August 16, 2016

Ex-Goldman Sachs Trader to Pay $400K Fine to Settle RMBS Fraud Case

Edwin Chin, an ex-Goldman Sachs Group Inc. (GS) senior trader, will pay $400K to resolve U.S. Securities and Exchange Commission charges accusing him of misleading the bank’s customers when he sold them residential mortgage-backed securities at prices that were higher than they should have been. Even though he is settling, Chin is not denying or admitting to the regulator’s findings. He has, however, agreed to the entry of the order stating that he violated the Securities and Exchange Act of 1934 and Rule 10b-5.

According to the Commission’s order, from 2010 until 2012, which is when Chin left the bank, the former Goldman trader made extra money for the firm by concealing the prices that it had paid for different RMBSs and reselling the securities at higher prices to customers. The difference in cost would go to Goldman.

The SEC said Chin made over $1.5M in additional trading profits. Because Goldman made more money, Chin did as well.

The regulator accused Chin of sometimes misleading buyers by suggesting that he was in the process of negotiating a transaction between customers when he was merely selling residential mortgage-backed securities from Goldman’s inventory. In one alleged incident, Chin earned an additional $200K by telling a hedge fund client that he would sell a bond at cost price and without compensation. Unfortunately, he purportedly neglected to tell the hedge fund that he had already bought the security, had it in inventory, and was charging the fund a worse price than what Goldman paid earlier that day. The SEC said that Chin misled the same client about the price of a different security the following day, resulting in an additional $100K in profit.

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August 12, 2016

401K Lawsuits Brought Against Franklin Templeton and Neuberger Berman

Two more 401(K) lawsuits alleging self-dealing have been brought against asset management firms. In Cryer V. Franklin Resources, Inc. et al, the employees of Franklin Resources Inc. are suing their employer. Franklin Resources (BEN) operates under the name Franklin Templeton Investments.

According to the plaintiffs, the asset management firm engaged in self-dealing in its 401(k) plan. They believe that individuals overseeing the retirement plan were in breach of duty under ERISA when they chose costly, proprietary funds that performed poorly instead of selecting less expensive funds that performed better. The plaintiffs are also accusing their employer of charging excessive fees for administrative services.

In the lawsuit, they noted that the 401K had invested in hundreds of millions of dollars in mutual funds that Franklin Templeton and its subsidiaries managed even though there were many other choices available. These entities manage all of the mutual funds in the Franklin Templeton 401(K) retirement plan. The plaintiffs said that Franklin Templeton chose these funds so that it could receive fees and make money.

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August 11, 2016

San Francisco Investment Manager is Sued Over $2M Hedge Fund Fraud

The U.S. Securities and Exchange Commission has filed a financial fraud lawsuit against Nicholas M. Mitsakos and his Matrix Capital Market. Mitsakos and his investment advisory firm are accused of pretending that they managed millions of dollars in assets. They allegedly stole about $800K from the first client that invested with them. The client, a Cayman Islands fund, invested $1.99M.

Mitsakos and his firm are accused of soliciting investors in a purported hedge fund. They are said to have falsely claimed they were successful money managers overseeing millions of dollars even though they had no assets. Instead, they allegedly made up a hypothetical investment portfolio in which the investments made up to 66% of yearly returns. The two of them are accused of pretending that these trades were real.

Commenting on the hedge fund fraud, SEC New York Regional Office Director Andrew Calamari said that it is important for investors to verify any information about an investment opportunity, especially one that is touted as having a “lofty historical performance.”

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August 9, 2016

US Attorney Bharara Asks Second Circuit To Reconsider Overthrown Mortgage Fraud Verdict Against Countrywide

The U.S. Attorney for Manhattan’s Southern District is asking the Second Circuit Court of Appeals to look at a ruling that overturned the jury verdict that held Countrywide Home Loans liable for mortgage fraud. Countrywide, which is now owned by Bank of America (BAC), made billions of dollars on home loans that went into default following the 2008 financial crisis.

It was in 2007 that the mortgage provider introduced a new program, referred to as the “high-speed swim lane,” to process applications for mortgages. Within Countrywide, the program was dubbed the “hustle.”

The program did not include the majority of conditions required to make sure loans would be paid back after Wall Street banks, Freddie Mac, or Fannie Mae sold them to investors. Unfortunately, Freddie and Fannie were not told that these conditions had become more relaxed or that loans no longer met certain criteria. The two mortgage finance firms had tightened their own loan buying requirements and underwriting guidelines. As a result of the loosened restrictions by Countrywide, contended the Justice Department, “rampant instances of fraud” resulted.

Despite the 2013 jury verdict that found Countrywide and a Bank of America executive liable for mortgage fraud, a Second Circuit judge panel overruled the decision. It found that even though Countrywide purposely breached contracts, this was not fraud because the lender had not intended to fool customers at the time that contracts were signed.

Now, U.S. Attorney Preet Bharara wants a Second Circuit panel of judges to consider that Countrywide made false statements when selling loan bundles to customers, including Freddie Mac and Fannie Mae. He said that the court bypassed evidence at trial that showed how the defendants made fraudulent misrepresentations when selling the loans and while the contracts were being executed. Prosecutors are arguing that the language in the contract refers to each mortgage sale during the actual sale and not upon the writing of the contract.

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August 5, 2016

Primus Pacific Partners Sues Goldman Sachs for $510M

Goldman Sachs Group Inc. (GS) is a defendant in a securities lawsuit brought by Primus Pacific Partners. Primus used to own 20% of Eon Capital, a Malaysian lender. In its complaint, brought in the New York State Supreme Court, Primus accused Goldman and ex-Managing Director Tim Leissner of hiding that there were conflicts of interest involving Malaysian Prime Minister Najib Razak and the 1Malaysia Development Berhad (1MDB), which is a sovereign wealth fund.

Goldman had been advising Eon Capital when the latter was considering a takeover offer from Hong Leong Bank Bhd, which is a Malaysian bank. According to Primus, in January ’10, Goldman and Leissner determined that Hong Leong’s first bid wasn’t fair. A few months later later, however, they decided that a revised offer that was only 2.8% greater was fair and recommended that Eon Capital take the deal.

The plaintiff believes that Goldman approved of the higher bid because it was seeking to impress the Malaysian Prime Minster whose brothers would benefit from a merger. Nazim Rajak worked for Hong Leong as a director while Nazir Rajak was chairman of CIMB Group Holdings Bhd, which advised Hong Leong about its takeover bid of EON Capital.

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August 4, 2016

Fed Orders Goldman Sachs to Pay $36M Fine Over Confidential Documents Leak

Goldman Sachs Group Inc. (GS) will pay $36.3M to settle allegations accusing ex-employees of obtaining access to confidential documents from the Federal Reserve. The Fed contends that Joseph Jiampietro, while working as a Goldman Sachs managing director, obtained the unauthorized supervisory data belonging to bank regulators and utilized the information for his work at the financial firm.

The Fed said that ex-Goldman Sachs banker Rohit Bansal was the one who shared the confidential documents with Jiampietro. Bansal had gotten the documents from his friend Jason Gross, a New York Fed employee that he used to work with at the regulatory agency. The confidential data involved a bank that was a client of Goldman Sachs. Last year, Bansal pleaded guilty to a misdemeanor charge involving the Fed documents, while Gross pleaded guilty to giving Bansal the information.

The Fed believes that Jiampietro used the confidential information to make pitches to potential and current clients. A lawyer for Jiampietro, who had previously worked for UBS Group Ag (UBS) and JPMorgan Chase & Co. (JPM), maintains that the allegations against his client are “demonstrably false.”

Jiampietro maintains that he never asked anyone for confidential supervisory information, nor did he use said information to benefit him or anyone else. Last week, he filed a lawsuit against Goldman Sachs accusing his former employer of not paying at least $350K in legal fees that he incurred in the government probe into the Fed documents.

As part of the settlement, Goldman Sachs will remedy flaws in its policies so that confidential document leaks don’t happen in the future. The firm will have to set up an improved program to fulfill compliance expectations around issuing and using secret supervisory information and it cannot re-hire individuals previously linked to improper disclosures.

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August 1, 2016

Financial Firm News: Deutsche Bank Ordered to Face Part of Subprime Mortgage Fraud Lawsuit & Morgan Stanley & Bank of America Must Contend with MBS Case

A U. S. district court judge said that Deutsche Bank AG (DB) must face part of a mortgage fraud case accusing the German bank of bilking investors who purchased over $5.4M of preferred securities. The plaintiffs, led by two individuals and Belmont Holdings Corp., claim that Deutsche Bank hid its exposure to the subprime mortgage market.

Judge Doborah Batts turned down the bank’s bid to throw out claims related to about $2.55B of securities sold in 11/07 and 2/08. She did, however, dismiss claims involving $2.9B of securities sold in 5/07, 7/07, and 5/08. Investors claim that Deutsche Bank should have notified them in offering documents that it had significant exposure to subprime markets via collateralized debt obligations and residential mortgage-backed securities. They believe that early notification could have prevented them from purchasing the preferred securities before their values dropped, resulting in billions of dollars of losses.

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July 30, 2016

Securities News: Citigroup to Pay $7M Over Incomplete Blue Sheet Data, Cetera Fined $75K for Client Record Issue, and Raymond James Settles EB-5 Program Violations for $1.45M

Raymond James to Pay Vermont Almost $1.5M in Immigrant Visa Case
The Securities Division of the Vermont Department of Financial Regulation said that Raymond James & Associates (RJF) must pay $1.45M in penalties because one of its registered representaitves allowed investor money to be misused in a$350M development fraud involving the EB-5 program. The program lets rich foreign investors obtain permanent residency if they invest a certain amount in projects that help establish jobs for U.S. citizens.

Earlier, a Securities and Exchange Commission-appointed receiver sued Raymond James, which received wire transfers involving the scam beginning in 2008. The money was from investors who thought they were investing in a Vermont ski resort. One of the fraudsters, Ariel Quiro, is accused of borrowing against the Raymond James accounts and using nearly $2.5M of investors’ money to cover margin interest loans to the firm. Last month, Raymond James arrived at a $5.95M settlement with the Vermont Department of Financial Regulation over violations involving the ski resort. $4.5M of the money was for paying back investors.

Regarding this $1.45M fine, Vermont regulators said that it was a Raymond James representative who set up the brokerage and margin accounts involved in the alleged scam. The financial representative also failed to procure the proper documentation showing that Quiros was entitled to act for certain limited partnerships and let him authorize the transfer of $13M in limited partnership money to buy the ski resort even though written instructions directed otherwise.


Citigroup Admits Wrongdoing Over Blue Sheet Data
According to the SEC, for 15 years, Citigroup Global (C) markets provided the regulator with incomplete blue sheet data regarding trades that it executed. The coding error involved software that the firm used from 5/99 to 4/14 for processing the Commissions’ requests for the information, including data about trade times, prices, volume traded, and information identifying customers. As a result, Citigroup left out nearly 27,000 securities transactions in responses to over 2,300 blue sheet requests.

Continue reading "Securities News: Citigroup to Pay $7M Over Incomplete Blue Sheet Data, Cetera Fined $75K for Client Record Issue, and Raymond James Settles EB-5 Program Violations for $1.45M" »

July 27, 2016

State Street to Pay $382M for Misleading Clients, Including Mutual Funds, Over Hidden Markups In Foreign Currency Exchange Trades

The Securities and Exchange Commission has arrived at a global settlement with State Street Bank and Trust Company. According to the regulator, State Street misled custody clients, including mutual funds, about hidden markups that were added to foreign currency exchange trades. The firm will pay $382.4M, including $167M in penalties and disgorgement to the Commission, a $155M penalty to the U.S. Justice Department, and at least $60M to ERISA plan clients.

Among the other services it provides, State Street facilitates indirect foreign currency exchange trading for clients so that they can sell and purchase foreign currencies in transactions involving foreign securities. An SEC probe found that State Street made a substantial chunk of money in revenue when it misled some clients about Indirect FX, claimed that it offered the most competitive rates on trades, charged “market rates,” and provided “best execution.” The Commission contends that the company did not try to get the best prices for clients.

The SEC believes that State Street concealed markups so that custody clients would not notice. It also found that registered investment company custody clients were given monthly transaction reports and trade confirmations that were materially misleading because of misrepresentations about foreign currency exchange transaction pricing.

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July 26, 2016

“Weekly” Investments Are Popular With Big Traders But Come With Drawbacks

With the trading volume for weekly short-term options having grown, our securities fraud law firm wanted to remind investors that there are risks involved in these investments. Weeklys are listed on a Thursday and expire the next Friday. Their popularity is due in part to their lower cost compared to options that expire after a longer period of time. Aggressive traders, such as hedge funds, are among the weeklys’ primary investors.

Weeklys are popular on NASDAQ, CBOE Holdings, OMX, and Intercontinental Exchange. They were introduced in 2005. Weeklys are available on the majority of liquid stocks and a number of individual equities and exchange-traded funds.

Barron's reported last year that there were over 400 weekly options listed on exchanges. Many of them involve the most popular indexes and stocks. That said, there are negatives to investing in weeklys, including:


· A smaller stock pool

· Higher commissions

· Price executions that are not that favorable

· Lower liquidity options

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July 22, 2016

Employees of American Century and New York Life Sue over Excessive Fees with 401(K) Lawsuits

Another two asset management firms are the subject of separate (401)K lawsuits filed by their employees . The plaintiffs claim that American Century and New York Life, respectively, charged excessive fees in their retirement savings plans.

In Andrus et al v. New York Life Insurance Company et al , a class action lawsuit, plan participants in the the Employee Progress-Sharing Plan and the Agents Progress-Sharing Plan contend that New York Life and affiliated fiduciaries engaged in self-dealing when they kept a MainStay-branded S&P 500 index mutual fund i both retirement plans. New York Life and the subsidiaries own the MainStay brand fund.

The plaintiffs believe that they improperly benefited from “excessive fees and expenses.” They argued that because the defendants have a financial interest in the mutual fund, they neglected to look for lower-cost funds between ’10 and now. Instead, they kept the MainStay fund, which cost 35 basis points, in the two 401(k) plans. They say that this cost participants more than $3M. The plaintiffs are alleging breach of loyalty and prudence under ERISA.

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July 21, 2016

Following Securities Fraud Allegations, Visium Asset Management and Alliance Bernstein Reach Preliminary Sales Deal

Visium Asset Management has arrived at a preliminary sales deal with AllianceBernstein Holding LLP (AB). As part of the agreement, the asset manager will sell the Visium Global Fund, which was its remaining hedge fund. It was just recently that three of Visium's traders were accused of securities fraud, including the mismarking of securities, and insider trading.

This week, former Visium Asset Management portfolio manager Stefan Lumiere pleaded not guilty to charges accusing him of taking part in a scam to bilk investors. The 45-year-old allegedly inflated a bond fund’s value while overstating its liquidity. The criminal charges against him are securities fraud, conspiracy, and wire fraud.

Last month, former Visium hedge fund manager Sanjay Valvani committed suicide after he was arrested for insider trading that would have occurred from ’05 to ’11. Prosecutors said that he used confidential information about drug approvals to make illegal trades. Valvani allegedly made $25M from the insider trading. Prior to his death he pleaded not guilty to conspiracy, wire fraud, and securities fraud.

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