April 26, 2016

Hedge Fund Investors Want to Withdraw $1.4 Billion from Brevan Howard Master Fund

According to Bloomberg sources say that investors in Brevan Howard Asset Management’s primary hedge fund are asking to withdraw about $1.4M from the fund in the wake of successive yearly declines and losses from the first quarter.The fund is the Brevan Howard Master Fund, which invests in different asset classes.

As of the end of March the fund managed $17.6M, which is an approximately a $27B decline from two years ago. Brevan Howard has until the end of June to meet investors’ redemption requests.

Its investors aren’t the only ones seeking their money back. According to Hedge Fund Research Inc., many other investors were not happy with the way a number of hedge funds have performed recently when there was trouble in the markets. Last quarter, investors pulled more money from the funds than they have since the end of the financial crisis.

Recently, reports New York City’s pension for its civil employees voted to take out $1.5B from hedge funds. The New York City Employees Retirement System took its investment out of a number of hedge funds due to unsatisfactory performances. Meantime, Tudor Investment Corp.’s clients asked to take out over $1.B from the firm in the wake of unimpressive results over the last three years.

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April 21, 2016

Sen. Elizabeth Warren Calls Out the SEC for Not Stopping Hedge Fund Billionaire Steven Cohen From Starting New Hedge Fund

U.S. Senator Elizabeth Warren chastised the Securities and Exchange Commission for not barring billionaire Steven Cohen from starting a new hedge fund just months after the regulator scolded him for not properly overseeing an ex-employee convicted of securities fraud.

In 2013, Cohen’s SAC Capital consented to pay $1.8 million and pleaded guilty to fraud charges accusing the hedge fund of allowing insider trading to take place. It wasn’t until January of this year, however, that the SEC told Cohen that he was barred from managing the money of other people until 2018. Now, however, he is already involved in efforts to start Stamford Harbor Capital, a new hedge fund, of which he owns 25%.

Criticizing the SEC in a letter to its chairperson, Mary Jo White, Senator Warren said that Cohen’s application to start the new hedge fund, which the Commission approved, is just another example of the regulator’s enforcement actions failing to properly punish parties that are guilty, not protecting investors, and failing to impede future wrongdoing. It was just this January that Warren said that she believed that U.S. companies manage to commit crimes in part because of poor enforcement. She pointed to the SEC as an agency that often does not succeed in using the full scope of its enforcement powers.

In its case against Cohen, the SEC accused him of not properly supervising Mathew Martoma, who was convicted in of insider trading that allowed SAC to make gains and avoid losses of $276M. (Martoma is appealing his conviction.) While Cohen did not admit to wrongdoing when settling the SEC case, he did retain an independent consultant to ensure legal compliance.

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April 20, 2016

Wine Mogul Accuses Fidelity of Fraud, Seeks up to $500M in FINRA Arbitration

Wine merchant Peter Deutsch has filed a FINRA arbitration claim seeking $400 - $500M from Fidelity. He claims that he might have earned that amount of money if only the financial firm had not stopped him from obtaining a 66% share of a company in which he had already invested $40M. Meantime, Fidelity is contending that it kept Deutsch from trading because of worries that he was attempting to illegally manipulate the company’s shares.

The dispute began when Deutsch sought to purchase at least another 50 million shares of stock in China Medical Technologies in 2012. His investment efforts, however, were barred by Fidelity, which said it was “uncomfortable” with the transaction. It was in 2011 that a sales team from Fidelity Family Office Services (FFOS) had sought Deutsche out to join its group of wealthy clients.

In court papers, Deutsch alleges that while he was trying to gain control of China Medical Technologies, which is a cancer treatment device maker, FFOS was aggressively buying the stock in secret rather than helping him. He also claims that Fidelity used his shares to its benefit even though this was not what he wanted. He believes that the firm blocked him from trading to conceal its wrongdoing.

He is accusing Fidelity of inappropriate share lending. The firm, however, describes its practice of lending out shares belonging to its clients as fully paid lending. According to Bloomberg, sources said that Fidelity, which insists that the arbitration case is without merit, maintains that it didn’t lend out Deutsch’s shares under its lending program but that it used its authority to lend shares out of his margin account. Securities lending is something that Fidelity clients consent to when they set up a margin account.

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April 19, 2016

SEC Files Financial Fraud Cases Against Logitech and Ener1

The Securities and Exchange Commission has filed fraud cases against Logitech International and Ener1. Logitech, a technology manufacturer, will pay $7.5M to resolve the charges. Its former controller, Michael Doktorczyk and ex-accounting director, Sherallyn Bolles, will pay $50K and $25K penalties, respectively. The SEC said that the two companies and their former executives committed accounting-related violations that caused investors to not have an accurate portrayal of what was going on financially at Logitech and Ener1.

According to the regulator, Logitech fraudulently inflated its financial results for fiscal year 2011 to satisfy earnings guidance, as well as committed other accounting violations over five years. The SEC also filed charges against the technology company’s former CFO, Erik Bardman, and ex-controller Jennifer Wolf, accusing them of purposely minimizing the write-down of millions of dollars of extra component parts for a product that had inventory in excess. For the company’s financial statements, Bardman and Wolf are accused of falsely assuming that the company would construct the components into complete products even though knew of contrary events and facts. Also, ex-CEO Gerald Quindlen, who is not accused of misconduct, gave back $194,487 in stock sale profits and incentive-based compensation that was given to him during a time when alleged accounting violations were taking place.

In the Ener1 case, the battery manufacturer consented to pay penalties for its materially overstated assets and revenues for year-end 2010, as well as overstated assets from 2011’s first quarter. The SEC said that the financial misstatements were a result of management’s failure to impair certain receivables and investments. Ex-CFO Jeffrey A. Seidel, ex-CEO Charles Gassenheimer, and ex-chief accounting officer Robert Kamische consented to pay $50K, $100K, and $30K, respectively.

The SEC said that Robert Hesselgesser, who was the engagement partner of Pricewaterhosue Coopers LLP’s audit of Ener1’s financial statements of 2010, violated auditing standards when he did not conduct the proper procedures to back his audit findings that Ener1’s management had properly accounted for revenues and assets.

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April 15, 2016

Judge Refuses to Totally Dismiss $1B Mortgage Fraud Case Against Credit Suisse Unit

A judge has ruled that the $1B mortgage fraud case brought against Credit Suisse (CS) unit DLJ Mortgage Capital can be resubmitted. This ruling reiterated U.S. Bank National Association’s contention that a six-year statute of limitations did not bar its claims, which it brought as a trustee.

In 2015, New York Supreme Court Judge Marcy S. Friedman had dismissed the case because the trustee had not made a repurchase demand of Ameriquest, the loan’s originator, according to the pre-suit requirement. However, she rejected DLJ’s claim that because these conditions were not met prior to the statute of limitations they were time barred. Friedman said that if U.S. National were to refile the case, then the issue of the repurchase demand’s impact on the trustee’s ability to file litigation in this matter would be determined on a “fully developed record.”

U.S. National sued DLJ Mortgage Capital in 2013, accusing the securitizer of not complying with its duty to buyback loans that breached of a number of warranties and representations that DLJ made in a contract presiding over the sale of 4,534 residential mortgage loans. The loans, originated by Ameriquest Mortgage Co., were securitized by the trust, sold by DLJ to investors, and came with multiple assurances about their quality. Such guarantees were supposed to place any risks from faulty mortgages with the originator.

The plaintiff contends that rather than construct a loan pool with quality mortgages, Ameriquest, which is no longer in operation, used faulty loans. As a result, contends U.S. National, the trust lost $227M.

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April 14, 2016

Houston Pension Fund Files Securities Fraud Case Against BofI Holding

The Houston Municipal Employees Pension System is suing Internet banking company BofI Holding Inc. (BOFI). The pension fund claims that the bank engaged in unlawful lending practices and other misconduct to enhance profits.

For example, according to the complaint, BofI Holdings refinanced a loan to a borrower involved in a gang-run gambling ring, did not disclose that it was using off-balance-sheet entities to buy lottery receivables, gave loans to foreigners with suspect or criminal backgrounds, did not have a healthy compliance system, and failed to tell investors that it was the subject of regulatory and government subpoenas and pending federal probes. The Houston pension fund is seeking class action status.

The case was spurred by a whistleblower court case filed by an ex-junior auditor at BofI Holdings. The whistleblower claimed that the Internet banking company issued loans to certain foreign nationals without properly vetting them even though some of them had criminal pasts. BofI denied his contentions and countered with its own lawsuit.

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April 12, 2016

The FCA Bars Ex-Royal Bank of Scotland Trader Over Libor Rigging

U.K.’s Financial Conduct Authority is barring Paul White, an ex-Royal Bank of Scotland (RBS) trader, for misconduct involving the rigging of the London interbank offered rate. The FCA said that White behaved with recknlessness and was not in integrity when he would submit information about Libor related to the Swiss frank and the Japanese yen.

According to the British regulator, from 5/07 to 11/10, White improperly considered requests that came from derivatives traders at two banks when issuing Libor submissions. If any of the information he turned in wasn’t been accurate, this could have changed the rate for Libor in a manner benefitting White and others. In a news release, the FCA said that White had a duty to make sure his submissions were correct and not influenced by his own financial interests or the interests of others.

The regulator provided a transcript that included electronic messages between a broker at another bank and White. The messages indicated that they worked together to rig Libor.

White was the recipient of 68 communications from RBS derivatives traders for Libor submissions. In the exchanges, said the FCA, the traders sought to help their trading positions. There was also a Swiss franc trader that purportedly made such requests verbally for twenty months. White also received requests from a yen derivatives trader who did not work at the firm.

The FCA’s final notice states that White claims that although he took into account trading positions when issuing Libor submissions, his entries were always “correct” and within a range that was acceptable according Libor’s definition. White claimed that he engaged in seemingly improper communications only to “appease.” FCA, however, rejects White’s account of what happened. Yet despite imposing an industry bar against him, the regulator waived what could have been a $354,000 fine because White is undergoing financial difficulties.

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April 10, 2016

Morgan Stanley Still Embroiled in $147M RMBS Lawsuit Brought by IKB Deutsche Industriebank

More than three years after IKB Deutsche Industriebank AG sued Morgan Stanley (MS) for over $147.1M in residential mortgage-backed securities, the brokerage firm is asking the New York appeals court to dismiss the case. Morgan Stanley claims that it was the German lender that did not conduct the necessary due diligence.

IKB claims the Morgan Stanley provided offering documents that left out or did not properly characterize different underwriting standards involving the loans that were underlying the securities. The bank claims there were misrepresentations and omissions regarding loan-to value ratios.

The lender says it received inaccurate information about the underlying loans related to how much homeowners had borrowed, the securities’ credit ratings, and the percentage of properties that were occupied by the owners. IKB cited purportedly incorrect statements made about trusts, loans, and mortgages. It accused Morgan Stanley of taking the loans from different originators and bundling them together to package the securities despite knowing there were issues that could make the RMBS problematic.

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April 8, 2016

Credit Suisse Wants Appeals Court to Dismiss NY AG’s $11.2B Residential Mortgage-Backed Securities Fraud Lawsuit

A number of Credit Suisse Group (GS) units want a NY court to rule that the RMBS case brought by Attorney General Eric Schneiderman is time-barred in the wake of precedent from the state’s highest court. The AG, who brought the case under the Martin Act, is seeking more than $11.2B.

According to the complaint, in ’06 and ’07 Credit Suisse put together over 60 residential mortgage-backed securities with about 248,000 loans. 24% of the loans have since been liquidated and investors have lost $11.2B on initial balances of about $93.8B. The state claims that investor losses resulted because of the bank’ determination to raise the volume of mortgages it bought and the securities it generated. Credit Suisse employees purportedly paid a higher price for mortgages and didn't address reports of problems identified by due diligence forms so as to preserve relationships with mortgage originators. The bank is accused of making false claims about due diligence when choosing which mortgages to bundle with the securities.

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April 6, 2016

California Venture Capitalist to Disgorge $4.875M to Settle Institutional Investor Fraud Charges

The SEC and G. Steven Burrill have reached an agreement to settle charges accusing the biotech venture capitalist of taking money from a fund overseen by his firm to pay for his expensive lifestyle and help support his other businesses. Burrill is accused of hiding from investors that he siphoned money from Burrill Life Sciences Capital Fund III while claiming that the cash was going toward management fees. In truth, claims the regulator, Burrill used the money to pay for private jets, lavish vacations, gifts, and other items. The investors of the fund include public companies, state pension funds, and others.

Burrill and his Burrill Capital Management have consented to disgorge $4.785M that he is accused of stealing plus pay a $1M penalty. He also will be barred from the securities industry. Commenting on the case, SEC Enforcement Division Director Andrew J. Ceresney said that despite having registration exemption, Burrill and other venture capital advisers have a fiduciary obligation to clients. Ceresney accused Burrill of prioritizing his own interests over that of his clients.

Also settling SEC charges are Burrill Capital Management controller Helena C. Sen and chief legal officer Victor A. Hebert. Hebert is accused of agreeing to call in more money from fund investors even while knowing that the cash would be spent on unrelated expenses. Sen is accused of, along with Burrill, at least twice delaying payment distributions that fund investors were owed so that Burrill’s personal spending and the salaries of Sen and Hebert would continue to be paid. It was in 2013 that the fund’s Investment Committee noticed that all of the capital that had been committed was already spent.

As part of the SEC settlement, Burrill and Sen are permanently suspended from practicing as accountants before the Commission. Hebert is no longer allowed to practice as a lawyer before the SEC.

Our institutional investor fraud lawyers at The SSEK Partners Group would like to offer you a free case consultation.

Read the SEC Order (PDF)

April 5, 2016

Two Ex-State Street Executives Face Criminal Charges Involving Institutional Investor Fraud

Federal prosecutors are charging Ross McClellan and Edward Pennings with securities fraud and wire fraud. McLellan was formerly with State Street Corp.’s (STT) brokerage firm unit in the US and Pennings worked for the bank in London. According to the government, the two men secretly charged six clients excess commissions for billions of dollars of securities trades. The clients included government pension funds in Britain and Ireland and a sovereign-wealth fund in the Middle East.

The two former State Street executives allegedly charged clients the trading commissions in addition to the fees that the latter had already agreed to pay and even though they specifically were not supposed to charge them commissions. The men purportedly ran their scam from 2/10 through 9/11, allegedly making millions of dollars in the process.

Although State Street wasn’t officially named in the criminal indictment, The Wall Street Journal reports that the firm's senior vice president, Carolyn Cichon, verified that two of the bank’s former employees were involved in the matter. It was in 2014 that the U.K. Financial Conduct Authority fined State Street’s unit in that country $32.4M for charging clients $20.2M in excess commissions.

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March 31, 2016

California Sues Morgan Stanley for Purportedly Selling Bad Investments

The State of California is suing Morgan Stanley (MS) for allegedly selling bad residential mortgaged backed securities. According to lawmakers, the firm sold residential mortgage-backed securities as risky loans to subprime lenders while downplaying or hiding the risks and at times encouraging credit raters to bestow the securities with high ratings that were not warranted. Because of these RMBS sales, contends the state, the California Public Employees' Retirement System (CALPERS) and California State Teachers Retirement System (CalSTRS) sustained devastating losses.

California claims that the firm violated the state’s False Claims Act and securities laws. A significant part of the case challenges Morgan Stanley’s behavior when marketing the Cheyne SIV, which was a structured investment vehicle that failed nine years ago. State Attorney General Kamala Harris is seeking $700M from the firm, as well as over $600M in damages.

Meantime, Morgan Stanley has argued that the case is meritless. It contends that the RMBSs were sold and marketed to institutional investors who were sophisticated enough to understand the investments. They claim that the RBMBs performed in a manner that was in line with the sector to which it belonged.

It was just recently that Moody’s Corp. reached an agreement with CalPERS to pay the California pension fund $130M to resolve allegations that the credit rating agency may have acted negligently by giving high ratings to toxic investments. CalPERS contended that its purchase of the investments cost it hundreds of millions of dollars.

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