog, May 15, 2012

Appeal of Stockbroker Found Liable in Unauthorized Trades of Cyberonics Stock is Rejected by 7th Circuit, Stockbroker Fraud Blog, August 18, 2012

In the largest individual federal payout in our nation’s history, the Internal Revenue Service has awarded ex-UBS AG (UBSN) Bradley Birkenfeld $104 million for acting as a whistleblower and exposing wide scale tax evasion involving the Swiss Bank. Birkenfeld, who was released from prison last month after serving 2.5 years in prison for fraud conspiracy related to this matter, is the one who revealed to the IRS how the Swiss bank helped thousands of Americans evade paying their taxes. He reported that in handling $20 billion in undeclared assets annually, UBS made $200 million a year.

The information that he provided led to UBS paying a $780 million fine so that it wouldn’t be prosecuted over the allegations. The Swiss bank also consented to an unprecedented agreement for it to give over the names of thousands of US citizens suspected of tax evasion and admitted that it fostered tax evasion between 2000 and 2007. UBS would eventually hand over information on 4,700 of its accounts.

At least 33,000 Americans have since voluntary disclosed to the IRS that they have offshore accounts. This resulted in over $5 billion.

Birkenfeld, who is from Massachusetts, had worked in Swiss banking for 15 years. He is one of the UBS bankers who traveled the US seeking out wealthy clients. He informed the IRS that UBS trained its bankers to avoid detection by regulators. They were told to use encrypted laptop computers and make false statements claiming they were coming to the country for pleasure on travel forms. (USB has admitted that it assisted clients in avoiding US securities restrictions by having them work with outside advisors with fake companies in Panama, the British Virgin Islands, and other tax havens.)

Although Birkenfeld blew the whistle on UBS to US investigators in 2007, prosecutors went ahead and charged him with committing a crime because at first he refused to describe his own involvement in the tax evasion fraud and did not reveal that he had worked with billionaire real estate developer Igor Olenicoff, who pleaded guilty to filing a false tax return that year. Birkenfeld was indicted by a federal grand jury and arrested in 2008.

Since the UBS case, it has become harder for rich Americans to avoid the IRS by going to a Swiss bank. The federal government is currently conducting a criminal investigation on at least 11 banks. Already, reports Bloomberg.com, two dozen offshore bankers, advisers and lawyers, and 50 US taxpayers have been hit with criminal charges.

Under the IRS whistleblower program, whistleblowers that bring in information about high income tax evaders are guaranteed a reward if the company involved owes at least $2 million in unpaid interest, taxes, and penalties. “Our law firm is involved in other actions, advising and representing whistleblowers,” said Shepherd Smith Edwards and Kantas, Ltd. LLP founder and securities attorney William Shepherd. “As we all see, there can be substantial rewards for those with valuable information about law and rule breakers. These can include securities related claims as well.”

UBS Whistle-Blower Secures $104 Million Award From IRS, Bloomberg, September 11, 2012

IRS pays whistleblower $104 million, Reuters/AP, September 11, 2012

Whistleblower Gets $104 Million, The Wall Street Journal, September 11, 2012

More Blog Posts:
CFTC Director Says Corporate Compliance Employees Should Have Comprehension of Dodd-Frank Whistleblower Requirements’Anti-Retaliation Provisions, Institutional Investor Securities Blog, June 14, 2012

SEC’s Office of the Whistleblower In Early Phase of Evaluating Reward Claims, Institutional Investor Securities Blog, March 23, 2012

Plaintiff Says Morgan Stanley Fired Him for Calling out Investment Adviser Who Was Churning Accounts and Bilking Investors, Stockbroker Fraud Blog, August 7, 2012

The U.S. Bankruptcy Court for the Southern District has issued an order giving Irving Picard, the Bernard L. Madoff Investment Securities LLC liquidation trustee, permission to issue a second interim distribution to the victims of the Madoff Ponzi scam. Picard had asked to add $5.5 billion to the customer fund and issue a second payout of $1.5 billion to $2.4 billion to the investors that were harmed.

According to Bloomberg Businessweek, a $2.4 billion payout would be seven times more than what the bilked investors have been able to get back since Madoff, who is serving a 150-year prison term for his crimes, defrauded them. A huge part of the customer fund is on reserve because there are investors who have filed securities lawsuits contending they should be getting more.

Meantime, the U.S. District Court for the Southern District of New York has decided that the mortgage-backed securities lawsuit filed by insurance company Assured Guaranty Municipal Corp. against UBS Real Estate Securities Inc. can proceed. The plaintiff contends that UBS misrepresented the quality of the loans that were underlying the MBS it insured in 2006 and 2007.

Assured claims that the defendant was in breach of the pooling and servicing agreements involving three MBS certificates that it had insured. Because UBS allegedly misrepresented the quality of the underlying mortgage loans, it has to, per the contracts, repurchase them from Assured.

While Judge Harold Baer denied UBS motion to dismiss the insurer’s contention that the defendant misrepresented the loans’ quality, it agreed with the defendant that Assured cannot force UBS to repurchase them because certificate trustees are the only ones entitled to make sure the “repurchase obligation” is enforced.

In other institutional investment fraud news, the Securities and Exchange Commission has filed charges against Edward Bronson and his E-Lionheart Associates LLC. The two are accused of making over $10 million in a penny stock scam involving the reselling of billions of unregistered shares in about 100 small companies that they acquired at “deep discounts.”

Per the Commission, at Bronson’s direction, E-Lionheart would cold call penny stock companies to try to get them to obtain capital. If there was interest, the firm would offer to purchase shares in the concern at prices that were greatly lower than market value. The defendants would then start reselling the shares through brokers involved in unregistered sales.

The SEC says that while the defendants are invoking a registration exemption that exists under Rule 504(b)(1)(iii) of Regulation D, the Commission contends that this does not apply to these types of sales. The regulator is seeking disgorgement of over $10M, in addition to other penalties.

In an unrelated financial scam, this one involving a criminal case, a New York jury has convicted hedge fund manager Doug Whitman on securities fraud and conspiracy over his involvement in two insider trading schemes. Whitman, who is a Whitman Capital LLC portfolio manager, was charged with using insider trading tips to trade in Marvell Technology Group Ltd. (MRVL), Polycom Inc., (PLCM), and Google Inc. (GOOG) stocks. This allegedly caused him to generate over $900,000 in profits.

Prosecutors claim Whitman obtained the confidential information about the Marvell options and shares from an independent research consultant that received the information from the company’s employees. A colleague in the hedge fund industry gave him the information about Google and Polycom.

The SEC has also filed a civil lawsuit against Whitman and his financial firm. The securities fraud complaint is still pending.

Madoff Trustee’s Customer Payment May Reach $2.4 Billion, Bloomberg Businessweek, August 22, 2012

The Madoff Recovery Initiative

Assured Guaranty Municipal Corp. v. UBS Real Estate Securities Inc. (PDF)

Read the SEC's Complaint against E-Lionheart Associates LLC (PDF)

California Hedge Fund Manager Doug Whitman Found Guilty in Manhattan Federal Court on All Counts for Insider Trading, FBI.gov, August 20, 2012

More Blog Posts:
Merrill Lynch Agrees to Pay $40M Proposed Deferred Compensation Class Action Settlement to Ex-Brokers, Stockbroker Fraud Blog, August 27, 2012

Securities Lawsuit Against Options Clearing Corporation and Chicago Board Options Exchange Can Proceed Says Illinois Appellate Court, Stockbroker Fraud Blog, August 24, 2012

2nd Circuit Affirms Dismissal of $18.5M Auction-Rate Securities Lawsuit Against Merrill Lynch Filed by Anschutz Corp., Institutional Investor Securities Blog, August 23, 2012

The U.S. District Court for the Eastern District of Virginia said that Citigroup (C) and UBS (UBS)cannot preliminarily enjoin Financial Industry Regulatory Authority arbitration over an auction-rate securities offering that did not succeed. The case is UBS Financial Services Inc. v. Carilion Clinic. Carilion is a nonprofit health care and the two financial services firms had provided it with services, including underwriting, for an issuance of auction rate securities that ended up failing.

Per Judge John Gibney, Jr., in 2005, the nonprofit had looked to Citigroup and UBS for help in raising raise $308.465 million to renovate and grow its medical facilities. The two financial firms allegedly recommended that Carilion issue $72.24 million of bonds as variable demand rate obligations. The nonprofit then issued the rest of the funds—$234 million—as ARS, which are at the center of the case.

After the ARS market failed in 2008, the interest rates on Carillion’s ARS went up, forcing the nonprofit to refinance its debt so it wouldn’t have to contend with even higher rates. The auctions then started failing.

Carilion contends that it didn’t know that UBS and Citigroup had been helping to hold up the ARS market prior to its collapse (which they then stopped doing) and said it wouldn’t have issued the securities if they had known that this was the case. The nonprofit filed FINRA arbitration proceedings against the two financial firms and said it could submit the dispute as a “customer” of both even though arbitration isn’t a provision of their written agreements.

Citigroup and UBS sought to bar the arbitration with their motion for a preliminary injunction. The district court, however, rejected their contention that the nonprofit is not a customer of theirs (if this had been determined to be true, then Carilion would not be able to arbitrate against them in front of FINRA). It said that the nonprofit was a “customer,” to both UBS and Citigroup, seeing as both firms provided it with numerous financial services and were paid accordingly.

The court also turned down the financial firms’ argument that Carilion had waived its right to arbitration when it consented to a mandatory forum selection clause that requires for disputes to go through the litigation in front of the U.S. District Court for the Southern District of New York. It pointed out that the “forum selection clause” could only be found in the agreements with one of the parties and that language used, as it relates to arbitration, is ambiguous and would not be interpreted as a waiver of Carillion’s arbitration rights.

Carilion can therefore go ahead and have FINRA preside over its arbitration dispute.

UBS Financial Services Inc. v. Carilion Clinic, Reuters, July 30, 2012

More Blog Posts:
Texas Securities Fraud: BNY Mellon Capital Markets LLC Settles Allegations of Rigged Bond Bidding for $1.3M, Stockbroker Fraud Blog, January 24, 2012

Securities Claims Accusing Merrill Lynch of Concealing Its Auction-Rate Securities Practices Are Dismissed by Appeals Court, Stockbroker Fraud Blog, November 20, 2012

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

Continue reading "UBS, Citigroup FINRA Arbitration with Nonprofit Over ARS Cannot Be Halted, Said District Court" »

The London Inter-Bank Offer Rate (LIBOR) manipulation scandal involving Barclays Bank (BCS-P) has now opened up a global probe, as investigators from the United States, Europe, Canada, and Asia try to figure out exactly what happened. While Barclays may have the settled the allegations for $450 million with the UK’s Financial Services Authority, the US Department of Justice, and the Commodity Futures Trading Commission, now a number of other financial firms are under investigation including UBS AG (UBS), JPMorgan Chase (JPM), Deutsche Bank AG, Credit Suisse Group (CS), Citigroup Inc., Bank of Tokyo-Mitsubishi UFJ, HSBC Holdings PLC (HBC-PA), Lloyds Banking Group PLC (LYG), Rabobank Groep NV, Mizuho Financial Group Inc. (MFG), Societe Generale SA, RP Martin Holdings Ltd., Sumitomo Mitsui Banking Corp., and Royal Bank of Scotland PLC (RBS).

In the last few weeks, the accuracy of LIBOR, which is the average borrowing cost when banks in Britain loan money to each other, has come into question in the wake of allegations that Barclays and other big banks have been rigging it by submitting artificially low borrowing estimates. Considering that LIBOR is a benchmark interest rates that affects hundreds of trillions of dollars in financial contracts, including floating-rate mortgages, interest-rate swaps, and corporate loans globally, the fact that this type of financial fudging may be happening on a wide scale basis is disturbing.

“It’s my understanding the total financial paper effected by LIBOR is close to $500 trillion dollars. This is a half-quadrillion dollars if you are wondering about the next step up,” said Shepherd Smith Edwards and Kantas, LTD, LLP Founder and Institutional Investment Fraud Attorney William Shepherd.

Barclays contends that its manipulation of borrowing estimates could not alone have dramatically influenced the final labor rate. The bank claims that it submitted low borrowing costs that were artificial because it suspected that this is what other banks were doing and it didn’t want to look like it was in financial trouble by comparison.

“In the US, these allegations could fall under the Sherman Anti-trust and/or the Clayton Unfair Trade Practices Acts, said Securities Lawyer Shepherd. “The recovery possible under such legislation could reach triple damages, plus legal fees and costs.”

A slew of securities lawsuits, including class actions and regulator complaints, against some of these banks under investigation, are likely. CNN reports that already, attorneys general in Massachusetts, Florida, New York, and Connecticut are investigating the LIBOR rate-setting scandal. There may be a variety of plaintiff types, including municipal governments and investment firms.

“Institutions are usually the subject of such actions, which are also federal crime statutes, but individuals can also be held liable,” said Stockbroker Fraud Attorney Shepherd. “The allegations cover more than just price-fixing or predatory pricing and involve multiple acts of price manipulation among institutions (legally an “enterprise”), such that racketeering (RICO) laws could also apply.”

Banks belonging to the LIBOR panels will likely become defendants of criminal complaints, regulator complaints, and huge class actions. For now, they in turn, have been blaming the central banks and regulators.

States weighing Libor scandal suit, CNN, July 16, 2012

Who Else Is Under Investigation for Libor Manipulation?, The Wall Street Journal, July 9, 2012

The Worst Banking Scandal Yet?, Bloomberg, July 12, 2012

More Blog Posts:
$1.2 Billion of MF Global Inc.’s Clients Money Still Missing, Stockbroker Fraud Blog, December 10, 2011

Ex-Goldman Sachs Director Rajat Gupta Pleads Not Guilty to Insider Trading Charges, Stockbroker Fraud Blog, October 26, 2011

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

A Financial Industry Arbitration panel has decided that ex-UBS Financial Services broker Pericles Gregoriou can keep $1 million of the signing bonus he was given when he joined the financial firm even though he left the company earlier than what the terms of the hiring agreement stipulated. Gregoriou worked for the UBS AG (UBS) unit from ’07 to ’09.

This is an unusual victory for a broker. They usually find it very challenging to contest demands by a financial firm to give back unpaid bonus money. However, the FINRA panel said that Gregoriou was not liable for the $1 million damages. Also, the
panel denied Gregoriou’s counterclaim against UBS and a number of individuals. He had sought $3.24 million.

In a securities fraud case involving two former Bear Stearns employees against the SEC, “reluctantly,” the U.S. District Court for the Eastern District of New York approved a settlement deal involving Matthew Tannin and Ralph Cioffi. The defendants are accused of making alleged representations about two failing hedge funds.

The ex-Bear Stearns managers faced civil and criminal charges in 2008 for allegedly misleading bank counterparties and investors about the financial state of the funds, which ended up failing due to subprime mortgage-backed securities exposure in 2007. Cioffi and Tannin were acquitted of the criminal allegations in 2009.

Senior Judge Frederic Block approved the agreement wile noting that the SEC has limited powers when it comes to getting back the financial losses of investors. He asked Congress to think about whether the government should do more to help victims of “Wall Street predators.”

Per the terms of the securities settlement, Tannin will pay $200K in disgorgement and a $100K fine. Meantime, Cioffi will also pay a $100K fine and $700K in disgorgement. Although both are settling without denying or admitting to the allegations, they also have agreed to not commit 1933 Securities Act violations in the future and consented to temporary securities industry bars—Tannin for two years and Cioffi for three years.

In other securities law news, the U.S. District for the District of Columbia dismissed the lawsuit that investors in Bernard Madoff’s Ponzi scam had filed against the government. The reason for the dismissal was lack of subject matter jurisdiction.

The investors blame the SEC for allowing the multibillion dollar scheme to continue for years and they have pointed to the latter’s alleged gross negligence” in not investigating the matter. The plaintiffs contend that the Commission breached its duty to them. Judge Paul Friedman, however, sided with the government in its argument that the investors’ claims are not allowed due to the Federal Tort Claims Act’s “discretionary function exception,” which gives the SEC broad authority in terms of when to deciding when to conduct probes into alleged securities law violations.

While recognizing the plaintiffs’ “tragic” financial losses, the court found that investors failed to identify any “mandatory obligations” that were violated by SEC employees that executed discretionary tasks. The plaintiffs also did not adequately plead that the SEC’s activities lacked grounding in matters of public policy.

Meantime, the SEC has named ex-Morgan Stanley (MS) executive Thomas J. Butler the director of its new Office of Credit Ratings. The office is in charge of overseeing the nine nationally recognized statistical rating organizations that are registered, and it was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The office will conduct a yearly exam of each credit rating agency and put out a public report.

UBS loses case to recoup bonus from ex-broker, Reuters, February 6, 2012

Court Clears SEC Deal With Former Bear Execs Tannin, Cioffi, Bloomberg/BNA, June 20, 2012

Strike Four: Another Federal Court Dismisses Madoff Investor Lawsuit Against SEC, Compliance Week, June 20, 2012

Former Exec to Head Office of Credit Ratings, The Wall Street Journal, June 15, 2012

More Blog Posts:
SEC Wants Proposed Securities Settlements with Bear Stearns Executives to Get Court Approval, Stockbroker Fraud Blog, February 28, 2012

AARP, Investment Adviser Association, Among Groups Asking the SEC to Make Brokers Abide by 1940 Investment Advisers Act’s Fiduciary Duty, Stockbroker Fraud Blog, April 14, 2012

Investor Groups, Securities Lawyers, and Business Community Comment on the JOBS Act Reg D’s Investor Verification Process, Institutional Investor Securities Blog, June 24, 2012

Continue reading "Institutional Investment Roundup: FINRA Lets Ex-UBS Broker Keep $1M Signing Bonus, Court Approves Settlement Reached By Ex-Bear Stearns Hedge Fund Managers & SEC, Madoff Investors’ Securities Suit Against the Govt. is Dismissed" »

With their share of the high-net-worth-market expected to drop down to 42% in 2014 from the 56% peak it reached five years ago, wirehouses are looking to regain their grip. According to Cerulli Associates, Bank of America Merrill Lynch (BAC), Wells Fargo (WFC), Morgan Stanley Smith Barney (MS), and UBS (UBS)—essentially, the largest financial firms—will see their portion of the high-net-worth market continue to get smaller. Meantime, because private client groups can now be called the largest high-net-worth services provider, they can expect their hold to continue as they likely accumulate about $2.8 trillion in high-net-worth assets in two years—a 49% market share.

The Cerulli report says that the wirehouses’ reduced share of the market can be attributed to a number of factors, including the fact that high-net-worth investors are allocating their wealth to several advisors at a time. Also, during the economic crisis of 2008, many investors transferred some assets out of the wirehouses. There were also the wirehouse advisers that chose to go independent or enter another channel. In many cases, these advisors’ clients ended up going with them.

The private client groups are the ones that have benefited from this shift away from wirehouses. A main reason for this is that they are considered safer for both advisors that wanted a change and investors who were seeking lower risks.

Also, per the report, there has been healthy growth in the independent advisor industry. The registered investment advisor/multi-family offices grew their assets under management by 18% two years ago. Meantime, during this same time period, wirehouses assets only grew by 2%.

In other wirehouse-related news, beginning summer, ERISA Section 408(b)(2) ‘s new point-of-sale fee disclosure rules will make it harder for these firms to up the fees they charge investors. According to AdvisorOne, as a result, these firms are raising the fees that they charge mutual fund companies instead.

Wirehouses and mutual fund companies usually have a revenue sharing agreement. In exchange for investing their clients’ money in a mutual fund, a wirehouse charges the mutual fund company a fee (this is usually a percentage of every dollar that the client invests). However, in the wake of the upcoming disclosure changes, financial firms have started raising that fee.

For example, according to The Wall Street Journal, at the start of the year, UBS approximately doubled the rate that mutual funds must now pay. The financial firm is seeking up to $15 for every new $10,000 that a clients invests in a mutual fund. Moving forward, this will go up to $20 annually. Morgan Stanley’s new raised rate is $16 a year. It used to charge $13 for stock funds and $10 for bond funds.

Wirehouses are saying that since its the brokerage firms and not the individual financial adviser who gets the separate payment streams, the rate won’t impact the judgment of an adviser when it comes to selecting funds. Such fees paid by mutual funds can impact a financial firm’s bottom line. For example, last year, almost a third of Edward Jones’s $481.8 million in profits came from mutual fund company fees.

Wirehouses raise fees on mutual fund companies, AdvisorOne, April 5, 2012

Wirehouses Battle to Keep Market Share, On Wall Street, March 28, 2012

More Blog Posts:
Institutional Investor Fraud Roundup: SEC Seeks Approval of Settlement with Ex-Bear Stearns Portfolio Managers, Credits Ex-AXA Rosenberg Executive for Help in Quantitative Investment Case; IOSCO Gets Ready for Global Hedge Fund Survey, Institutional Investor Securities Blog, March 29, 2012

Citigroup Ordered by FINRA to Pay $1.2M Over Bond Markups and Markdowns, Institutional Investor Securities Blog, March 27, 2012

FINRA Bars Registered Representatives Accused of Securities Misconduct and Negligence, Stockbroker Fraud Blog, April 5, 2012

Continue reading "Wirehouses Struggle to Retain Their Share of the High-Net-Worth-Market" »

According to a report published by Cornerstone Research, there has been a decline not just in the number of securities class action settlements that the courts have approved, but also in the value of the settlements. There were 65 approved class action settlements for $1.4 billion in 2011, which, per the report, is the lowest number of settlements (and corresponding dollars) reached. That’s 25% less than in 2010 and over 35% under the average for the 10 years prior. The report analyzed agreed-upon settlement amounts, as well as disclosed the values of noncash components. (Attorneys’ fees, additional related derivative payments, SEC/other regulatory settlements, and contingency settlements were not part of this examination.)

The average reported settlement went down from $36.3 million in 2010 to $21 million last year. The declines are being attributed to a decrease in “mega” settlements of $100 million or greater. There was also a reported 40% drop in media “estimated damages,” which is the leading factor in figuring out settlement amounts. Also, according to the report, over 20% of the cases that were settled last year did not involve claims made under the 1934 Securities Exchange Act Rule 10b-5, which tends to settle for higher figures than securities claims made under Sections 11 or 12(a)(2).

Our securities fraud law firm represents institutional investors with individual claims against broker-dealers, investment advisors, and others. Filing your own securities arbitration claim/lawsuit and working with an experienced stockbroker fraud lawyer gives you, the claimant, a better chance of recovering more than if you had filed with a class.

In other securities fraud news:
The U.S. District Court for the Southern District of New York tossed out the securities lawsuit related to an IPO offering of common stock in Chinese internet company Mecox Lane Ltd. (MCOX). Per the court, the plaintiffs, who sued Mecox, its leading officials, and underwriters Credit Suisse Securities (USA) LLC and UBS AG (UBS), failed to adequately allege any materially false or misleading statements in the registration statement or prospectus for the 2010 IPO. (The plaintiffs, who bought the common stock after the IPO, claimed that the offering materials did not provide full disclosure regarding Mecox Lane’s financial state. When this information was disclosed in fourth quarter data, share prices dropped.)

Earlier this month, the European Securities and Markets Authority (ESMA) decided to recognize the U.S. regulatory framework on credit rating agency supervision. This will let financial firms in the EU keep using credit ratings that were issued in this country.

ESMA’s moves follows intense dialogue with the SEC and the Department of Treasury. If ESMA had chosen otherwise, companies throughout the EU would have had to obtain other ratings.

ESMA also gave mutual recognition to the regulatory frameworks for CRAs of Hong Kong, Canada, and Singapore because their respective models are equal in stringency to the EU. It will also decide whether to do the same for the regulatory frameworks of Brazil, Argentina, and Mexico.

Settlement Values, Estimated Damages, and the Number of Cases Settled in 2011 Experience Historic Declines, Cornerstone Research

Court Tosses 1933 Act Suit Over Chinese Firm's IPO, Bloomberg/BNA, March 16, 2012

EU watchdog allows U.S. ratings use in Europe, 4-Traders, March 15, 2012

More Blog Posts:
SEC Chairman Schapiro Says Jumpstart Our Business Startups Act Needs Better Investor Protections, Institutional Investor Securities Blog, March 21, 2012

As the US House Passes Package of Bills to Open Capital Market Flow to Small Businesses, the Senate Prepares Similar Legislation, Institutional Investor Securities Blog, March 13, 2012

US Army Staff Sergeant Held in Afghan Civilian Massacre Was Once Accused of Securities Fraud, Stockbroker Fraud Blog, March 20, 2012

The Securities and Exchange Commission says that UBS Global Asset Management will pay $300,000 to resolve charges that it did not give securities in three mutual fund portfolios the proper price. This alleged failure caused investors to receive a misstatement regarding the funds’ net asset values. By agreeing to settle the charges, UBSGAM is not admitting to or denying the findings.

The SEC start investigating UBSGAM after SEC examiners conducted a routine check of the financial firm. According to its order, in 2008 UBSGAM bought about 54-complex fixed-income securities of $22 million, which was an aggregate purchase price. The majority of the securities were part of subordinated tranches of nonagency MBS with underlying collateral, which were were mortgages that weren’t in compliance with requirements to be part of MBS-guaranteed or to have been issued by Fannie Mae, Freddie Mac, or Ginnie Mae. CDO’s and asset-backed securities were among these securities.

After the securities were bought, 48 of them were priced substantially over the transaction price. This is because the pricing sources that provided the valuations to UBSGAM didn’t appear to factor in the price that the funds paid for the securities. Some quotations were not priced on a daily basis, while others were formulated using ending price from the last month. It wasn’t until over 2 weeks after UBSGAM started getting price-tolerant reports pointing out such discrepancies that it’s Global Valuation Committee finally met.

By using the prices that the 3rd party pricing service or a broker-dealer provided, the SEC contends that the mutual funds did not abide by their own valuation procedures, which mandate that the securities use the transaction price value until the financial firm makes a fair value determination or gets a response to a price challenge based on the discrepancy noted in the price tolerance report. The transaction price can be used for 5 business days, when a decision would have to be made on the fair value. The SEC concluded that by not making sure that these procedures were being followed, the financial firm caused the mutual funds to violate the Investment Company Act’s Rule 38a-1.

The SEC also determined that due to the securities not being timely or properly priced at fair value for a number of days in 2008, the funds were misstated (up to 10 cents in some cases) and they were then purchased, sold, or redeemed based on NAVs that were not accurate and higher than they should have been.

Read the SEC's Order Against UBS (PDF)

More Blog Posts:
SIFMA Wants FINRA to Take Tougher Actions Against Brokers that Don’t Repay Promissory Notes, Institutional Investor Securities Blog, January 17, 2012

Raymond James Financial to Buy Morgan Keegan from Regions Financial for $930 Million, Institutional Investor Securities Blog, January 14, 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 "UBS Global Asset Management to Pay $300,000 to Settle SEC Charges Related to Alleged Mutual Fund Price Violations" »

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" »

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

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

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

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

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

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

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

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

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

FINRA

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

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

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

UBS Financial Services Inc. has consented to a $160 million settlement over charges that it took part in anticompetitive practices in the municipal bond market. The Securities and Exchange Commission and the US Justice Department announced the settlement together. 25 state attorneys generals and 3 federal agencies had accused the financial firm of rigging a minimum of 100 reinvestment transactions in 36 states, which placed the tax-exempt status of over $16.5 billion in municipal bonds at peril. Justice officials say that the unlawful conduct at issue, which involved former UBS officials, took place between June 2001 and June 2006.

According to SEC municipal securities and public pensions enforcement unit chief Elaine Greenberg, ex-UBS officials engaged in “secret arrangements,” played various roles, and took part in “illegal courtesy bids, last looks for favored bidders, and money to bidding engagements” in the guise of “swap payments” to “defraud municipalities” and “win business.” The SEC contends that between October 2000 until at least November 2004, the financial firm rigged a minimum of 12 transactions while serving as bidding agents for contract providers, won at least 22 muni reinvestment instruments, entered at least 64 “courtesy” bids for contracts, and paid undisclosed kickbacks to bidding agents at least seven times. The SEC says that UBS indirectly deceived municipalities and their agents with their fraudulent misrepresentations and omissions and rigged bids to make them appear as if they were competitive when they actually weren’t.

UBS, which left the municipal bond market in 2008, says that the “underlying transactions” involved were in a business that is no longer a part of the financial firm and that the employees who were involved don’t work there anymore. Of the $160 million settlement, $47.2 million will go to the SEC, which in turn will give the money to the 100 muni issuers as restitution, about $91 million will go to the states, and $22.3 million will go to the IRS.

Related Web Resources:
UBS Financial Reaches $160M Settlement with the SEC and Justice Department Over Securities Fraud, Antitrust, and Other Charges Related to Municipal Bond Market, The Bond Buyer, May 5, 2011

UBS to Pay $160 M to Resolve Charges Over Muni Bond Market Probe, BNA Securities Law Daily, May 5, 2011

United States Justice Department

Internal Revenue Service

Securities and Exchange Commission

More Blog Posts:
UBS Financial Services Fined $2.5M and Ordered to Pay $8.25M Over Lehman Brothers-Issued 100% Principal-Protection Notes, Institutional Investors Securities Blog, April 12, 2011

Securities Fraud Lawsuit Against UBS Securities LLC by Detroit Pension Funds Won’t Be Remanded to State Court, Says District Court, Institutional Investors Securities Blog, January 17, 2011

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

Continue reading "UBS Financial Reaches $160M Settlement with the SEC and Justice Department Over Securities Fraud, Antitrust, and Other Charges Related to Municipal Bond Market" »

The Financial Industry Regulatory Authority is fining UBS Financial Services, Inc. $2.5 million and ordering it to pay $8.25 million in restitution for allegedly misleading investors about the "principal protection" feature of 100% Principal-Protection Notes. Lehman Brothers Holdings Inc. issued the PPNs Holdings Inc. before it filed for bankruptcy in 2008.

FINRA contends that even as the credit crisis was getting worse, between March and June 2008 UBS advertised and described the notes as investments that were principal-protected while failing to make sure clients knew that they PPNs were unsecured obligations of Lehman and that the principal protection feature was subject to issuer credit risk. UBS also allegedly failed to:

• Properly notify its financial advisers of the impact the widening of credit default swaps was having on Lehman’s financial strength
• Sufficiently analyze how appropriate the Lehman-issued PPNs were for certain clients
• Set up a proper supervisory system for the sale of the Lehman-issued PPNs
• Provide proper training or appropriate written supervisory procedures and policies
• Provide adequate suitability procedures for determining who should invest

FINRA also says that UBS developed and used advertising collateral about the PPNs that misled certain clients, such as the suggestion that a return of principal was certain as long as clients held the product until it matured. FINRA claims that the reason that some UBS financial advisers gave incorrect information to customers was because they themselves didn’t fully understand the product.

FINRA says that because UBS’s suitability procedures were inadequate and certain PPN’s lacked risk profile requirements, the product was sold to investors who were not willing or shouldn’t have been allowed to take on the risks involved. More often than not it was these investors who were likely to depend on the Lehman PPNs’ "100% principal protection" feature that were “risk averse.”

By agreeing to settle, UBS is not denying or admitting to the charges.

Related Web Resources:
FINRA Fines UBS Financial Services $2.5 Million; Orders UBS to Pay Restitution of $8.25 Million for Omissions That Effectively Misled Investors in Sales of Lehman-Issued 100% Principal-Protection Notes, FINRA, April 11, 2011

UBS to shell out $10.75M to settle Lehman-related row, Investment News, April 11, 2011

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

UBS Must Pay Couple $530,000 for Lehman Brothers-Backed Structured Notes, Institutional Investors Securities Blog, November 5, 2010

Lehman Brothers’ “Structured Products” Investigated by Stockbroker Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LLP, Stockbroker Fraud Blog, September 30, 2008

Continue reading "UBS Financial Services Fined $2.5M and Ordered to Pay $8.25M Over Lehman Brothers-Issued 100% Principal-Protection Notes" »

The U.S. District Court for the District of Connecticut says that ex-UBS (UBS) employee Mary Barker's whistleblower claim alleging that she was retaliated against for she reporting a purported accounting mistake can move forward. Her Age Discrimination in Employment Act claim, however, was dismissed.

Barker, who used to work UBS's Stamford, Conn. Office, was given the responsibility of reconciling UBS's existing exchange seat shares with old company records in December 2006. The valuation had to take place because UBS's holdings of exchange seat assets were redistributed after the Commodity Exchange Inc. and the New York Mercantile Exchange merged.

Barker allegedly found that some of UBS's historical exchange seat holdings had either not been accounted for or had been improperly accounted on the financial firm’s balance sheet. UBS went on to realize that about $80 million from the sale of exchange seats had been overlooked.

Barker told her manager about the brokerage firm’s alleged failure to disclose the seat holdings in February 2007. She says that not only did her manager fail to report her findings, which violated federal securities laws, to upper management, but also, her worries were never addressed. She says that her interactions with other UBS officials over the matter were similarly unsatisfying.

Despite getting a “Thank You Award” for her efforts, Barker says that UBS began to take retaliatory action against her. Not only did she get a poor review rating that year and fail to get a salary bump the following year, but also she was passed over for a promotion and her complaints were disregarded. In May 2008, Barker was told that the financial firm was letting her go due to a general reduction in UBS’ workforce.

Related Web Resource:
Barker v. UBS AG

More Blogs on Whistleblower Cases:
SEC’s Proposal on Implementing Whistleblower Rule Draws Mixed Reactions, Institutional Investors Securities Blogs, January 3, 2011

Why Whistleblowers Should Act Quickly and Consult Competent Legal Counsel, Stockbroker Fraud Blog, December 18, 2010

Whistleblower Sues Moody’s Investors Service for Defamation, Stockbroker Fraud Blog, September 15, 2010

Continue reading "Ex-UBS Employee Can Proceed with Her Whistleblower Claim, Says District Court" »

The U.S. District Court for the Eastern District of Michigan says it won’t be remanding the securities fraud lawsuit accusing UBS Securities LLC and related entities of inducing two Detroit pension plans into taking an equity position in a collateralized loan obligation and then breaching their fiduciary duties through the improper liquidation of the securities. As a result of the alleged defrauding, the Detroit Police and Fire Retirement System of Detroit and the Detroit General Retirement System, also known together as the “Systems,” claim they were deprived of their $40 million investment.

The securities fraud lawsuit, which seeks rescission of contracts and damages, alleges violations of the Michigan Uniform Securities Act and numerous Michigan statutory and common law wrongs. The plaintiffs contend that the $20 billion in CLOs that UBS had obtained through subsidiary Dillon Read Capital Management had deteriorated so badly by May 2007 that UBS sought to unload them. They claim that the broker-dealer not only misrepresented the risks involved with CLOs and its ability to control them, but also, the misrepresentations were part of a scam to get rid of the loans.

While the defendants sought to remove the action to federal district court on the grounds of diversity jurisdiction, the plaintiffs wanted to remand the case to state court. They argued that diversity jurisdiction was lacking. The court, however, refused to send the securities lawsuit back.

Related Web Resource:
General Retirement System of the City of Detroit vs. UBS AG

Finance, City of Detroit

Securities Fraud Attorneys

UBS, Institutional Investors Securities Blog

Continue reading "Securities Fraud Lawsuit Against UBS Securities LLC by Detroit Pension Funds Won’t Be Remanded to State Court, Says District Court" »

A Financial Industry Regulatory Authority arbitration panel has ordered UBS AG to pay two clients $529,688 over their purchase of Lehman Brothers Holdings notes. The investors, Steven and Ellen Edelson, were told that they were buying “structured products, some of which were “principal protected.”

Between 2006 and 2008, the Edelsons, who used to own a plumbing supply company, purchased some $3.5 million in structured products—$529,688 of which came from Lehman. They even purchased the Lehman notes as late as August 2008, just a month before the bank failed.

Some of the Lehman notes that they bought were called “Return Optimization Securities with Partial Protection,” and “100% Principal Protection Notes” (PPN). According to the couple’s securities fraud lawyer, the Lehman notes are now valued at pennies on the dollar). Their attorney contends that by calling the notes “principal protected,” UBS misrepresented the risks involved in investing in the structured notes.

According to Forbes.com, Lehman’s structured notes were supposed to perform like an S&P 500 index or a basket of securities. However, the PPN should be different from either in that the investments—in return for the financial security—would be capped. Unfortunately, as investors found out in September 2008, there were “principal protected” investments that did not live up to their name because they lacked that inferred protection.

UBS maintains that it followed “regulatory requirements” when it sold Lehman notes and that it could not have foreseen the latter’s financial collapse. Meantime, FINRA has ordered the investment bank to repurchase the notes from the retired couple.

Securities Fraud Against UBS Over Lehman Products
UBS has reportedly sold $1 billion of Lehman products to US investors. In six of the seven cases alleging securities fraud that were decided through FINRA, UBS must now repay some or all of the losses sustained by the investors.

Related Web Resources:
UBS loses arbitration case over 'principal protected' notes, Investment News, November 4, 2010

UBS Having Hard Time With Lehman Structured Products Arbitration, Forbes, April 26, 2010

UBS Loses Lehman Arbitration Note Claim by Small Investor, Stockbroker Fraud Blog, December 9, 2010

Brokers Renew Push for Investors to Buy Structured Products, Stockbroker Fraud Blog, June 12, 2009

Continue reading "UBS Must Pay Couple $530,000 for Lehman Brothers-Backed Structured Notes " »

UBS AG has filed a motion to dismiss a class securities case against it. The move is putting the US Supreme Court’s recent ruling in Morrison v. National Australia Bank Ltd. to the test.

In this securities fraud case, four institutional investors—three of them foreign—are charging UBS and a number of individual defendants with violating Section 10(b) of the 1934 Securities Exchange Act. This is based on misstatements that were allegedly made regarding its auction rate securities-related and mortgage-related activities. They are seeking relief for all purchasers of UBS stock on all worldwide exchanges. Most of the statements in question were issued from the bank’s headquarters in Switzerland.

In 2008, the defendants asked the court to dismiss the allegations due to lack of subject matter jurisdiction. They cited the decision made in Morrison by the U.S. Court of Appeals for the Second Circuit, which had dismissed the action.

Now that the US Supreme Court issued its ruling in Morrison, with the justices concluding that Section 10(b) only applies to securities transactions on domestic exchanges and in other securities, the defendants are attempting to also have the securities case against them dismissed per Morrison’s “bright-line, location-of-the transaction rule.”

The defendants say that the plaintiffs have advised them that they will use the Supreme Court’s use of the word “listed” to end-run Morrison. Per the justices' decision, Section 10(b) applies to transactions involving securities that are “listed on an American stock exchange.” UBS shares can be found on the NYSE.

However, the defendants are contending that there isn't any support in the "the test of Section 10(B), its legislative history, or Morrison" for this type of unprecedented interpretation. They say that the word “listed," as it is used in Morrison is only applicable to two kinds of securities that can be purchased in the US—an unlisted security that trades over the counter in this country and a listed one that trades on a US exchange. The defendants claim that the plaintiffs are misreading the word “listed” in order to authorize international class action lawsuits based on securities purchases on a foreign market and that this "flies in the face of Morrison’s statements that Section 10 (b) doesn’t “regulate foreign securities exchanges.”

Related Web Resources:
Morrison v. National Australia Bank Ltd., Supreme Court (PDF)

1934 Securities Exchange Act

Continue reading "UBS AG Motion to Dismiss Class Securities Case Test’s US Supreme Court’s Ruling Regarding Extraterritorial Transactions" »