August 19, 2014

Securities Lawsuit Against BlackRock Accuses Firm of Charging Excessive Sub-Advisor Fees

BlackRock Inc. (BLK) wants a judge to dismiss a securities lawsuit accusing the money manager of charging exorbitant fees and breaching its fiduciary duties. Lawyers for the firm argued that the claims have no merit in the U.S. District Court in Trenton, New Jersey.

The investor plaintiffs, including a Florida investment adviser who won the lottery, contend that BlackRock’s subsidiaries collected excessive fees for services provided to Equity Dividend Fund (MDDVX), worth almost $30 billion, and their Global Allocation Fund, (MDLOX), worth close to $59 billion. They say that they lost millions of dollars because of excessive fees.

However, reports InvestmentNews, according to one of the lawyers representing BlackRock, the complaint does not properly acknowledge the fund’s size or allege facts adequate enough to plausibly demonstrate that the fees are unreasonable, especially considering the services that were provided.

The investors blame the board of directors of the funds for failing to behave “conscientiously” when approving “markups” and fees. They say that this violates U.S. the Investment Company Act of 1940 as it pertains to duty breaches.

This securities case is one of several that are pending against different firms over sub-advisor fees. Defendants in the other cases include J.P. Morgan Investment Management Inc. (JPM), SEI Investments, and AXA Equitable Life Insurance Co.

The lawsuits claim that subsidiaries of the fund companies get to keep too much of the revenue made by their funds. To date, the courts have yet to dismiss any of these cases.

BlackRock fights lawsuit claiming 'excessive fees', Investment News, August 14, 2014

Investment Company Act of 1940 (PDF)

Securities Lawsuits Accuse BlackRock Of Charging Exorbitant Investment Advisor Fees, Institutional Investor Securities Blog, May 8, 2014


More Blog Posts:
Fidelity Investment, BlackRock, Other Asset Managers Take Issue with Plans to Expand Too Big to Fail Rules, Institutional Investor Securities Blog, April 28, 2014

Investment Fraud Lawsuit Against BlackRock Over Exchange-Traded Funds Could Shed More Light on Securities Lending, Institutional Investor Securities Blog, February 18, 2013

June 11, 2014

SEC Charges Chicago Investment Advisory Founder With Real Estate Investment Fraud

The Securities and Exchange Commission is charging Attorney Robert C. Acri with Illinois securities fraud related to a real estate venture. Acri is the founder of Kenilworth Asset Management, LLC, a Chicago-based investment advisory firm. He has agreed to settle by disgorging the funds that were misappropriated from investors, as well as commissions, interest, and a penalty. Monetary sanctions total about $115,000.

The SEC brought the real estate investment fraud charges after detecting possible misconduct when it examined the firm. The regulator’s Enforcement Division was alerted and a probe followed.

According to the findings of the investigation, Acri misled investors over promissory notes that were issued to supposedly redevelop an Indiana shopping center, misappropriated $41,250 for other purposes, and failed to tell investors that the firm received a 5% on every note sale. This amount would total $13,750. He also purportedly did not let investors know a number of material facts, including that the reason there even was an investment offer is that he was trying to rescue funds that other clients had invested earlier in the same real estate developer.

The developer, Praedium Development Corporation, had set up Prairie Common Holdings LLC to issue the promissory notes. One of Praedium’s main reasons for selling the notes to Kenilworth clients was to repay those earlier investors. (It had defaulted earlier on a half-million dollar loan.)

Meantime, these clients were not told that the loan default or the developer and an affiliate had been delinquent to pay property taxes, its mortgages, and certain invoices. They didn’t even know that Praedium was involved in the project or that one of its owners was a friend of Acri’s and in financial trouble. Acri used the $41,250 of client money to pay back other clients and make other payments he owed, including a settlement on a lawsuit.

He resigned from the investment advisory firm in 2012. As part of the settlement with SEC, Acri has agreed to cease and desist from violating federal securities laws’ anti fraud provisions and is barred from the industry. He has consented to not take part in penny stock offerings or appear before the Commission as a lawyer or for any entity that the agency regulates.

If you suspect that you were the victim of investment advisory fraud and suffered financial losses as a result, contact our securities law firm today.

Chicago-Area Attorney Charged After SEC Exam Spots Fraud in Real Estate Investment Offering, SEC.gov, June 11, 2014

Read the SEC Order (PDF)


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Bank of America Could Settle Mortgage Probes for $12B, Institutional Investors Securities Blog, June 7, 2014

SEC Sues Wedbush Securities and Dark Pool Operator Liquidnet Over Regulatory Violations, Institutional Investor Securities Blog, June 6, 2014

SEC Files Order Against New Mexico Investment Adviser Over Allegedly Secret Commissions, Stockbroker Fraud Blog, June 10, 2014

May 27, 2014

SEC Judge Bans Money Manager For Misleading Morningstar and the Public

U.S. Securities and Exchange Commission judge Cameron Elliot has banned Max E. Zavanelli, a separate-account money manager from the securities industry. Now, Zavanelli and his firm, ZPR Investment Management Inc., must pay $660,000 for misleading research firm Morningstar Inc. and the public.

ZPR Investment Management, in its filing with securities regulators, names over $200 million in assets from 119 accounts. Its clients include pension plans, high net worth individuals, and charitable organizations.

According to Judge Elliot, Zavanelli misrepresented and left out important information in newspaper ads, newsletters, and reports to Morningstar. Firm performance data is believed to have falsely implied compliance with the Global Investment Performance Standards. These are the standardized, voluntary ethical principals for investment advisers that call for fair representation and full disclosure. It also includes guidance for advertisements that maintain they are in compliance with GIPS.

Zavanelli and his firm are accused of making false claims that performance result presentations complied with GIPS in six ads when this was not the case. Judge Elliot said that Zavanelli purposely misled clients and prospective ones. Elliot also noted that Zavanelli refused to accept responsibility for not having honored his fiduciary obligation to customers.

If you are an institutional investor or a high-net worth individual investor who suspects that your investment losses are a result of a breach of fiduciary duty or some other action by your financial representative, you should speak with our securities law firm today. The SSEK Partners Group has helped thousands of investors get their money back.

SEC judge bans money manager for misleading Morningstar, investors, Investment News, May 28, 2014

Advisor Gets Lifetime Ban, Nearly $1M Fine Over Ad Footnotes, Financial Planning Advisors, May 29, 2014

Read the Initial Decision (PDF)


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SEC Warns About Investment Scams Involving Marijuana, Stockbroker Fraud Blog, May 24, 2014

FINRA Delays Submitting REIT Share Price Rule to the SEC, Revises Trading Surveillance System, Gets Approval to Rule Limiting Self-Trading, Institutional Investor Securities Blog, May 24, 2014

AIG Wants to Stop Former CEO Greenberg From Naming It as a Defendant in Derivatives Lawsuit Against the US, Stockbroker Fraud Blog, April 13, 2013

May 13, 2014

US Wants BNP Paribas to Pay Over $3.5B and Plead Guilty to Criminal Charges

Authorities in the United States want BNP Paribas SA (BNP) to pay over $3.5 billion to settle state and federal probes into the lender’s involvement with countries that are sanctioned, including Iran and Sudan. Prosecutors reportedly would like BNP to plead guilty to criminal charges related to the alleged misconduct. The government’s push for a guilty plea is definitely a shift from previous sanction cases that were usually resolved with a deferred prosecution deal.

The US Justice Department, US Treasury Department, the U.S. Attorney's office in Manhattan, the New York Department of Financial Services, and the Manhattan District Attorney's office are the ones who conducted the investigations against BNP Paribas. According to Reuters, last week the bank’s CEO Jean-Laurent Bonnafe and its lawyers met with the New York Department of Financial Services to ask for leniency. A source told the wire service that the state’s banking regulator doesn’t plan to take away BNP Parabas’s license as longa as any deal reached includes certain stiff penalties, such as the temporary suspension of dollar clearing through New York.

US authorities have pursued several foreign banks because they violated sanctions on Iran and other nations. The government believes that these banks did business with entities with ties to these countries, perhaps even stripping information that came from wire transfers so they could get through the US financial system without raising concerns.

One of those to settle was Standard Chartered (STAN.L) in 2012. The bank consented to pay $327 million to settle allegations that it violated sanctions against Sudan, Libya, Iran, and Burma. Standard Chartered also paid $340 million to New York’s regulator over the Iran sanctions.

In December, Royal Bank of Scotland Group Plc (RBS) agreed to pay $100 million to resolve allegations that it violated sanctions involving Sudan, Iran, Cuba, and Burma. According to New York’s banking regulator, from 2002 to 2011, RBS concealed or did not reveal data about the identities of sanctioned parties in 3,500 transactions valued at about $523 million. Also reaching settlements were HSBC Holdings Plc (HSBA), Mitsubishi UFJ Financial Group Inc. (MTU), and ING Bank NV (NV).

The SSEK Partners Group is a securities law firm that represents high net worth individuals and institutional investors.

BNP Paribas may pay more than $3 billion to end probes: sources, Reuters, May 13, 2014

U.S. Seeking More Than $3.5 Billion From BNP Paribas, Bloomberg, May 13, 2014


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Puerto Rico-Based Doral Financial Expected to Default on Over $150M in Muni Bonds, Stockbroker Fraud Blog, May 12, 2014

Citigroup Must Contend With $1B New York CDO Lawsuit, Says Appeals Court, Institutional Investor Securities Blog, May 9, 2014

Securities Lawsuits Accuse BlackRock Of Charging Exorbitant Investment Advisor Fees, Institutional Investor Securities Blog, May 8, 2014


May 7, 2014

FSOC Worries Crackdown on Banks is Creating New Risks

Regulators belonging to the Financial Stability Oversight Council are looking at the new practices of asset managers, mortgage services companies, and insurers to search for potential threats related to certain high risk investment areas. The group just issued its yearly report to Congress, highlighting certain risks, both current and emerging ones. According to The Wall Street Journal, there is concern that the US government’s efforts to clamp down on banks could be sending risky activity outside the reach of legal recourse.

Since the 2008 financial crisis, banks are now subject to stricter rules. Two of the added requirements are that these financial institutions lower their exposure to high risk businesses and keep more loss-absorbing capital as protection in case of another economic meltdown. Now, however, regulators are watching to see whether financial firms that aren’t banks have been stepping in to fill in the roles that the latter vacated because of the stipulations.

For example, some nonbanks are now involved in mortgage servicing rights, which involves the collection and billing of mortgages. These firms aren't under the same kind of regulatory oversight as banks, nor are they obligated to carry a specific cushion of capital.

In the report, the council expressed worry over certain securities lending markets-related activities. Asset-management firms are now providing protection services to investors engaging in short-selling and hedging. However, these firms also don’t have to carry a capital buffer. The regulators also expressed cause for possible concern because life-insurance companies have moved tens of billions of dollars of policy holder obligations to captive affiliates, which generally are not subject to even minimal disclosure.

The FSOC said it would keep an eye on these “emerging threats.” Areas that regulators have already identified as risk points include money-market mutual funds, repurchase agreements, short-term wholesale funding, growing interest rates, and cyber security. Also noted as possible causes for worry were whether fire sales might cause instability, how certain firms might be impacted by interest rates rising, the inadequate overhaul of the housing finance market, tight access to mortgage credits, and the markets' dependence on Libor.

The council also acknowledging that there have been successes, including better balance sheets for big bank holding companies, greater confidence levels thanks to the Federal Reserve's stress tests to gauge whether a financial institution could survive another economic crisis, the completion of the Volcker rule, and new rules for swaps markets and bank capital.

The SSEK Partners Group represents institutional investors and high net worth individual investors with securities fraud claims. We help clients get their money back.

Regulators See Growing Financial Risks Outside Traditional Banks, The Wall Street Journal, May 7, 2014

Financial Stability Oversight Council (FSOC) Releases Fourth Annual Report, Treasury.gov

2014 Annual Report

Financial Regulators See Progress and Threats, NY Times, May 7, 2014


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Morgan Stanley Gets $5M Fine for Supervisory Failures Involving 83 IPO Shares Sales, Stockbroker Fraud Blog, May 6, 2014

Bank of America Ordered to Hold Off Giving Back Money To Shareholders After Incorrectly Reporting $4B in Capital, Institutional Investor Securities Blog, May 5, 2014

Lawyers, Investor Advocates Want to Know More About SEC Supervision Of FINRA’s Arbitrator Selections, Institutional Investor Securities Blog, December 2, 2013

Continue reading "FSOC Worries Crackdown on Banks is Creating New Risks" »

April 21, 2014

Institutional Investors Sue BP for Securities Fraud

A number of pension funds in the US are suing BP (BP) for fraud. The institutional investors, including funds for public workers in Texas, Louisiana, and Maryland, and Bank of America’s (BAC) private pension plan, claim, that the corporation bilked them when it made misstatements about the Deepwater Horizon oil spill in 2010. Also bringing securities fraud causes against the oil company, just within the statute of limitations, are a number of foreign institutions.

The oil spill claimed the lives of 11 people. It is considered the worst offshore spill in US history. According to Reuters, BP is now the defendant in numerous securities fraud cases filed by at least 20 institutional investors contending that their investment managers were influenced by misrepresentations the company made when they deciding whether to purchase BP shares. The securities lawsuits claim that BP violated British securities and fraud laws when misrepresenting it safety record and the extent of the oil spill.

It was in 2010, when the Supreme Court issued its decision in Morrison v. National Australia Bank that foreign-based companies in general obtained immunity from securities fraud claims. In that lawsuit, the nation’s highest court held that American securities laws couldn’t be applied beyond the borders of the United States. Trial courts took this to mean that companies found on foreign exchanges cannot be sued for fraud under the Exchange Act of 1934—save for claims made by investors that traded in American Depository Shares.

Since then, it has been tough getting foreign-based companies to pay. Shareholders have even tried to get to companies on non-US exchanges by filing lawsuits under state fraud law instead, albeit unsuccessfully.

A shift occurred last year, however, when a district judge in Houston ruled that plaintiffs of a US class action securities case by common shareholders could go ahead with their lawsuit against BP. A previous ruling had dismissed the securities fraud lawsuit. However, the plaintiffs’ attorneys filed separate cases to try to get around Morrison by claiming that the oil company committed fraud under both state law and common law. (BP’s attorneys countered that under the Commerce clause, state laws cannot endow rights beyond what are given under federal law.)

Judge Keith Ellison in Houston, who is the judge on all of the securities fraud cases against BP, determined that because British law governs the funds’ claims against BP, the US Constitution couldn’t be applied. (It was BP who asked that British Fraud law be applied, expecting the judge to find that England should be the proper venue for the securities claims and then toss out the U.S. cases.)

Ellison said that the shareholder case could proceed in federal court in Texas and not England because the lawsuits involve BP’s U.S. outfit .The judge decided that because British and US laws share a common lineage, he can oversee the lawsuits. His ruling paved the way for this latest onslaught of securities fraud cases against BP.

The SSEK Partners Group is an institutional investor fraud law firm. We represent institutional clients and high net worth individuals seeking to get their investment losses back.

Institutional investors step off sidelines to sue BP for fraud, Reuters, April 21, 2014

Morrison v. National Australia Bank (PDF)

BP Oil Spill, The Guardian


More Blog Posts:
As BP Oil Spill Reaches Crisis Mode, A Number of Wall Street Analysts Placed “Buy” Rating On the Company’s Plunging Shares, Stockbroker Fraud Blog, January 22, 2010

BP Oil Spill Payouts Recipients May Be Targeted by Investment Scam Fraudsters, Says SEC, Stockbroker Fraud Blog, October 22, 2010

Federal Reserve Passes New Rules for Deutsche Bank, UBS, and Other Foreign Banks
, Institutional Investor Securities Blog, February 20, 2014

April 12, 2014

SAC Capital Advisor’s $1.8B Criminal Securities Fraud Settlement with the DOJ is Accepted by a Federal Judge

U.S. District Judge Laura Taylor Swain has approved the criminal settlement reached between the US Department of Justice and SAC Capital Advisors LP. The hedge fund, which was founded by Steven A. Cohen, consented to pay a $1.8 billion penalty and plead guilty to insider trading charges that resulted in hundreds of millions of dollars in illegal profits.

According to an indictment issued last year, for over a decade, insider trading involving stock of over 20 publicly-traded companies occurred at SAC Capital. The hedge fund is pleading guilty to numerous counts of securities fraud and a single count of wire fraud.

Eight of its employees have either been convicted or pleaded guilty over their involvement, including former SAC Capital portfolio managers Mathew Martoma and Michael Steinberg, who were convicted in their trials but will likely appeal. Cohen, however, has not been criminally charged—although the Securities and Exchange Commission did file a civil case against him. The regulator also put forth an administrative action to get Cohen barred from the securities industry because he failed to properly supervise Steinberg and Martoma or prevent the insider trading from happening.

Of the $1.8 billion, $900 million is a civil forfeiture (lowered to $284 million because of money already paid by SEC to SAC) and $900 is a criminal penalty. Included in the securities settlement is $616 million that will go to the regulator as settlement. Also, as part of the agreement, SAC can no longer manage the funds of outside investors and it will have to undergo a 5-year probation and compliance monitoring period.

SAC is now called Point 72 Asset Management and it can only invest the wealth of Cohen, members of his family, and his employees. The firm oversees around $9 – $10 billion, much lower than the over $16 billion it managed prior to the financial crisis.

The DOJ has been trying to uncover market cheating at hedge funds, publicly traded companies, and expert-networking firms for several years now, and so has the Federal Bureau of Investigation. In nearly five years, about 80 people have entered guilty pleas or been convicted as a result.

The SSEK Partners Group is a securities fraud law firm that represents individual investors and institutional investors. Contact our securities lawyers today.

U.S. judge accepts SAC guilty plea, OK's $1.2 billion deal, Reuters, April 10, 2014

As Judge OKs SAC Plea, Pursuit of Cohen Appears to Cool, The Wall Street Journal, April 10, 2014


More Blog Posts:
SAC Capital Advisors to Pay $1.2B Penalty, Pleads Guilty to Insider Trading Violations, Stockbroker Fraud Blog, November 4, 2014

SEC Charges SAC Capital Hedge Fund Adviser Stephen Cohen Faces With Failure to Stop Insider Trading, Institutional Investor Securities Blog, July 20, 2013

US Hedge Fund Industry is Worried About Tax Implications Under EU Directive, Institutional Investor Securities Blog, November 27, 2013

March 29, 2014

Bank of America Settles Mortgage Bond Claims with FHFA for $9.3B

Bank of America (BAC) will pay $9.3 billion to settle securities claims that it sold faulty mortgage bonds to Freddie Mac (FMCC) and Fannie Mae (FNMA). The deal, reached with the Federal Housing Finance Agency, includes $3.2 billion in securities that the bank will buy from the housing finance entities and a cash payment of $6.3 billion.

The mortgage bond settlement resolves securities lawsuits against the bank, Countrywide, and Merrill Lynch (MER). FHFA, which regulates both Freddie Mac and Fannie Mae, accused Bank of America of misrepresenting the quality of the loans behind residential mortgage-backed securities that the mortgage financing companies purchased between 2005 and 2007.

This is the 10th of 18 securities lawsuits reached by the FHFA over litigation involving around $200 billion in mortgage-backed securities. To date, it has gotten back over $10 billion over such claims.

During the housing boom, Freddie and Fannie bought privately issued securities in the form of investments and became two of the biggest bond investors. The US Treasury was forced to rescue the two entities in 2008 as their mortgage losses grew.

Also, Bank of America and its ex-CEO Kenneth Lewis have settled for $25 million a NY mortgage lawsuit accusing them of deceiving investors about the firm’s acquisition of Merrill Lynch. The state’s Attorney General Eric Schneiderman accused Lewis of hiding Merrill’s growing losses from Bank of America shareholders before the merger vote in 2008 and getting the US government to give over another $20 billion in bailout money by making false claims that he would step out of the merger without the funds. Another defendant, ex-CFO Joe Price, has not settled yet.

NY officials had sued Bank of America, Lewis, and Price under its Martin Act. The US Securities and Exchange Commission also sued the bank over Merrill losses and bonus disclosures. That securities lawsuit was settled for $150 million. Another case, a shareholder class action lawsuit, was settled for $2.43 billion.

Contact our mortgage-backed securities lawyers if you suspect you may have been the victim of securities fraud.

Bank of America to Pay $9.5 Billion to Resolve FHFA Claims, The Wall Street Journal, March 26, 2014


Bank of America to pay $9.3 billion to settle mortgage bond claims, Reuters, March 26, 2014

Federal Housing Finance Agency


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$500M MBS Settlement Reached Between Countrywide and Investors, Stockbroker Fraud Blog, May 10, 2013

Bank of America and Countrywide Financial Sued by Allstate over $700M in Bad Mortgage-Backed Securities, Stockbroker Fraud Blog, December 29, 2010

Bank of America’s $8.5B Mortgage Bond Settlement Gets Court Approval, Institutional Investor Securities Blog, January 31, 2014

March 17, 2014

Will Castlight Health IPO Prove Too Costly for Investors?

Castlight Health (CLST) saw its share price soar from $16/share to close to $40/share on the first day of its IPO last week. Despite bringing in just $13 million in revenue yearly thus far, its market cap still managed to hit $3 billion. Now some are wondering if this is an indicator that the IPO market may be approaching bubble territory. (Morgan Stanley (MS), Goldman Sachs (GS), and other top underwriters had priced the shares at $16, just over the raised and expected range of $13 to $15 per share)

Motley Fool analyst Ron Gross observed on Friday’s Investor Beat that this is the ninth IPO to double during its first trading day in the last nine months. Previous to that only five IPOs had done the same in the last 12 years. So yes, he says this is bubble area. Gross expressed concern that investors might be getting into stocks with super high valuations in light of the momentum yet later find that they are framing themselves for failure because they didn’t purchase the stocks at the right price.

However, reports USA Today, Castlight EO Giovanni Cilella is saying that the company sold its shares at the right time and financing is being done to keep up with customer demands. The company makes software to help employers and companies control the costs of healthcare.

Bottom line, is investing in Castlight a good idea for investors? Hard to say for sure, really. One need only look at how Twitter’s (TWTR) IPO proved successful for IPO participants and investment banks but not so much for retail investors. And in an article posted on Investopedia in 2012, David Bakke outlined the risks of getting involved in IPOs and startups, including how losses can result when an investor buys into the hype—remember the Facebook IPO—and what can happen if you bet on stocks that made quick profits in the long-term, and the downsides of having an inexperienced team at the helm of a company.

It is important that your broker or investment advisers understand the risks involved putting your money into IPO stock and is aware of whether/not you and portfolio can handle what could arise. If you think your investment losses are a result of bad or inappropriate investment advise and money handling you received, please contact our securities lawyers today.

4 Risks Of Investing in Startups and IPOs, Investopedia, September 18, 2012

Castlight Health: Most overpriced IPO of the century, YAHOO, March 14, 2014

Castlight Health IPO soars 149% in debut, USA Today, March 14, 2014


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Goldman Sachs Must Contend with Proposed Class-Action CDO Lawsuit, Institutional Investor Securities Blog, January 22, 2014

March 12, 2014

SEC Investigates Whether Currency Traders Distorted ETF and Options Prices, Manipulated Currency Markets

InvestmentNews is reporting that according to sources in the know, the Securities and Exchange Commission is trying to figure out whether currency traders at the biggest banks fixed benchmark foreign-exchange rates and distorted the process for exchange-traded funds and options. The regulator, which oversees the options and ETFs involved with the rates, joins the ongoing US and European regulatory investigations into possible currency market manipulation. Also probing the matter is the Commodity Futures Trading Commission, the Federal Reserve, the US Justice Department, New York’s lead banking regulator, and the Office of the Comptroller of the Currency.

European and US authorities have talked to at least 12 banks as they look into allegations reported by Bloomberg News last year accusing dealers of saying they shared data about client orders to manipulate currency benchmark spot rates. Options and other derivatives comprise over 50% of the $5.3 trillion/day foreign exchange market, with the remaining consisting of spot transactions.

In London today, with the Bank of England’s governor, Mark J. Carney talked to lawmakers about concerns that banking officials might have known about and tolerated currency market manipulation. Independent directors are currently conducting a review. Carney testified in front of the Treasury Select Committee.

The bank now has tighter policies obligating employees to internally escalate any reports of improper conduct and speak about they knew of past wrongdoing. Carney said that the bank would establish a new deputy governor position accountable for banking and markets.

In the ongoing international probe into currency market manipulation allegations, 20 traders have already either been let go or placed on leave following internal probes at a number of large banks involved in foreign exchange trading, including JPMorgan Case (JPM), Barclays (BCS), and UBS (UBS). Deutsche Bank (DB) and Citigroup (C) have even terminated the employment of certain staffers. Authorities, however, haven’t accused any of the traders or their banks of doing anything wrong.

Our securities lawyers represent investors that have sustained losses because of exchange-traded fund fraud. Contact The SSEK Partners Group today.

Recap: Mark Carney Faces Lawmakers Over FX, The Wall Street Journal, March 11, 2014

SEC to probe whether FX rigging distorted options, ETFs, InvestmentNews, March 10, 2014


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SEC Charges Filed Against Stifel, Nicolaus & Co. and Former Sr. VP David Noack Over CDO Sales to Wisconsin School Districts, Institutional Investor Securities Blog, August 11, 2013

February 19, 2014

Lehman Brothers Holdings’ $767M Mortgage Settlement to Freddie Mac is Approved by Judge

A judge in US bankruptcy court has approved the $767 million mortgage securities settlement reached between Lehman Brothers Holdings Inc. and Freddie Mac (FMCC). The deal involves a $1.2 billion claim over two loans made by the mortgage giant to Lehman prior to its collapse in 2008.

As part of the accord, Freddie will provide loan data to the failed investment bank so that Lehman can go after mortgage originators over alleged misrepresentations. Lehman will pay the $767 million in a one-time transaction.

Its bankruptcy was a main trigger to the 2008 global economic crisis. According to Matthew Cantor, chief general counsel of the unwinding estate, the bank has already paid creditors $60 billion, with more payouts.

This settlement comes less than a month after Lehman settled with Fannie Mae (FNMA) over that mortgage firm’s $18.9 billion mortgage-backed securities claim, also related to MBS and mortgage loans that the bank sold to the mortgage giant before the 2008 crisis. Under that deal, Fannie Mae is to get general unsecured claim of $2.15 billion against the estate of the holding company.

Per the terms of Lehman’s Chapter 11 payment plan, Fannie is also getting $537.5 million. This should free up around $5 billion for creditors. Also, Lehman will be able to pay another $400 million as part of among its distribution to creditors. The settlement resolves its dispute with Fannie, which has held Lehman accountable for the loans.

Please contact our securities lawyers at The SSEK Partners Group today if you are an institutional investor or high net worth investor that suspects you may have been the victim of mortgage fraud.

Lehman settles with Freddie Mac over $1.2 billion claim, Reuters, February 13, 2014

Lehman Reaches Deal With Fannie Mae Over Mortgages, The Wall Street Journal, January 23, 2014


More Blog Posts:
UBS to Pay Fannie Mae and Freddie Mac $885M to Settle RMBS Lawsuit, Institutional Investor Securities Blog, July 27, 2013

Fannie Mae Sues UBS, Bank of America, Credit Suisse, JPMorgan Chase, Citigroup, & Deutsche Bank, & Others for $800M Over Libor, Institutional Investor Securities Blog, December 14, 2013

Hedge Funds Interested in Upcoming Puerto Rico Bond Offering Want The Territory to Borrow Money To Last Two Years, Stockbroker Fraud Blog, February 17, 2014


January 30, 2014

SEC Accuses Private Equity Manager of $9M Securities Fraud

The SEC says that Camelot Acquisitions Secondary Opportunities Management and owner Lawrence E. Penn III of stealing $9 million from a private equity fund. Also named in the securities fraud complaint are Altura Ewers and three entities, two of which are Camelot entities owned by Penn.

The regulator says that Penn, a private equity manager, reached out to overseas investors, public pension funds, and high net worth individuals to raise funds for Camelot Acquisitions Secondary Opportunities LP, a private equity fund that invests in companies that want to become public entities. He was able to get about $120 million of capital commitments.

According to the Commission, Penn paid over $9.3 million of the money to Ssecurion, a company owned by Ewer, as fake fees/ The two of them purportedly misled auditors about the fees that were supposedly related to due diligence, even forging documents up to as recently as last year.

The SEC is charging Penn, Ewers, Ssecurion, and Camelot entities with violating federal securities laws’ provisions related to records and books, antifraud, and registration applications. The regulator wants disgorgement of ill-gotten gains plus interest, payment of penalties, and a bar from violating the securities laws’ antifraud provisions ever again.

At the SSEK Partners Group, our securities lawyers represent high net worth clients and overseas investors with securities claims and financial fraud lawsuits against financial firms that are based in the US. Contact our private equity fund law firm today. Working with an experienced institutional investment fraud law firm can increase your chances of recovering everything that you are owed. Our securities attorneys have helped thousands of clients recoup their losses.

SEC Charges Manhattan-Based Private Equity Manager With Stealing $9 Million in Investor Funds, SEC, January 30, 2014

Read the SEC Complaint (PDF)

New York private equity manager, firm charged with $9 million theft, Reuters/Yahoo, January 30, 2014


More Blog Posts:
Two Oppenheimer Investment Advisers Settle for Over $2.8M SEC Fraud Charges Over Private Equity Fund, Institutional Investor Securities Blog, March 14, 2013
Securities Fraud Lawsuit Seeks to Recover $49M From 96 Independent Broker-Dealers Liable Over Sales of Tenant-In-Common Exchanges, Stockbroker Fraud Blog, December 15, 2010

Plaintiffs Can Pursue Narrowed Claims Against Private Equity Firms, Institutional Investor Securities Blog, March 9, 2013

January 14, 2014

Securities Fraud Court Matters

While a district court allowed the securities fraud claims brought under securities law against LightSpeed Environmental, Inc. & other defendants to go forward, the claims brought against the company under Section 12(a)(2) of the Securities Act were thrown out. The securities case is Wang v. LightSpeed Environmental, Inc.

The court said that while the plaintiff, Tonglin Wang, sufficiently alleged justifiable reliance, specific misrepresentations, and scienter, so that certain claims could proceed, he did not succeed in his claims that there was a prospectus or a public offering or that there was any verbal exchange made about the prospectus.

Wang is a Chinese businessman who wanted to invest in a US entity to obtain immigration status here via a federal program. In 2011, two individuals, who were LightSpeed agents (Wang did not know this), purportedly told him they would act as his translators and advisors. He then was introduced to David Tarrant, CEO of ASG. He had the majority of voting shares in LightSpeed.

The defendants marketed LightSpeed, which, along with ASG and Unicell, was supposedly developing "Quicksider,” an electronic, zero-emission delivery vehicle, as a viable investment to Wang. The businessman signed a subscription agreement in English, a language that he doesn’t understand. He then sent $1 million to LightSpeed for 120,000 shares.

After becoming suspicious of LightSpeed’s viability—Roger J. Martin, the CEO of Unicell, sent him a letter that made representations that Wang contends were not the same as what had been made to him. He then filed a securities fraud lawsuit.

While the court allowed certain claims to proceed, it found that the Sec. 12(a)(2) claim should be dismissed. Although Wang said the issue of whether not the offering was private or public was a factual matter, the court determined that the allegations made were not sufficient.

In other securities fraud court news, a district court has dismissed the complaint brought against Suntech Power Holdings Co. Ltd. because the factual allegations were not enough to support a claim. Bruce v. Suntech Power Holdings Co., Ltd. was filed after there was a drop in the solar energy company’s share price when it revealed that it might have been defrauded. Suntech filed a motion to dismiss, which the court granted leaving room to amend.

In 2010, Suntech had gone into guarantee of a loan that the China Development Bank had granted to an investee company. A third party gave Suntech a €560 pledge in German government bonds as security for the loan. The pledge let Suntech say that €2 million was the liability’s fair value for the loan guarantee. In July 2012, however, Suntech made known that it now thought that the bonds did not actually exist and that it had been defrauded. This caused its share price and convertible notes to go down significantly. After Suntech confirmed that the bonds were fraudulent it said it would have to substantially raise its loan liability valuation and take a net income reduction.

Plaintiffs said the company should have known (or did know) that the German government bonds never existed. They also accused Suntech of making misleading and false statements about the sufficiency of its financial and internal controls, as well as the liability and fair value involving the loan guarantee. They also believe that the company’s fair value assessment of the liability involving the loan guarantee was false.

The court said that plaintiffs did not offer facts to show that this was true or demonstrate any lack of due diligence. It also said that the plaintiffs did not succeed in adequately pleading that there was a strong inference of scienter and rejected a few of their other allegations, including a failure to plead lost causation.

If you are an institutional investor that has sustained investment losses that you believe were caused by financial fraud, contact our securities lawyers today.

Wang v. LightSpeed Environmental, Inc. (PDF)

Bruce v. Suntech Power Holdings Co., Ltd. (PDF)


More Blog Posts:
Ex-Goldman Sachs Trader Fabrice Tourre’s Request for New Civil Trial in RMBS Fraud Case is Denied, Institutional Investor Securities Blog, January 10, 2014

SEC in Action: Finds Nomura Holdings Not Ineligible Issuer Even with Judgment, Will Consider Redrafted Shareholder Proposal Regarding Exelon, & Puts Out Regulation M, Rule 105 Violation Sanctions, Institutional Investor Securities Blog, January 8, 2014

Stifel, Nicolaus & Century Securities Must Pay More than $1M Over Inverse and Leveraged ETF Sales, Stockbroker Fraud Blog, January 14, 2014

January 10, 2014

Ex-Goldman Sachs Trader Fabrice Tourre’s Request for New Civil Trial in RMBS Fraud Case is Denied

The federal district court in Manhattan has turned down former Goldman Sach’s (GS) trader Fabrice Tourre’s request that he get a new civil securities fraud trial after he was found liable on seven counts of federal securities law violations related to his involvement in the firm’s sale of the Abacus 2007-AC1, which is a synthetic collateralized debt obligation that was backed by residential mortgage-backed securities. Goldman has already paid a $550 million fine over the matter.

The district court is saying that his claim that there was no evidence backing a finding that he violated Section 17(a)(20) of the Securities Act by getting property or money via the alleged fraud can’t be supported. The court noted that to prove liability this section of the Act does not make it necessary for the SEC to show that Tourre got a “fraud bonus”—only that he got the property or money through omission or material statement. The court said Tourre could have given evidence to show that the compensation he received from Goldman would have been the same without such a transaction, but since he didn’t put on a case during his trial the jury was free to infer otherwise.

The court noted that there was sufficient evidence backing the jury’s finding that the ex-Goldman Sachs trader’s conduct abetted and aided violations of SEC regulations. Also, the court is rejecting Tourre’s contention that he should get a new trial because he believes that the other court acted inappropriately when it took away from the jury the question of whether the swaps agreements involved were security based swap agreements within the meaning of securities law. This court said that for securities law purposes, the swap agreements were security-based swap agreements, and it granted summary judgment to the SEC on this.

The SSEK Partners Group represents RMBS fraud and CDO fraud customers that have lost money due to the negligence of members of the securities industry.

'Fab' Trader Liable in Fraud, The Wall Street Journal, August 2, 2013

Tourre's Request for New Trial Denied, Fox Business, January 7, 2014


More Blog Posts:

Goldman Sachs Cleared in Securities Fraud Case Against Dragon Systems for Losses Related to $250M Loss in Sale to Lernout & Haspie, Stockbroker Fraud Blog, January 31, 2013

Investor in Goldman Sachs Special Opportunities Fund 2006 to Get $2.5M FINRA Arbitration Award For Allegedly Unsuitable Investment, Stockbroker Fraud Blog, May 27, 2013

SEC Antifraud Lawsuit Against Goldman Sachs Executive Fabrice Tourre Won’t Be Reinstated, Says District Court, Institutional Investor Securities Blog, December 3, 2012

September 14, 2013

Broker Gets 1-Year Suspension From FINRA Over Inadequate Due Diligence and Supervision

Gary Mitchell Spitz, a broker and a registered principal of an Iowa-based brokerage firm, is suspended from associating with any FINRA member for a year and must pay a $5,000 fine. The SRO says that Spitz did not perform proper due diligence of an entity—a Reg D, Rule 506 private offering of up to $2 million—even though this action is mandated by his firm’s written supervisory procedures.

FINRA’s finding state that because of Spitz’s inadequate review, he did not make sure that the offering memorandum had audited financials of the issuer or make sure that these financials were accessible to non-accredited investors prior to a sale—also, a Regulation D requirement. The SRO says that Spitz let certain registered representatives, who were associated with the firm, to sell the entity’s shares and turn in offering documents that customers had executed directly to that entity. This meant that Spitz did not get copies of the documents or perform a suitable review of the transactions before they were executed. Certain customers even invested in the entity prior to Spitz getting the subscription documents from these representatives.

Spitz also is accused of not acting to make sure that the representatives made reasonable attempts to get information about the financial status, risk tolerance, and investment goals of customers. FINRA says he did not retain and review these representatives’ email correspondence and that they worked for a company that was the entity’s manager. Spitz let these representatives use the company’s email address to dialogue with customers and prospective clients but that the firm’s server did not capture the correspondence.

FINRA also says there weren’t any procedures to make sure that employees that were dually employed sent email correspondence from external email addresses to Spitz for retention and review. This let the representatives make unwarranted, exaggerated, and possibly misleading statements to customers.

Spitz consented to FINRA’s findings without denying or admitting to them.

Failure to Supervise
Brokerage firms need to have written procedures for properly supervising brokers and other employees. When failure to execute these procedures allows for negligence or misconduct, the firm and the supervisor can be subject to liability for broker fraud.

Gary M. Spitz, BrokerCheck

Financial Industry Regulatory Authority


More Blog Posts:
FINRA Enhances Its Arbitrator Vetting Policy, Stockbroker Fraud Blog, August 26, 2013

Former Broker Claims He is the Reason FINRA’s Regional Director Resigned, While Ex-JP Morgan Broker Files Arbitration Claim Against His Former Employer, Institutional Investor Securities Blog, June 18, 2013

Citigroup Must Pay $11M Claimant for Royal Bank of Scotland Investment Losses, Says FINRA Arbitration Panel, Institutional Investor Securities Blog, August 7, 2013

August 22, 2013

US DOJ To Bring Charges Against Those Accountable for 2008 Financial Crisis

According to The Wall Street Journal, US Attorney General Eric Holder wants Wall Street to know that the Justice Department is getting ready to bring criminal and civil securities fraud charges against those accountable for the financial crisis of 2008. Cases against a number of large financial firms are likely. During his interview with the WSJ, Holder said that "No individual, no company is above the law.”

Holder has been criticized, along with the Obama Administration, of not doing enough to file criminal charges against financial firm executives over the 2008 meltdown. However, recent disclosures indicate that the US government is going after new prosecutions of possible wrongdoing involving mortgage-backed securities.

After that industry’s fast growth led to the housing bubble, which then burst, resulting in a credit crisis, financial institutions were left with securities that dropped in value. DOJ officials also say that prosecutors continue to be involved in probes involving RMBS.

Meantime, federal prosecutors have been filing cases related to purported wrongdoing from prior to the economic meltdown, including the criminal charges against two former JPMorgan (JPM) traders for allegedly misstating trading loses that would eventually lead to over $6 billion in loses. There is also the DOJ’s securities lawsuit against Standard & Poor's Ratings Services and McGraw Hill Financial Inc. for allegedly misleading investors about the ratings of mortgage bonds.

While such action is positive, it is important to note that when certain white-color criminal charges are involved, the five-year statute of limitations may make it hard to successfully prosecute actions that took place prior to the financial crash.

Our financial fraud lawyers work with investors seeking to recover their losses caused by the negligence of members of the financial industry. Contact our securities law firm today.

Justice Department Plans New Crisis-Related Cases, Wall Street Journal, August 20, 2013

US Department of Justice



More Blog Posts:

Mandatory Securities Arbitration vs. Court? The Debate Rages Past the Quarter-Century Mark, Stockbroker Fraud Blog, July 4, 2013

US Justice Department Sues Standard and Poor's Over Allegedly Fraudulent Ratings of Collateralized Debt Obligations, Stockbroker Fraud Blog, February 5, 2013

McGraw Hills, Moody’s, & Standard & Poor’s Can’t Be Held Liable by Ohio Pension Funds for Allegedly Flawed MBS Ratings, Affirms Sixth Circuit, Stockbroker Fraud Blog, December 20, 2012

August 20, 2013

Harbinger Capital and Hedge Fund Adviser Philip Falcone To Settle SEC Fraud Charges by Paying Over $18M and Admitting Wrongdoing

The SEC says that Philip A. Falcone and his Harbinger Capital Partners will pay over $18 million and admit wrongdoing related to its securities fraud case alleging the improper use of $113 million in fund assets to cover the hedge fund advisor’s personal taxes. The Commission also is accusing them of secretly placing a preference over specific customer redemption requests at cost to other investors and performing an improper “short squeeze” involving bonds that were put out by a Canadian manufacturer.

Not only are Harbinger and Falcone admitting wrongdoing but also they are acknowledging that they committed numerous acts of misconduct that hurt investors and got in the way of the securities market’s proper functioning.

Admissions by Falcone and Harbinger, as set out by papers submitted to the court:
• The improper borrowing of $113.2 million by Falcone from the Harbinger Capital Partners Special Situations Fund (SSF) at an interest rate below what the fund was paying to borrow money. Investors weren’t told about the loan for months.

• The bestowing of federal redemption and liquidity terms to specific investors in HCP Fund I without disclosing all arrangements to other investors and the fund’s board.

• Falcone suggested that customers short the Canadian manufacturer’s bonds in 2006 after discovering that a Financial Services Firm was doing so.

• Getting back at that firm later that year for shorting the bonds by getting Harbinger’s funds to buy all of the outstanding bonds left in the open market.

• Demanding that the firm settle outstanding bond transactions and deliver what bonds were owed while failing to reveal that the company likely wouldn’t be able to get any bonds to deliver because all almost all of them were tied up in the custodial account of the Harbinger funds, which were not making them available for sale.

Because of the way that the defendants improperly dealt with the interplay of bond demand and supply, the bonds’ price went up by over double.

The U.S. District Court for the Southern District of New York has to approve the hedge fund fraud settlement. Per the terms of the agreement, Falcone must pay disgorgement of $6,507,574 and prejudgment interest of $1,013,140 plus a penalty of $4 million. He also has agreed to a judgment entry that prevents him from associating with any dealer, broker, municipal securities dealer, investment adviser, transfer agent, municipal advisor, or statistical rating organization that is nationally recognized but can apply again in five years. However, during the bar, Falcone has permission to liquidate his hedge funds while an independent monitor supervises. Also, he isn’t precluded from taking on the role of director or office at a public company. The agreement also doesn’t come with an injunction against future securities law violations.

The Harbinger entities have to pay a penalty of $6.5 million.

This is the first time that the SEC has employed its new policy to obtain admissions of fault in certain securities cases.

Philip Falcone and Harbinger Capital Agree to Settlement, SEC, August 19, 2013

Read the proposed final judgment (PDF)

Read the Consent doc. (PDF)


More Blog Posts:
Harbinger Capital Partners LLC and Hedge Fund Adviser Philip A. Falcone Face SEC Securities Charges Over Client Asset Misappropriation and Market Manipulation Allegations, Institutional Investor Securities Blog, June 29, 2012

SEC Votes to Turn Down Would-Be Securities Settlement With Hedge Fund Manager Philip Falcone, Stockbroker Fraud Blog, July 31, 2013

AIG Sued by Nuveen Funds For Securities Fraud, Institutional Investor Securities Blog, August 12, 2013

August 12, 2013

AIG Sued by Nuveen Funds For Securities Fraud

25 Nuveen Investments Inc. funds have filed a securities fraud lawsuit against American International Group (AIG) accusing the company of federal securities laws and Illinois securities law violations, common law fraud, and unjust enrichment in the months before the 2008 US financial crisis. They want unspecified monetary damages. Also named as defendants are ex-CEO Martin J. Sullivan, ex-CFO Steven Besinger, and Joseph Casano, who was in charge of the AIG Financial Product unit.

Among the funds suing AIG are the Nuveen Large Cap Value Fund, the Nuveen Equity Premium Opportunity Fund, and the Dow 30 Enhanced Premium. The funds purchased AIG securities at prices that were purportedly inflated and dropped when the truth was revealed.

The plaintiffs claim that they lost tens of billions of dollars in part because of materially misleading and false statements that AIG and others allegedly made. They contend that when the housing market started to fail, AIG told analysts that the risks it faced were “modest and remote” and that they didn’t see any potential financial losses tied to the swaps business.

AIG began upping its writing of credit default swap contracts in 2005 and started focusing on US residential mortgage loans, including subprime loans. It was around this time that its AIG Financial Products unit ceased its insuring of certain credit default obligations due to what it cited as a drop in standards for subprime loan underwriting.

The Nuveen funds believe that AIG did not disclose that it was experiencing an internal control weakness tied to its valuing of the CDS portfolio and it wasn’t until February 2008 that AIG stated in a filing with the SEC that it did not properly estimate its swaps portfolio market losses. By September of that year, AIG required federal aid of $85 billion because it was verging on bankruptcy. That amount would later go up to $182.3 billion.

The securities fraud case was filed in court in Chicago. However, the plaintiffs they said they would qualify to be part of the lawsuit against AIG in federal court in Manhattan if the judge determines that the case can move forward as a class action securities case.

Also making similar fraud claims against AIG is the Regents of the University of California. The Regents claim that the company concealed its subprime mortgage exposure between 2006 and 2008 and inflated its stock price, which caused the university system to suffer losses when shares of AIG dropped.

Our securities fraud law firm represents institutional clients and high net worth individuals with claims against financial firms, investment banks, broker-dealers, investment advisers, brokers, and financial representatives. Over the years, Shepherd Smith Edwards and Kantas, LTD, LLP has helped thousands of investors recoup their losses.'

Nuveen Funds Sue AIG, Executives for Securities Fraud, Bloomberg, August 7, 2013

University of California regents sue AIG over subprime mortgages, Housingwire, August 8, 2013


More Blog Posts:

SEC Adopts Rules to Protect Investors that Have Brokerage Firm-Held Assets, Stockbroker Fraud Blog, August 7, 2013

Texas Money Manager Sued by SEC and CFTC Over Alleged Forex Trading Scam, Stockbroker Fraud Blog, August 6, 2013

Judge Approves Creditor Vote on Jefferson County, Alabama’s Bankruptcy Plan, Institutional Investor Securities Blog, August 9, 2013

August 9, 2013

Judge Approves Creditor Vote on Jefferson County, Alabama’s Bankruptcy Plan

A US judge has paved the path for the creditors of Jefferson County, Alabama to vote on a plan to conclude what is being called the second biggest municipal bankruptcy in US history. Now, the county’s creditors—they are owed $4.2 billion—have until October 7 to vote.

Most of them have already agreed to the negiotiated plan, which would deliver just $1.735 billion to warrant holders of the county’s sewer system that are owed $3.078 billion. A deal has also been reached over non-sewer debt.

It will be up to US Bankruptcy Judge Thomas Bennett to look into a timeline that would wrap up Jefferson County’s bankruptcy. He is the one who approved the vote on the plan. If creditors the plan, it will need to be confirmed during a hearing that would take place in November.

The debt-reduction plan is based on a settlement reached between Jefferson County, and JP Morgan Chase & Co (JPM), hedge funds, and other creditors. The financial firm and the funds hold most of the $3 billion in sewer warrants. The county wants to cancel these and approximately $2 billion of new debt would replace them.

Per the plan, JPMorgan would get back 31% of the $1.22 billion owed to it. Several hedge funds would get over 80% of $872 million. Meantime, Jefferson County would up sewer rates of 7.4% a year for four years, susceptible to an increase if interest rates see one too.

As for warrant holders that are owed over $500 million and not included in the deal, they are allowed to vote either to collect 65 cents/dollar owed or, if they surrender the right to get money from insurers, they could get 80 cents for every dollar. The reductions in sewer warrants would be the first time investors of municipal bond in this country would be compelled to sustain losses on the principal they are owed because of a US bankruptcy case. Jefferson County’s bankruptcy is linked to a sewer refinancing marred by political corruption.

Unlike with corporate bankruptcies, creditors cannot seize or sell the county’s assets in a municipal bankruptcy and a trustee cannot be appointed. Recently, the city of Detroit, Michigan made national headlines when it filed the biggest municipal bankruptcy in the US to date and sought Chapter 9 protection. The city has about $18 billion in liabilities.

Please contact The SSEK Partners Group if you believe you are the victim of institutional investor securities fraud. Our stockbroker fraud law firm represents corporations, financial firms, partnerships, banks, municipalities, retirement plans, school districts, large trusts, charitable organizations, high net worth individuals, and private foundations. Your case assessment with our securities lawyers is free.

U.S. judge OKs vote on Alabama county's bankruptcy plan, Reuters, August 6, 2013

Jefferson County Investors Seek Debt Vote as Exit Approaches, Bloomberg Businessweek, August 6, 2013


More Blog Posts:

Jefferson County, Alabama Declares Municipal Bankruptcy, Institutional Investor Securities Blog, November 15, 2011

Detroit Becomes Largest US City to File Bankruptcy Protection, Institutional Investor Securities Blog, July 18, 2013

Texas Securities Case: SEC Alleges Ponzi Scam Involving Virtual Currency Bitcoin, Stockbroker Fraud Blog, July 28, 2013

July 22, 2013

DOJ’s $5B Securities Lawsuit Against Standard & Poor’s Can Proceed, Says Judge

U.S. District Judge David O. Carter for the Central District of California has turned down Standard & Poor’s bid to have the Justice Department’s $5 billion securities lawsuit against it dismissed. This affirms Carter’s recent tentative ruling earlier on the matter.

S & P is the largest credit rating agency in the world. It is a McGraw Hill Financial Inc. unit.

According to the US government, the credit rater fraudulently misrepresented its ratings process as objective and independent when it was, in fact, stymied from issuing ratings because of its desire to please banks and other clients. Instead, between 2004 and 2007, S & P purportedly issued AAA ratings to certain poor quality mortgage packages, including residential mortgage-backed securities, collateralized debt obligations, and subprime mortgage-backed securities. Now, prosecutors want to recover the losses that credit unions and federally insured banks allegedly suffered because of these inaccurate ratings that it contends upped investor demand for the instruments until the prices soared and the market collapsed, contributing to the global economic meltdown that followed.

S & P contends that it did not cause the financial crisis. It claims that just like the Federal Reserve, the US Treasury, and other market participants, the credit rater could not have foreseen the market events that went on to happen in 2008.

Seeking to have the securities case dismissed, S & P argued that its public statements about its objectivity and autonomy that prosecutors identified as purportedly fraudulent misrepresentations, including official policy statements about rating deals and employee conduct codes, are in actuality “puffery” statements that investors were not supposed to take at face value. S & P lawyers said that because of this, the government couldn’t use these statements as grounds for its securities fraud case.

Now, Judge Carter is saying that he finds S & P’s “puffery” defense “deeply… troubling,” especially in light of the implications. He observed that with this defense, S & P is implying that investors, legislators, and regulators shouldn’t have taken seriously any of the public statements the credit rater made about either supposed data-based, unbiased credit ratings or its agency procedures.

As in his earlier, tentative ruling, Carter said that contrary to defendants’ protestations, his court cannot see how all the “must nots” and “shalls” used by S & P in its statements was merely the company’s way to aspire about vague objectives. Rather, he sees these statements as “specific assertions” about polices and they contrast conduct the government is accusing S & P of committing.

Meantime, S & P is battling more than a dozen CDO lawsuits filed by state prosecutors who are accusing the credit rating agency of the same alleged fraud.

Please contact our CDO lawyers at Shepherd Smith Edwards and Kantas, LLP if you believe your losses are due to securities fraud. Your initial case consultation with The SSEK Partners Group is free.

U.S. Federal Judge Calls S&P Defense Troubling, NASDAQ, July 17, 2013

Judge lets U.S. pursue $5-billion fraud lawsuit against S&P, Reuters, July 17, 2013


More Blog Posts:
District Judge Not Inclined to Toss $5B Securities Fraud Case Against Standard & Poor’s, Institutional Investor Securities Blog, July 4, 2013

Standard & Poor’s Seeks Dismissal of DOJ Securities Fraud Lawsuit Over RMBS and CDO Ratings Issued During the Financial Crisis, Institutional Investor Securities Blog, May 9, 2013

US Justice Department Sues Standard and Poor's Over Allegedly Fraudulent Ratings of Collateralized Debt Obligations, Stockbroker Fraud Blog, February 5, 2013

June 24, 2013

Cayman Islands LLC Must Replead CLO Securities Case Against Deutsche Bank

The U.S. District Court for the Southern District of New York says that Arco Capital Corp. a Cayman Islands LLC, has 20 days to replead its $37M collateralized loan obligation against Deutsche Bank AG (DB) that accuses the latter of alleged misconduct related to a 2006 CLO. According to Judge Robert Sweet, even though Arco Capital did an adequate job of alleging a domestic transaction within the Supreme Court's decision in Morrison v. National Australia Bank, its claims are time-barred, per the two-year post-discovery deadline and five-year statute of repose.

Deutsche Bank had offered investors the chance to obtain debt securities linked to portfolio of merging markets investments and derivative transactions it originated. CRAFT EM CLO, which is a Cayman Islands company created by the bank, effected the transaction and gained synthetic exposure via credit default transactions. For interest payment on the notes, investors consented to risk the principal due on them according to the reference portfolio. However, if a reference obligation, which had to satisfy certain eligibly requirements, defaulted in a way that the CDS agreements government, Deutsche Bank would receive payment that would directly lower the principal due on the notes when maturity was reached.

Arco maintains that the assets that experienced credit events did not meet the criteria. It noted that Deutsche Bank wasn’t supposed to use the transaction as a repository for lending assets that were distressed, toxic, or “poorly underwritten.”

Seeking to dismiss the claims, Deutsche Bank contended that Morrison barred the plaintiff’s 1934 Securities Exchange Act Section 10(b) claim. That ruling found that the section is only applicable to transactions in securities found on US exchanges or transactions that occur domestically. The bank argued that since Arco bought the notes offshore, the LLC is unable to allege federal securities fraud violation in relation to the transactions.

While the court was in agreement with Arco that the lawsuit and associate documents allow for the “plausible inference” that there was irrevocable liability in New York and that, for purposes of Morrison, investment in the Notes was a transaction that occurred domestically, it did say that the company could have found the facts pertaining to the violation within two years of that date that a plaintiff that was “reasonably diligent” would have sufficient data to file a case. Hence, the pleading was untimely.

Collateralized Loan Obligation
A CLO is a type of collateralized debt obligation. It is a securities backed by loans or receivables as we as a special purpose vehicle that has securitization payments as different tranches. CLOs are supposed to reduce lending costs for a business while lowering the lending risks for banks, which sell the loans to outside investors.

At SSEK, our CLO fraud lawyers represent institutional investors throughout the United States. Please contact our CDO law firm to request your free case assessment.

Morrison v. Australia (PDF)

Arco Capital Corporation Ltd. v. Deutshe Bank AG, Justia Docket


More Blog Posts:
Courts Nationwide Dismiss More Securities Actions: Madoff Trustee’s Case, Equinox Investor’s Class Lawsuit, K-Sea Transportation Litigation, & Shareholder Derivative Complaint is Thrown Out, Stockbroker Fraud Blog, June 21, 2013

Securities Lending Trial Against Wells Fargo & Co. is Underway, Institutional Investor Securities Blog, June 21, 2013

RMBS Lawsuit Against Deutsche Bank Can Proceed, Says District Court, Institutional Investor Securities Blog, April 4, 2013

June 19, 2013

Former Millennium Global Investments Portfolio Manager Accused of Fraud Involving Nigerian Sovereign Debt Markups

According to prosecutors, Michael Balboa, an ex-Millennium Global Investments Ltd. portfolio manager, took part in a 10-month financial scam that involved marking up the Nigerian sovereign debt in funds he oversaw.

The federal government contends that Balboa and three unnamed co-conspirators engaged in a scheme in which he provided bogus mark-to-market quotes to a valuation agent that then inflated the market prices at month-end for Nigerian warrants. As a result, one fund’s total valuation for the Nigerian warrants was able to go from over $12 million at the start of 2008 to over $84 million in August of that year. Balboa’s Millennium Global Emerging Credit Fund is now insolvent.

He allegedly overstated the value of the securities positions and illiquid securities in the funds, which caused him to earn performance and management fees that were not legitimate. Balboa also purportedly lied to investors repeatedly about how the funds were faring.

In the process of perpetuating the scheme, says the prosecution, Balboa made $6.5 million for servicing the fund. This amount was determined by the fund’s performance.

In 2010, Balboa allegedly tried to get those that helped him commit the scam to cover up his crimes. One of the men accused of helping him is Gilles De Charsonville, a BCP Securities LLC broker. De Charsonville and two other co-conspirators are working with prosecutors and will testify against Balboa on the government’s behalf. They haven’t been charged with any crimes.

Meantime, Balboa is charged with numerous criminal counts, including securities fraud, conspiracy, investment adviser fraud, and wire fraud. His defense attorney, however, is disputing the allegations, claiming that Balboa cultivated the skill to set illiquid asset valuations and he provided investors with literature letting them know that he had the authority to modify valuations. The lawyer says that Balboa’s customers were experienced institutional investors that were well-versed in the market and could not be easily scammed.

In 2011, the US Securities and Exchange Commission filed civil charges against Balboa and De Charsonville over the same fraud. The complaint says that Balboa gave DeCharsonville and another broker bogus prices that they could give to the Fund’s auditor and outside valuation agent. The regulator says that by overstating the overall net asset value of the fund and its returns, Balboa was able to bring in at least $410 million in new investments, make millions in inflated performance and management fees, and deter approximately $230 million in redemptions that were eligible.

Our securities lawyers represent institutional investors that have suffered losses in financial scams and other types of securities fraud. Contact SSEK today.

Ex-Millennium Manager Inflated Funds’ Value, Prosecutor Says, The Washington Post, June 11, 2013

SEC CHARGES HEDGE FUND MANAGER AND BROKER WITH MULTI-MILLION DOLLAR OVERVALUATION SCHEME, SEC, December 2, 2011


More Blog Posts:
Former Broker Claims He is the Reason FINRA’s Regional Director Resigned, While Ex-JP Morgan Broker Files Arbitration Claim Against His Former Employer, Institutional Investor Securities Blog, June 18, 2013

SEC Risk Fin Director Wants Public Input About Investor Protection-Related Costs and Benefits, Institutional Investor Securities Blog, June 15, 2013

Dismissal of $44M International Boiler Room Scam Claims Raises Issue of SEC Extraterritorial Enforcement Authority, Institutional Investor Securities Blog, May 21, 2013

May 21, 2013

Dismissal of $44M International Boiler Room Scam Claims Raises Issue of SEC Extraterritorial Enforcement Authority

Pointing to the US Supreme Court’s ruling in Morrison v. National Australia Bank Ltd., the U.S. District Court for the Northern District of Illinois dismissed the SEC’s allegations that a group of entities and persons violated broker-dealer registration requirements in an alleged $44 million international boiler room scam. The broker fraud case is SEC v. Benger.

Claiming the transactions were extraterritorial and not within the scope of the regulator’s reach, defendants sought summary judgment even though a lot of the allegedly fraudulent activity is said to have happened in the US. The district court, however, found that investors became irrevocably bound in their countries upon submission of buying offers even though they turned those offers in to escrow agents in this country. Moreover, the issuer became irrevocably bound in Brazil when accepting the purchase offers, and when the sale went through the titled passed either there or the countries where investors got the stock certificates regardless that the agents that served as middlemen were located here.

In Morrison, the Supreme Court determined that the 1934 Securities Exchange Act’s key federal securities antifraud provision is only applicable to securities transactions that can either be found on U.S. exchanges or that took place domestically. Following that decision, and seeking to give back exterritorial reach to both Justice Department and the SEC, Congress issued the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 929P, which gives federal courts jurisdiction over enforcement actions involving conduct that took place in the US that played a part in significantly furthering a violation/behavior taking place abroad that will have a likely effect domestically.

The Commission believes that, in effect, Dodd-Frank, overturned Morrison.
Speaking at a DC panel-hosted cross-border securities litigation panel, the SEC's Office of International Affairs Director Jacobs said that Morrison’s transactional test doesn’t succeed in reducing the regulator ability to go after federal securities law cross border violations. She said that the agency is still deciding what to do in the wake of the district court’s ruling in Benger and that the regulator has a full docket of investigations that it is continuing to move forward on.

Meantime, some commenters have suggested that Dodd-Frank’s efforts have been incomplete. Private litigants have had problems with Morrison’s test, with federal district courts turning down plaintiffs’ efforts to file securities actions involving non-US investments. However, in an effort to get around Morrison, big institutional investors have brought their non-US securities cases to state courts instead, as well as to foreign courts. They have also attempted to file related lawsuits involving their American Depositary Receipts.

If you are an institutional investor that has suffered losses because of securities fraud, please contact our stockbroker fraud law firm right away.

Morrison v. National Australia Bank Ltd. (PDF)

SEC v. Benger (PDF)

More Blog Posts:
SEC Submits Request for Data on Whether to Make Brokers & Investment Advisers Abide by Uniform Fiduciary Standard, Stockbroker Fraud Blog, April 4, 2013

Stakeholders With $55M Securities Fraud Case Against Government Over AIG Bailout Get Class Action Certification, Institutional Investor Securities Blog, March 19, 2013

New York Fed Bailed Out Bank of America Over Mortgage-Backed Securities Sold to AIG, Institutional Investor Securities Blog, February 20, 2013

April 30, 2013

State Courts Securities Litigation: Va. County Can Sue Over Bond Offering Advice, Plaintiff’s Breach Claim Against Brother to Go to Jury, & Ruling Affirms that Investment Bank’s Offer to Buy Minority Shares Triggered Company’s First Refusal Rights

Fluvanna County, VA Can Sue Over Bond Offering Advice, Says Supreme Court of Virginia
Virginia’s highest court has reinstated a securities fraud lawsuit filed by Fluvanna County, Virginia Board of Supervisors against Davenport & Co. The county claims that the investment concern gave it faulty bond offering advice about the building of a new high school.

The Board said that it depended on this investment advice when deciding to put out standalone bonds that caused it to incur $18 million in excess payments. It then sued Davenport in circuit court, making numerous contentions, including breach of fiduciary duty, gross negligence, and Virginia securities law violations. That court ‘sustained the demurrer with prejudice’ and would not let the board make amendments to pleadings. It said that the separation of powers doctrine won’t let the court resolve the securities case because then it would have to look into the Board’s motives. The latter then appealed.

Now, the Supreme Court of Virginia has waived its common law legislative immunity from civil liability, saying that board of supervisor members/legislatures of a municipality are not within the scope of state and federal Constitutional legislative immunity, and it is allowing the securities case to go forward.


Plaintiff Sues Her Brother for New York Securities Fraud
The U.S. District Court for the Southern District of New York says that plaintiff Judy Soley’s breach of fiduciary claim against her brother, Peter Wasserman, can be tried in front of a jury. Wasserman served as Soley’s financial adviser. He had tried to strike the jury demand from Soley’s New York securities fraud lawsuit. She is accusing him of mishandling her money.

The court found that the breach of fiduciary claim is legal and can get a jury trial. However, Judge Kimba Wood said that the nature of Soley’s claim for an accounting is equitable and has to be tried in court. Soley wants compensatory damages, not restitution.

Ruling That Investment Bank’s Offer to Buy Minority Shares Triggered Company’s First Refusal Rights Is Affirmed
The Pennsylvania Superior Court has decided that investment banking concern Insight’s offer to buy plaintiff TeleTracking Technologies Inc.’s minor stock was bona fide and did trigger the latter’s right of first refusal. This means that the healthcare technology concern did get the right to purchase the interest of the minority shareholders on the same terms under which Insight was willing to buy the stock.

That right is noted under a 1999 shareholder agreement. (TeleTracking Technologies is a privately held corporation. The minority had about 27% of the stock.) In March 2011, the minority shareholders told the company that Insight had agreed to by the minority stock for $37.35 million and that $16,805,762 had been put in an escrow account.

TeleTracking then submitted an action seeking a declaration that its duty to match Insight’s offer for the stock wasn’t activated under the agreement. It contended that the investment concern’s offer wasn’t bona fide and that it would not be able to buy the shares under the conditions and terms that Insight had set in its offer. The trial court, however, said the offer was bona fide and that the company’s matching rights had been triggered. The state’s Superior Court affirmed, noting that, per “pertinent precedent,” additional limits could not be imposed on the ability of the minority shareholders to sell their stock.

Board of Supervisors of Fluvanna County v. Davenport & Co. LLC (PDF)

Soley v. Wasserman (PDF)

Pa. Court: Offer for Minority Shares Triggered Company's First Refusal Rights, Bloomberg/BNA, April 15, 2013


More Blog Posts:
Three Cedar Brook Financial Partners Brokers’ Licenses Are Suspended Over Allegedly False & Misleading Statements About Subprime Mortgage-Backed Security IMH Fund and Medical Capital Holdings Inc., Stockbroker Fraud BLog, April 24, 2013

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

Oppenheimer & Co. Must Buyback $6M in Auction-Rate Securities from Investor, Says FINRA Arbitration Panel, Institutional Investor Securities Blog, January 11, 2012

April 27, 2013

Just Because Supreme Court’s Rulings in Amgen and Halliburton Give Defendants Less Tools to Beat Weak Class Certifications But Doesn’t Mean Plaintiffs Can Rest Easy

The US Supreme Court’s ruling earlier this year in Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds (and also in Erica P. John Fund, Inc. v. Halliburton Co.) decreases the tools that defendants of federal securities fraud lawsuits have to win against the class certification of weak claims. In Amgen, the Court found that plaintiffs don’t have to prove an alleged misrepresentation’s materiality to certify a class under the fraud-on-the-market theory, while in Halliburton, the Court held that plaintiffs don’t have to prove loss causation to garner class certification.

That said, although the Court’s rulings in recent years often have been considered “pro-plaintiff,” it actually has given securities defendants help in getting rid of the weaker securities fraud cases early on. For example, Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal mandate for plaintiffs to demonstrate that their interpretation of specific facts are plausible and beyond merely possible. Also, even with Amgen and Halliburton decreasing the chances of class certification being defeated on the grounds of loss causation or materiality, these issues can still be addressed in motions for partial summary judgment early on. Such a motion might even be submitted simultaneously as one opposing certification.

Our securities fraud law firm represents institutional and individual investors throughout the US. We believe that filing your own securities case increases your chances of recovering as much of your lost investment back. Over the years, Shepherd Smith Edwards and Kantas, LTD LLP has helped thousands of investors recoup their losses.

Securities Litigation Defense Implications From The Supreme Court's Amgen Opinion, Mondaq/Jones Day, April 17, 2013

Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds (PDF)

Erica P. John Fund, Inc. v. Halliburton Co. (PDF)


More Blog Posts:
Investors Duped in $150M Investment Scam Offering US Citizenship Prospect To Recoup Funds, Says SEC, Stockbroker Fraud Blog, April 25, 2013

MF Global Holdings Bankruptcy Trustee Files Lawsuit Against Ex-CEO Corzine and Other Former Executives, Institutional Investor Securities Blog, April 26, 2013

April 23, 2013

Lehman Brothers Australia Wants Federal Court to Approve $248M Settlement Payment Plan to Creditors

The liquidators of Lehman Brothers Australia want the Federal Court there to approve their plan that would allow the bank to pay $248M in securities losses that were sustained by 72 local charities, councils, private investors, and churches. Although the court held Lehman liable, no compensation has been issued because the financial firm went bankrupt.

Per that ruling, the Federal Court found that Lehman’s Australian arm misled customers during the sale of synthetic collateralized debt obligations. The court also said that Lehman Brothers subsidiary Grange Securities was in breach of its fiduciary duty and took part in deceptive and misleading behavior when it put the very complex CDOs in the councils’ portfolio. (Lehman had acquired Grange Securities and Grange Asset Management in early 2007, thereby also taking charge of managing current and past relationships, including the asset management and transactional services for the councils.) The court determined that the council clients’ “commercial naivety” in getting into these complex transactions were to Grange’s advantage.

Via the liquidators’ plan, creditors would get a portion of a $211 million payout. This is much more than the $43 million that Lehman had offered to pay. The payout would include $45 million from American professional indemnity insurers to Lehman, which would then disburse the funds to those it owes.

If the Federal Court approves the settlement, IMF will dismiss a class action securities case against Lehman.

Securities Fraud
Brokerage firms are not supposed to get unsophisticated or conservative investors involved in high risk, complex investments, even if the customers are institutions and not individuals. When doing so results in investment losses, there may be grounds for an institutional investment fraud case.

Lehman Seeks Australian Court Approval for Vote on Settlement, Bloomberg, April 14, 2013

Understanding the Federal Court’s landmark ruling against Lehman Brothers, The Conversation, September 24, 2012


More Blog Posts:
FINRA Orders UBS Financial Services to Pay $8.25M for Misleading Investors About Security of Lehman Brothers Principal Protected Notes, Stockbroker Fraud Blog, April 15, 2011

Lehman Brothers Australia Found Liable in CDO Losses of 72 Councils, Charities, and Churches, Institutional Investor Securities Blog, September 25, 2012

March 27, 2013

Institutional Investment Fraud and The Courts: District Court Won’t Stay Derivatives Case Alleging FCPA Violations, Control Person Claims Against Over Revenue Bond Purchases Can Proceed, Ex-Hedge Fund Manager Gets Enhanced Securities Fraud Sentence

District Court Won’t Stay Derivatives Case Alleging FCPA Violations
The U.S. District Court for the Eastern District of Louisiana decided not to stay a shareholder derivative lawsuit accusing Tidewater Inc. of violating the Foreign Corrupt Practices Act. Judge Jane Triche Milazzo believes that a stay would burden not just the court but also the defendants. The court threw out the case last year, concluding that shareholder plaintiff Jonathan Strong, who did not make a presuit demand on the Tidewater board, failed to plead with particularity why such a demand was futile.

Per Strong, the offshore energy services provider violated the act when it ignored payments of about $1.76M that a subsidiary made to government officials in Nigeria, allegedly to get around custom regulation to be able to import vessels into that nation’s waters, and Azerbaijan, allegedly as bribes over tax audits. The derivatives lawsuit was filed after the Tidewater and the subsidiary agreed to pay about $15.5 million in a related settlement with the US Department of Justice and the Securities and Exchange Commission.


Control Person Claims Over Revenue Bond Purchases Can Proceed
Plaintiffs Allstate Life Insurance Co. (ALL) and several individuals represented by Wells Fargo (WFC) as the indenture trustee of the bonds did bring up a material issue of fact as it relates to the defendant’s good faith for defense purposes, said a district court. The investors that bought bond purchases to finance an Arizona event center can therefore go ahead with their state and federal control person claims against the shareholder/chairman of two entities involved in the venture.

The plaintiffs contend that the defendants made misstatements in official statements and also allegedly failed to disclose feasibility studies demonstrating that the center would make a lot less money than what was stated it would. They also asserted control person claims against defendant James Treliving (a control person of defendants Global Entertainment Corp. and Prescott Valley Event Center LLC) under the Arizona Securities Act and the 1934 Securities Exchange Act. Finding that the plaintiffs succeeded in raising a material issue of fact that Treliving failed to act in good faith, the court denied his motion for summary judgment.

Ex-Hedge Fund Manager Gets Enhanced Securities Fraud Sentence
The U.S. District Court for the Eastern District of New York has ruled that ex-hedge fund portfolio manager Ward Onsa is subject to a four-point offense level investment adviser sentence enhancement for one count of securities fraud even though the government believed this was not warranted because he had not been advising investors, and, rather, was managing a money pool. Onsa had pled guilty to fraud over his alleged Ponzi scam.

Sentenced to 78 months behind bars and three years supervised released, as well as ordered to pay restitution, Onsa contended that his sentence shouldn’t have been enhanced because he wasn’t acting as an investment adviser when he solicited about $5 million from investors of the Century Hedge Fund Partners I LP, of which he was the lone portfolio manager and was supposed to get 50% of its profits. The hedge fund would go on to become insolvent. Now, Judge Dora L. Irizarry is affirming case law, which holds that hedge fund portfolio managers who get a percentage of the profit are investment advisers.

“Many have complained that prosecutors do not take action against those who perpetrate securities fraud,” said Stockbroker Fraud Attorney William Shepherd. “Here, the government is complaining that the punishment is too severe. Whose side is it on?”


Related Web Resources:
IN RE ALLSTATE LIFE INSURANCE COMPANY LITIGATION

United States v. Onsa (PDF)

Strong v. Taylor


More Blog Posts:
Investment Advisors Report: SEC Division Reviews Application of Investment Advisers Act, New Commission Unit Will Watch For Adviser Risk, & Just 1 in 10 SEC Exams Leads to Enforcement Action, Stockbroker Fraud Blog, March 26, 2013

Citigroup Will Pay $730M in Bond Lawsuit Alleging It Misled Debt Investors, Institutional Investor Securities Blog, March 20, 2013

March 16, 2013

State of Illinois Settles Securities and Exchange Commission Fraud Charges

Without denying or admitting to the charges, the state of Illinois has settled the securities fraud case filed against it by the SEC. The Commission contends that Illinois misled investors about municipal bonds and the way it funds its pension obligations. There will be no fine imposed on the state. Illinois, has, however, implemented numerous remedial actions and put forth corrective disclosures related to the charges over the last few years.

Per the Commission, even as the state offered and sold over $2.2 billion of municipal bonds between 2005 and 2009, it did not tell investors the effect problems with its pension funding schedule might have. Illinois is also accused of not disclosing that it had underfunded its pension obligations, which upped the risk of its overall financial condition.

The regulator’s order contends that Illinois had set up a 50-year pension contribution schedule in the Illinois Pension Funding Act. However, it turns out that the schedule was not sufficient to take care of both a payment amortizing the plans’ actuarial liability, which was unfunded, and the price of benefits accrued during a current year. Also, the statutory plan ended up structurally underfunding the state’s pension duties while backloading most pension contributions into the future. The structure caused stress on both the pension systems and Illinois’s ability to fulfill its competing obligations.

The SEC also claims that Illinois misled investors about the impact modifications to its funding plan might have. Even though the latter disclosed certain legislative amendments, it failed to reveal how these changes might affect the contribution schedule and whether or not it would be able to meet its pension obligations. Such misleading disclosures, says the SEC, was a result of different institutional failures.

The Commission believes that the state did not have the correct mechanisms in place that could identify and assess key information about its pension systems into disclosures while failing to properly train staff working with the disclosure process or hire disclosure counsel.

Among the steps the state took to remedy process deficiencies and improve its pension closures:

• Putting out dramatically better disclosure in its bond offering documents’ pension section.

• Appointing a disclosure committee to put together and assess pension disclosures.

• Hiring disclosure counsel.

• Putting out written procedures and policies.

• Putting into place disclosure controls.

• Setting up training programs.

The state has agreed to the SEC’s order to cease and desist from making or causing violations involving the Securities Act of 1933’s Sections 17(a)(2) and 17(a)(3).

Our securities fraud lawyers represent institutional and investment clients throughout the US. Your first case evaluation is free. Clients do not pay legal fees unless financial recovery is made and any payment would come from the compensation received.

SEC Charges Illinois for Misleading Pension Disclosures
, SEC.gov, March 11, 2013

Read the SEC Order
(PDF)

Securities Act of 1933 (PDF)


More Blog Posts:

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

Private Fund Advisers Have Fiduciary Duty to Client Funds, Says SEC’s Di Florio, Institutional Investor Securities Blog, May 10, 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

March 5, 2013

Securities Roundup: Venecredit Fined $25K for Working with Foreign Finders, Ex-Merrill Lynch/LPL Financial Rep. Faces Fraud Charges, & BrokersXpress Broker is Suspended Over Private Placement-Related Misconduct

Venecredit Fined $25K for Working with Foreign Finders to Generate Retail Investor Business
According to the Financial Industry Regulatory Authority, Venecredit Securities must pay a $25,000 fine for allegedly using foreign finders to get new retail investor business. The financial firm has now been censured for two years.

The SRO says that the foreign finders served as the primary contacts between Venecredit and the clients and had access to account information via the clearing firm’s platform. These finders worked for a foreign brokerage firm that shares directors and officers with Venecredit and its wholly owned entity. FINRA contends that not only did Venecredit fail to create and put into effect proper supervisory measures that would have allowed it to look at customer complaints about the employees at the foreign brokerage firm, but also it failed to keep electronic correspondence from both the foreign traders and the personal email accounts of its registered representatives.

Ex-Merrill Lynch/LPL Financial Rep. Faces Fraud Charges in Missouri
Missouri Secretary of State Jason Kander has charged former LPL Financial, LLC (LPLA) representative Greg John Campbell with serious misconduct. Prior to working for LPL, Campbell was with Merrill Lynch, Pierce, Fenner & Smith Inc. (MER)

Per the complaint, while registered with both financial firms, Campbell established a line of credit against the brokerage accounts of clients without their knowledge or permission. He then allegedly modified their addresses in their accounts so that they stopped getting their statements and correspondence from the firms and forged account statements for them showing the wrong balances. Using forged signatures, he allegedly moved over a million dollars from these to his accounts without their knowing or consent.

BrokersXpress Broker is Suspended from FINRA and NFA Over Alleged Securities Misconduct
BrokersXpress broker Tracy Morgan Spaeth is suspended from associating with any member of the Financial Industry Regulatory Authority or the National Futures Association. Per FINRA’s disciplinary action, Spaeth failed to ask for or receive the necessary written approval for private placement transactions that occurred between October and December 2010 when he solicited over 100 clients to buy shares in ProfitStars Int'l Corp., raising $8 million in the process. He also allegedly provided a deficient webinar to the investing clients that did not disclose the strategy risks involved and included forecasts about the security’s future performance. Spaeth’s bar from FINRA is two years and he has to pay a $50K fine.

Meantime, the NFA’s suspension of Spaeth comes after his alleged involvement with Profitstars Intl Corp. and International Commodity Advisors, which were both disciplined for using ParagonFX Enterprises, LLC, an unregistered and unregulated company, as a counterparty to the trading of their customers. The organization contends that Spaeth used deceptive and misleading promotional materials to get clients to invest in the companies even though he did not conduct the necessary due diligence on them. NFA says that Spaeth had a deal with a least one of the companies that gave him 50% of gross profits from his clients’ accounts (and perhaps even a referral bonus even if a client suffered a net loss following fees). His bar from the NFA is three years and he has to pay a $5K fine.


Related Web Resources:
Ladue advisor took $1.5 million, regulators say, St. Louis Post-Dispatch, February 20, 2013

NFA files complaint against Tracy Morgan Spaeth charging him with multiple misleading forex practices, Forexmagnates.com, November 23, 2012


More Blog Posts:
SEC Needs to File Securities Fraud Lawsuits Sooner, Rules the US Supreme Court, Institutional Investor Securities Blog, February 28, 2013

Plaintiff Must Arbitrate Faulty Investment Advice Claim With TD Ameritrade But Can Proceed With Litigation Against Oakwood Capital Management, Stockbroker Fraud Blog, October 29, 2012

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

February 28, 2013

SEC Needs to File Securities Fraud Lawsuits Sooner, Rules the US Supreme Court

In Gabelli v. SEC, the US Supreme Court has decided that in some securities fraud cases, the SEC needs to move faster when it comes to filing its case. The ruling could affect agencies nationwide.

In a unanimous decision, the justices sided with two officials of Gabelli Funds LLC, who sought to stop the regulator’s claim contending that they acted improperly by allowing a client to take part in market timing. The Commission sought civil penalties from them for illegal activities that allegedly took place leading up to August 2002.

Per the Investment Advisers Act, it is against the law for investment advisers to defraud clients and the regulator is allowed to seek penalties for such actions. However, the Commission only has five years from when the window opens to file. The regulator had argued that Gabelli and Alpert had let Headstart Advisers Ltd. take part in “market timing” in the fund while failing to disclose this and banning others from engaging in the same practice even as statements were issued noting that this was not allowed.

Alpert and Gabelli had argued that the SEC filed its securities complaint about these allegations after the statute of limitations for filing for penalties had passed. They said that under the appeals court decision, which said that the securities fraud lawsuit could go ahead because the statute of limitations doesn’t start with litigation involving fraud until the Commission has grounds to know that there was a violation, the SEC could then make an ancient claim just on the allegation that prior to that it hadn’t and couldn’t have found out about the violation sooner.

The Second Circuit’s ruling, reverses a District Court’s decision to throw out the SEC’s lawsuit against the two men because it said the civil penalty claim was time barred. The Second Circuit, however, disagreed, and accepted the Commissions contention that the discovery rule could be applied, which means that the five-year window to file didn’t start until the regulator found out (or could have reasonably discovered) the fraud.

Now, the US Supreme Court is saying that it never applies the Discovery Rule in a case where the government is the plaintiff bringing an enforcement action that seeks civil penalties in contradistinction to a victim that has been defrauded and wants compensation.

Shepherd Smith Edwards and Kantas, LTD, LLP represents securities fraud victims throughout the US. Your first case evaluation with one of our stockbroker fraud attorneys is free.

Securities fraud robs investors of their money every year. We work with institutional and individual investors seeking to recoup those losses. Call us today. Working with an experienced securities firm increases one’s chances of recovery.

Related Web Resources:
Gabelli v. SEC

Investment Advisers Act of 1940 (PDF)


More Blog Posts:
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

Court Upholds Ex-NBA Star Horace Grant $1.46M FINRA Arbitration Award from Morgan Keegan & Co. Over Mortgage-Backed Bond Losses, Stockbroker fraud Blog, October 30, 2012

Plaintiff Must Arbitrate Faulty Investment Advice Claim With TD Ameritrade But Can Proceed With Litigation Against Oakwood Capital Management, Stockbroker Fraud Blog, October 29, 2012

Continue reading "SEC Needs to File Securities Fraud Lawsuits Sooner, Rules the US Supreme Court" »

February 18, 2013

Investment Fraud Lawsuit Against BlackRock Over Exchange-Traded Funds Could Shed More Light on Securities Lending

In a recent securities case, manager BlackRock is accused of self-dealing and pilfering from iShares exchange-traded funds’ securities lending revenues. The plaintiffs are pension funds Plumbers and Pipefitters Local No. 572 Pension Fund of Nashville and Laborers’ Local 265 Pension Fund of Cincinnati. They contend that a number of the iShares ETFs put money towards compensation that was “grossly excessive” to pay agents, including those with affiliations to the funds. iShares Chairman Michael Latham and BlackRock President Robert Kapito are also defendants.

The plaintiffs contend that BlackRock’s iShares ETFs violated fiduciary duties and created an fee structure was excessive in order to avail of returns from securities lending that should have been paid to investors. They believe that iShares ETFs and officials at Blackrock perpetuated a scam that allowed them to get their hands on at minimum 40% of revenues from securities lending at cost to investors.

However, BlackRock, which is the largest ETF manager, is arguing that the securities case is without merit. The company claims that its program for securities lending has generated returns that exceed the average to ETF shareholders and it believes that its lending policies shouldn’t be compared with others in its field. BlackRock has pointed out that while it has profited from the program, investors do get their high returns “over time.” It intends to fight the ETF lawsuit.

Securities Lending
This practice involves ETFs and mutual funds paying agents for their help in lending portfolio shares to Wall Street traders while making interest. Securities lending has been known to up profits and investor returns.

The pension funds’ lawsuit could help shed light on the ETF business—perhaps even leading to reforms that could assist investors, just as recent investor lawsuits involving 401 (k) s resulted in lower prices and more disclosures.

If you believe you are the victim of ETF financial fraud, contact our securities law firm today.

Related Web Resources:
U.S. pension funds sue Blackrock, allege 'looting' at iShares, Reuters, February 3, 2013

BlackRock iShares unit joins ETF fee-cutting war, CBS News, October 15, 2012


More Blog Posts:
Oppenheimer Must Pay $30M to US Airways Group Over ARS Losses, Institutional Investor Securities Blog, February 9, 2013

Morgan Keegan Must Buy Back Auction-Rate Securities and Pay $110,500, Says District Judge, Institutional Investor Securities Blog, February 12, 2013

Texas Courts Show Preference for Arbitration to Resolve Securities Fraud Claims and Other Business Disputes, Stockbroker Fraud Blog, February 15, 2013

December 22, 2012

Reviving Antifraud Lawsuit Over Alleged Market-Timing Practices From Over Five Years Ago is Not the Answer, Say Ex-SEC Officials

In their amicus curiae brief, a number of ex-SEC Commissioners and top officials told the U.S. Supreme Court that the decision by the U.S. Court of Appeals for the Second Circuit to revive the agency’s antifraud cases against investment advisory officials Bruce Alpert and Marc Gabelli was a mistake. The men, who are Gabelli Funds LLC’s COO and portfolio manager, respectively, are accused of taking part in allegedly questionable market-timing practices involving the selling and buying of mutual fund shares to take advantage of short-term price swings.

Per the SEC’S 2008 securities case, Alpert and Gabelli committed these alleged violations between September 1999 and August 2002. While the district court threw out most of the lawsuit, finding that the majority of allegations were either untimely or not legally sufficient, the appeals court disagreed and reversed that ruling. It said that the defendants failed to fulfill the burden of demonstrating that a reasonably diligent plaintiff would have identified the alleged fraud more than five years before the SEC submitting its action.

Amicus curiae brief: A brief is a statement of the law and the impact on the law or other persons if a case if decided a certain way. “Amicus curiae,” is Latin for “friend of the court.” This “friend” can be any non-party to the lawsuit that has an opinion about it. Feasibly, there could be 100 such briefs, but the court would only be interested in those from credible groups, persons or lawyers.

This amici in particular includes ex-SEC commissioners Joseph Grundfest, Paul Atkins, Richard Y. Roberts, Roberta Karmel, and Laura S. Unger, ex-SEC division directors David B.H. Martin and John Fedders, ex-general counsels Simon Lorne and Brian Cartwright, ex-regional officials Ira Lee Sorkin, Barry W. Rashkover, and Lawrence Iason, ex-assistant GC Richard M. Phillips, ex-enforcement officials Herbert F. Janick II and William R. Baker III, and Office of Internal Affairs inaugural director Michael D. Mann.
They are concerned that letting a plaintiff bring an antifraud penalty case more than five years after the alleged violation would have been committed might decrease rather than “promote efficient law enforcement.” They also expressed worry that the discovery rule that the Second Circuit articulated might subject the Commission and other agencies to judicial inquiry that could be damaging or not appropriate to the processes “leading to the institution of agency proceedings.”

The amici want the high court to reverse the appeals court’s decision. In September 2012, the US Supreme Court said it would look at this controversy.

“Interesting that some former SEC enforcement attorneys are now taking a stand against the SEC’s ability to enforce the law,” said Institutional Investment Fraud Attorney William Shepherd. Many attorneys go to work for the SEC at low wages to get experience to later defend those who are being investigated by the SEC for high wages. Submitting briefs seeking to reverse a prosecution by their former employer could be a good way to advertise their services. Meanwhile, how could limiting the SEC’s ability to catch criminals be a good thing for the SEC?”

Gabelli v. Securities and Exchange Commission, SCOTUS Blog


More Blog Posts:

$18.7M Securities Fraud Case Involving Former Linkbrokers Derivatives Brokers is A Prime Example of How Trade Markups Involving Pennies Can Eventually Cost Investors Millions, Stockbroker Fraud Blog, October 10, 2012

Wells Fargo and Wachovia Sued by LBBW Luxemburg Over Alleged $1.5B Securities Fraud, Institutional Investor Securities Blog, October 6, 2012

Texas Securities Fraud: Investor Sues Behringer Harvard REIT I, Stockbroker Fraud Blog, September 26, 2012

November 22, 2012

UBS ‘Rogue Trader’ Convicted of Fraud that Caused $2.3B Loss

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

November 20, 2012

FDIC Sues Pricewaterhouse Coopers & Crowe Horwath for Over $1B Over Alleged Failure to Detect Large Fraud That Led to Colonial Bank’s Collapse

In a record first involving the Federal Deposit Insurance Company suing the auditors of a failed bank, the government agency has filed a lawsuit against Crowe Horwath LLP (CROHORP) and PricewaterhouseCoopers LLP for over $1 billion for their alleged failure to detect the securities fraud perpetuated by Taylor Bean & Whitaker Mortgage Corp. that led to the demise of Colonial Bank. Taylor Bean was one of the bank’s biggest clients. The two auditors are accused of gross negligence, professional malpractice, and breach of contract for not spotting the scam.

According to the FDIC’s complaint, two Colonial mortgage lending employees, Teresa Kelly and Catherine Kissick, let Taylor Bean officials divert money from the bank without it getting collateral in return. This resulted in Taylor Bean allegedly stealing nearly $1 billion from Colonial by promising it would provide the bank with mortgages that it had actually sold to other banks. The FDIC contends that not only did Kissick and Kelly know about Bean’s fraud but also they made it possible for the cash to be illegally diverted. The two of them would later plead guilty to aiding Taylor Bean’s fraud.

In 2009, Alabama banking regulators seized Colonial. The downfall of Colonial Bank is considered one of the biggest bank failures in our nation’s history and Is expected to cost the FDIC’s insurance fund about $5 billion.

Although auditing firms usually tend to benefit from pari delicto, a common-law doctrine that prevents one wrongdoer from suing another for money made from a joint wrongdoing (and since employees’ actions are usually imputed to the corporation, in this case Colonial typically would also be considered a wrongdoer), the FDIC's securities case portrays the Colonial lending officials as rogue employees who were working against the bank’s interest—especially as Colonial was harmed by the fraud when it lent Taylor Bean hundreds of millions of dollars that had been secured by loans that didn’t exist or were worthless. If the FDIC succeeds in demonstrating that Kissick and Kelly were working for their own benefit, then in pari delicto may not provide Pricewaterhouse Coopers and Crowe Horwath with such protections.

Meantime, Pricewaterhouse Coopers’s legal team is contending that Colonial’s employees acted to protect Colonial from loss and that Taylor Bean had been paying the bank $20-30 million/month in interest. The defendants are also arguing that auditors shouldn’t have been expected to discover the fraud that was so well hidden that the FDIC and OCC didn’t uncover it either when they conducted targeted exams.

A Tale of Two Lawsuits -- PricewaterhouseCoopers and Colonial Bank, Forbes, November 10, 2012

FDIC Sues Auditors Over Colonial Bank Collapse, Smart Money/Dow Jones, November 15, 2012

Federal Deposit Insurance Corporation


More Blog Posts:

FDIC Objects to Bank of America’s Proposed $8.5B Settlement Over Mortgage-Backed Securities, Stockbroker Fraud Blog, August 30, 2011

Texas Securities RoundUp: Provident Royalties CEO Pleads Guilty in $485M Ponzi Scam and District Court Upholds $100K Arbitration Award in Adviser Fee Dispute, Stockbroker Fraud Blog, November 10, 2012

Standard & Poor’s Misled Investors By Giving Synthetic Derivatives Its Highest Ratings, Rules Australian Federal Court, Institutional Investor Securities Blog, November 8, 2012

Continue reading "FDIC Sues Pricewaterhouse Coopers & Crowe Horwath for Over $1B Over Alleged Failure to Detect Large Fraud That Led to Colonial Bank’s Collapse" »

November 13, 2012

Federal Sentencing Judges Cannot Later Reopen Fraud Cases to Add Restitution, Rules Fifth Circuit

The U.S. Court of Appeals for the Fifth Circuit says that federal sentencing judges who initially withhold restitution in complex or large fraud cases because the amounts are too hard to calculate cannot choose to later open up the case and add that in should the government later come up with more information. The appeals court was not convinced by a district judge’s dependence on the US Supreme Court’s ruling in Dolan v. United States allowing sentencing judges to go back and include restitution after the 90-day post-sentencing deadline.

In this case, United States v. Murray, the defendants were convicted for mail fraud, securities fraud and other offenses stemming from a financial scam involving hundreds of investors and high valued collateralized loans. Rather than investing the victims’ funds in the loans, the defendants used the funds for their personal spending, made other investments, and also made good on the high returns that were promised to earlier investors. For purposes of determining sentencing, the district court calculated that the investors lost $84 million.

Yet during sentencing the sentencing judge and the federal probation department invoked a Mandatory Victims Restitution Act provision that lets the judge refuse to order restitution in cases where there are too many victims to determine exactly how many there are that it makes restitution “impracticable” or if figuring out certain complex issues of fact related to amount or cause of the losses would prolong or complicate the sentencing process to a point that this burden overrides the need to provide any victim with restitution. A few months after these defendants received their sentences, even though federal law places limits on when a district court can reopen or amend a sentence, prosecutors convinced the judge to open up the sentencing and conduct a hearing on information from hundreds of victim impact statements.

Following the hearing, the judge found that denying the investors restitution for their losses because the government had a hard time figuring out how much harm they suffered is a violation of MVRA’s main purpose, which is to make sure compensation where owed is given. She told the defendants they now had to pay restitution of millions of dollars.

Now, however, Fifth Circuit has said that in the event that a district court invokes §3663A(c)(3), §3663A(a)(1)’s provision that the court shall order for restitution to be made by the defendant to the victim is not applicable, which means that a district court cannot open a final sentence judgment. The fifth circuit said that while the sentencing judge in Dolan gave herself the option to revisit the matter of restitution in the future, the sentencing judge in US v. Murray did not.

United States v. Murray

Dolan v. United States

Mandatory Victims Restitution Act


More Blog Posts:
Senate Democrats Want Volcker Rule’s “JP Morgan Loophole” Allowing Portfolio Hedging Blocked, Institutional Investor Securities Blog, May 22, 2012

Moody’s, Fitch, and Standard and Poor’s Were Exercising Their 1st Amendment Rights When They Gave Inaccurate Subprime Ratings to SIVs, Says Court, Institutional Investor Securities Blog, December 30, 2010

Texas Securities RoundUp: Provident Royalties CEO Pleads Guilty in $485M Ponzi Scam and District Court Upholds $100K Arbitration Award in Adviser Fee Dispute, Stockbroker fraud Blog, November 10, 2012

Continue reading "Federal Sentencing Judges Cannot Later Reopen Fraud Cases to Add Restitution, Rules Fifth Circuit" »

October 12, 2012

FINRA Securities Fraud Roundup: Guggenheim Securities Fined $800K For Failure to Supervise CDO Traders, Brokerage Firm Managing TIC Securities Doesn’t Have to Arbitrate Investor Claims, & Investor Award in Morgan Keegan Funds is Upheld

FINRA is fining Guggenheim Securities, LLC $800,000 for allegedly not supervising two collateralized debt obligation traders accused of hiding a trading loss. The traders are Alexander Rekeda and Timothy Day. Rekeda, who is the financial firm’s ex-CDO Desk head, has to pay $50,000 and is suspended for a year. Day’s fine is $20,000 and he received a four month suspension. By settling, none of the parties are denying or admitting to the FINRA securities charges.

Due to a failed trade, the CDO Desk at Guggenheim acquired a €5,000,000 junk-rated tranche of a CLO in October 2008. When the desk was unable to sell the position, Rekeda and Day convinced a hedged fund client to buy the collateralized loan obligation for $950,000 more than it had initially agreed to pay by misrepresenting the CLA. FINRA said that to conceal the CLO position’s trading loss, the two traders gave the customer order tickets that upped the CLO position’s price and lowered the price of other positions. Day, allegedly at Rekeda’s order, is accused of lying to the client when the latter asked about the price modifications by saying that the CLO position had a third-party seller that had settled the trade at a higher price and wanted the customer to pay this rate. The client agreed, and, in exchange, Day and Rekeda said that they would compensate the customer via other transactions, including waiving the fees owed related to resecuritization transactions, adjusting the prices on several other CLO trades, and providing a payment in cash. No records, however, indicate that these transactions were related to the CLO overpayment.

In other FINRA securities news, the U.S. Court of Appeals for the Eighth Circuit has affirmed a district court’s ruling that a broker-dealer that acted as the managing broker-dealer in a Tenant in Common securities cannot be compelled to arbitrate claims filed by investors of the failed enterprise. In Berthel Fisher & Co. Financial Services Inc. v. Larmon, Judge Michael Melloy agreed that for the SRO’s purposes, the investors are not the financial firm’s “customers.”

The FINRA securities case stems from a ’07 and ’08 securities offering involving investors that bought TIC securities that were issued by Minnesota limited liability companies. Berthel Fisher & Co. Financial Services Inc. acted as the managing broker-dealer that put together a number of FINRA-registered brokerages, the Selling Group Members, that offered the securities to their clients, including these investors. However, the court said that per Fleet Boston Robertson Stephens Inc. v. Innovex Inc., a relationship doesn’t exist between Berthel and the Investors despite the latter’s contention that the brokerage firm failed to conduct proper due diligence on the offerings. Rather, held the 8th circuit, a customer is defined as one with a business relationship with a FINRA member that directly involves brokerage/investment services.

Meantime, in the U.S. District Court for Northern District of Alabama, investors who were involved in the now failed Morgan Keegan investment funds were pleased to hear that the FINRA arbitration award they were granted in their derivatives case has been affirmed. The plaintiffs accused Morgan Keegan & Co. Inc. of misleading them to the point that they agreed to get involved in high-risk investment funds despite their conservative goals. The funds lost over 90% of their value and the investors alleged breach of fiduciary duty, Alabama Securities Act violations, rule violations, and other tort law causes of action.

After the arbitration panel chose to issue an award to the investors, Morgan Keegan sought to have it vacated by claiming that the FINRA panel went beyond its powers by considering derivatives claims and granting an award on the grounds of alleged wrongdoing by nonmembers and nonparties. The district court, however, disagreed, saying that there is enough evidence to find that the arbitrators did not exceed their authority in deciding to hear the investors' claims.

FINRA Fines Guggenheim Securities $800,000 for Failing to Supervise CDO Traders; Two Traders Sanctioned for Efforts to Hide Loss, FINRA, October 11, 2012

Berthel Fisher & Co. Financial Services Inc. v. Larmon (PDF)

Butterworth v. Morgan Keegan & Co. Inc.


More Blog Posts:

Institutional Investor Securities Roundup: Biremis, Corp. Settles Securities Violation Charges with Industry Bar, FINRA Contacts Broker-Dealers About Conflicts of Interest Via Sweeps Letters, & Regulators Examine Financial Market Infrastructures, Institutional Investor Securities Blog, August 8, 2012

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

Citigroup Inc.’s $590M CDO Putative Class Action Settlement Gets Preliminary Approval from District Court, Stockbroker Fraud Blog, September 13, 2012

October 9, 2012

CFTC Securities Fraud Roundup: Commissioner Bart Chilton Wants Financial System to Adopt Risk-Based Compensation System, Agency Nets $3M in Four Speculative Limits Cases, & Two Registered Futures Entities Pay $539K Over Inadequate Supervision Allegations

According to Commodity Futures Trading Commission Bart Chilton, the financial system needs to undergo a “cultural shift” that should include employing a risk-based compensation structure instead of one that is “purely profit-based.” Speaking at the Hard Assets Investment Conference last month, Chilton said that bonus systems and incentives create a “poisonous” system in “our financial corporate culture,” compelling individuals to make earning as money as they can as quickly as they can their main priority.

Chilton also talked about how the system inadequately, if at all, uses "puny penalties" to deal with “bad behaviors" and that short-term profiteering is rewarded. He blames both results on the current compensation system employed by many financial firms. Risk management comes second under profit motive, with inducements generated to increase high risk trading, leverage, and the exploitation of funds. Chilton is recommending the implementation of a compensation system based on risk tolerance, with additional compensation and bonuses to be rewarded gradually. He believes that this will lead to longer-term strategies and actions, as well as “longer-serving employees.” He said that while the government may not be able to obligate financial firms to practice morality, it can takes steps to discourage misconduct by creating rules and laws that mandate good behavior.

In other CFTC news, the agency recently settled four separate speculative limits violation cases for $3 million. On September 21, Citigroup Inc. (C) and affiliate Citigroup Global Markets Ltd. consented to pay $525K to settle allegations that on the Chicago Board of Trade they went beyond the speculative position limits in wheat futures contracts. Four days later, Sheenson Investments Ltd., which is located in China, and its owner Weidong Ge consented to pay $1.5 million over allegations that they violated speculative limits in soybean and cotton futures.

A few days later, Australia and New Zealand Banking Group Ltd. agreed to pay $350K over allegations that they violated cotton and wheat futures speculative position limits when trading on the Intercontinental Exchange US and the Chicago Board of Trade. Also, JP Morgan Chase Bank NA (JPM) consented to pay a $600K penalty over allegations that it went beyond speculative position limits in Cotton No. 2 futures contracts on the IntercontinentalExchange U.S. (ICE). Its automated position limit monitoring system, which had an “inadvertent deficiency” allegedly was the reason the financial firm held the challenged positions. JP Morgan Chase Bank went on to use a manual position limit monitoring procedure after finding out about the problem. The respondents in all four CFTC cases settled without admitting or denying wrongdoing.

Also agreeing to settle with the CFTC without denying/admitting to wrong, Infinity Futures LLC consented to pay $340K for allegedly not diligently supervising the way certain trade accounts were handled. Infinity staffers are accused of disregarding red flags indicating that third party customer accounts were being “improperly deposited” in a proprietary trading account. Also, a customer of Infinity was acting as a commodity trading advisor and trading client accounts even without a power of attorney or the necessary registration.

A second registered futures entity, York Business Associates LLC, has agreed to pay a $130K penalty and disgorge $69K to the CFTC. While doing business as TransAct Futures, the firm allegedly did not properly supervise its employees, who handled an account in the name of Gordon Driver, the man who has been found liable for his involvement in a commodity pool Ponzi scam. The CFTC says that he used his TransAct account to commit the fraud.

Symbols, Cymbals and Systems - A Culture Shift Conversation, CFTC, September 21, 2012

In re Citigroup Inc., CFTC, No. 12-34, 9/21/12 (PDF)

CFTC Orders China-based Weidong Ge and Sheenson Investments, Ltd. to Pay $1.5 Million in Monetary Sanctions for Violating Speculative Position Limits in Cotton And Soybean Futures, CFTC, September 25, 2012

CFTC Orders Australia and New Zealand Banking Group Ltd. to Pay $350,000 Penalty for Violating Wheat and Cotton Futures Speculative Position Limits, CFTC, September 27, 2012

CFTC Orders JP Morgan Chase Bank, N.A. to Pay $600,000 Civil Monetary Penalty for Violating Cotton Futures Speculative Position Limits, CFTC, September 27, 2012

Infinity Futures ordered by CFTC to pay fine, Reuters, September 22, 2012

In the Matter of York Business Associates d/b/a TransAct Futures (PDF)


More Blog Posts:
CFTC Files Texas Securities Fraud Against TC Credit Services and its Houston Owner Over $1.4M Commodity Pool Scam, Stockbroker Fraud Blog, July 17, 2012

CFTC Commissioner Proposes Plan to Give Futures Customers SIPC-Like Protections, Stockbroker Fraud Blog, August 14, 2012

Peregrine Financial Group Customers Were Victims of the “System,” Says CFTC Chairman Gensler, Institutional Investor Securities Blog, July 26, 2012

October 6, 2012

Wells Fargo and Wachovia Sued by LBBW Luxemburg Over Alleged $1.5B Securities Fraud

LBBW Luxemburg SA has filed a securities fraud lawsuit against Wells Fargo & Co. (WFC) and its unit Wachovia Corp. over an alleged $1.5 billion securities fraud scam. The case involves transaction in 2006 involving Wells Fargo selling what they allegedly touted as securities with high ratings to LBBW and other customers. LBBW, a Landesbank Baden-Wurttemberg subsidiary, bought $40 million of these residential mortgage-backed securities.

Now, the European bank is contending that the underlying mortgages were riskier than represented and not worth their buying price. Within a year, the securities had defaulted. LBBW is alleging common law fraud, breach of contract, constructive fraud, negligent misrepresentation, and breach of fiduciary duty.

Per the plaintiff’s attorneys, the alleged financial fraud was discovered after the SEC investigated a $5.5 million investment that the Zuni Indian Tribe's employee pension fund made. The Securities and Exchange Commission had accused Wachovia of selling overpriced equity in Grant Avenue II, a collateralized debt obligation, to the tribe and another investor. The Commission contended that after marking down some of the equity to 52.7 cents on the dollar, Wachovia charged 90 cents and 95 cents on the dollar. The bank was also accused of misleading investors in Longshore 3, another CDO, by saying that assets had been acquired from affiliates at prices that were fair market when, actually, claims the regulator, 40 securities had been moved at prices that were above market and Wachovia moved assets at prices that were stale so it wouldn’t have to report the losses.

The SEC said that while it did not consider Wachovia to have acted improperly in the way it structured the CDOs, the bank violated investment protection rules by using stale prices, even as buyers were being told the prices were fair market value, and charging excessive markups in secret. The Commission found that the Zuni Indians and other investors suffered financial losses as a result. Last year, Wachovia agreed to pay $11 million to settle charges accusing it of violating federal securities laws in its sale of MBS leading up to the collapse of the housing market.

European Bank LBBW Sues Wells Fargo Over Alleged $1.5 Billion Securities Fraud, The Sacramento Bee, October 1, 2012

German bank sues Wells Fargo alleging $1.5 billion securities fraud, San Francisco Business Times, October 2, 2012

Wells Fargo Settles Case Originating At Wachovia, The New York Times, April 5, 2012


More Blog Posts:
Lehman Brothers Australia Found Liable in CDO Losses of 72 Councils, Charities, and Churches, Institutional Investor Securities Blog, September 25, 2012

REIT Retail Properties of America’s $8 Public Offering Results in Major Losses for Fund Investors, Institutional Investor Securities Blog, April 17, 2012

Texas Securities Fraud: Investor Sues Behringer Harvard REIT I, Stockbroker Fraud Blog, September 26, 2012

Continue reading "Wells Fargo and Wachovia Sued by LBBW Luxemburg Over Alleged $1.5B Securities Fraud" »

September 26, 2012

Institutional Investment Fraud Roundup: Ex-Hedge Fund Managers’ Guilty Plea Over Bilking Investors of Almost $1M Get 3-Year Prison Term, SEC Sues Investment Adviser Over Alleged $37M Ponzi, and SEC Files Lawsuit Over Purported “Fund of Funds” Scam

Ex-hedge fund managers Christopher Fardella and Michael Katz have been sentenced to three years in prison after they pleaded securities fraud and conspiracy charges for defrauding investors of nearly $1 million. Per court documents, between April 2005 and November 2006, the two men, along with two co-conspirators, were partners in KMFG International LLC, which is a hedge fund.

They cold called investors throughout the US and provided them with misleading information about the fund, its principals, and financial performance even though KMFG actually lacked a track record and never generated any profit for investors. The defendants and co-conspirators lost and spent $981,000 of the $1,031,086 that was given to them by investors.

Meantime, another hedge fund manager, Oregon-based investment advisor Yusaf Jawad, is being sued by the Securities and Exchange Commission over an alleged $37 million Ponzi scam. The securities lawsuit against him and attorney Robert Custis was filed in the U.S. District Court for the District of Oregon.

According to the Commission, Jawad employed bogus marketing materials claiming double-digit returns to get investors to take part in a number of hedge funds that he managed. He then allegedly redirected the funds into accounts under his control and used some of the money to pay for his own expenses. He also is accused of setting up bogus assets, providing investors with false accounts statements, and making up a fake buyout of the funds so investors would believe that their interests would be redeemable. Older investors were paid off using newer investors’ money. As for Custis, he allegedly sent investors misleading and false statements about the purported purchase of hedge funds assets, while consistently misrepresenting that a buy was “imminent” and would lead to them making a profit.

Over another Ponzi scam, the SEC is suing Georgia private fund manager Angelo Alleca and his Summit Wealth Management Inc. for bilking about 200 investors of approximately $17 million. Claiming to employ a supposed fund-of-funds strategy, Alleca, the Commission contends, was using clients’ money to play the stock market and losing badly.

Per the regulator's complaint, the defendants sold and offered interests in Summit Fund, which they told clients was a fund-of-funds. (The strategy for this fund is supposed to involve investing in other investment products to diversify the money while keeping exposure risks low.) However, not only did Alleca sustain financial losses when he allegedly opted to instead use investors money to engage in securities trading, but also he then hid the losses, made the fraud worse, and sustained even more losses. The SEC wants an emergency asset freeze so that more investment losses don’t happen.

Two Hedge Fund Managers Sentenced To Three-Year Prison Terms For Defrauding Investors Of Nearly $1 Million, Justice.gov, September 19, 2012

SEC Names Hedge Fund Manager, Lawyer in Alleged $37M Ponzi Scheme, Bloomberg/BNA, September 21, 2012

SEC v. Alleca
(PDF)


More Blog Posts:
Lehman Brothers Australia Found Liable in CDO Losses of 72 Councils, Charities, and Churches, Institutional Investor Securities Blog, September 25, 2012

Merrill Lynch Told to Pay $3.6M to Brazilian Heiress for Brother’s Alleged $389M in Unauthorized Trading, Stockbroker Fraud Blog, September 22, 2012

Municipal Advisor Bill Passes Vote by US House of Representatives, Institutional Investor Securities Blog, September 21, 2012

September 20, 2012

SEC Charges Advanced Equities with Securities Fraud Related to Private Equity Offerings

The Securities and Exchange Commission is charging investment advisory firm and broker dealer Advanced Equities Inc. and its cofounders Keith G. Daubenspeck and Dwight O. Badger with securities fraud related to two private equity offerings that were made for a California alternative energy company. Badger, who spearheaded the sales initiatives for the offering and allegedly made misstatements about the company’s finances, is charged with misleading investors. Daubenspeck is accused of not correcting these misstatements, therefore allegedly inadequately supervising Badger. Daubenspeck is the Advanced Equities’ parent company’s ex-chief executive and board chairman. All three parties have agreed to a cease-and-desist order entry but they are not denying or admitting to the charges.

Per the SEC, for the Silicon Valley company’s 2009 offering, Badger led close at least 49 outside investor presentations and a minimum of five in-house sales calls with Advanced Equities brokers related to this between January and March 2009 alone. He claimed that the energy company had over $2 billion in order backlogs when actually this never went above $42 million. He also said that a national grocery chain had placed a $1 billion order even though that was only worth $2 million, and although a letter of intent for making future buys was signed, it was a non-binding one. Badger also is accused of making a misstatement when he said that a US Department of Energy loan of over $250 million had been granted to the company after it had sought a $96.8 million loan. (He also allegedly again made a misstatement about the loan application in 2010 during the follow-up offering.) His misstatements were then repeated to investors during phone calls and in e-mails by brokers, Advanced Equities’ investment banking team, and the broker-in-charge at the firm’s branch in New York. (The SEC believes that these individuals should have known that the statements that Badger made were untrue.)

Meantime, Daubenspeck allegedly did not say anything after he heard Badger issue the misstatements about the grocery store order, order backlog, and loan application even though he took part in at least two of the internal sales calls attended by Advanced Equities brokers during the 2009 offering. The SEC contends that although these misstatements should have been warning signs that there was the danger that the wrong information would get to investors, Daubenspeck allegedly did not take reasonable steps to fix these misstatements and did not properly supervise Badger.

To settle the securities fraud allegations, Advanced Equities will pay a $1 million penalty and it has consented to cease and desist from making or causing future securities law violations of the laws it allegedly violated. It also has agreed to be censured and it will retain an independent consultant to assess its sales procedures and policies. As for Daubenspeck, he has agreed to a $50,000 penalty and supervisory suspension of one year, while Badger has consented to a $100,000 penalty and a one-year ban from associating with any dealer, broker, municipal securities dealer, investment adviser, or transfer agent.

SEC Charges Chicago-Based Investment Firm with Misleading Investors in Private Equity Offerings, SEC (PDF)


More Blog Posts:
Texas Securities Fraud: Ex-Stanford Chief Investment Officer Gets 3-Year Prison Term for Her Part in $7 Billion Ponzi Scam, Stockbroker Fraud Blog, September 18, 2012

IRS Pays Whistleblower $104M for Exposing Tax Evasion at UBS AG, Institutional Investor Securities Blog, September 13, 2012

US Government Sells $18B of AIG Stock and Turns a $12.4B Profit, Institutional Investor Securities Blog, September 11, 2012

Continue reading "SEC Charges Advanced Equities with Securities Fraud Related to Private Equity Offerings" »

August 29, 2012

Institutional Investment Roundup: Madoff Ponzi Victims to Get 2nd Payout, Insurer’s MBS Lawsuit Against UBS Can Proceed, SEC Charges 2 in $10M Penny Stock Scam, & Hedge Fund Manager Found Guilty in $900K Insider Trading Scheme

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

July 12, 2012

Institutional Investor Roundup: Evergreen Ultra Short Investor Lawsuit Settled for $25M, FINRA Launches Pilot Program for Huge Claims, Ex-AmeriFirst Funding Manager’s Conviction Appeal is Rejected, & EU Regulator Examines Credit Raters’ Bank Downgrade

Evergreen Investment Management Co. LLC and related entities have consented to pay $25 million to settle a class action securities settlement involving plaintiff investors who contend that the Evergreen Ultra Short Opportunities Fund was improperly marketed and sold to them. The plaintiffs, which include five institutional investors, claim that between 2005 and 2008 the defendants presented the fund as “stable” and providing income in line with “preservation of capital and low principal fluctuation” when actually it was invested in highly risky, volatile, and speculative securities, including mortgage-backed securities. Evergreen is Wachovia’s investment management business and part of Wells Fargo (WFC).

The plaintiffs claim that even after the MBS market started to fail, the Ultra Short Fund continued to invest in these securities, while hiding the portfolio’s decreasing value by artificially inflating the individual securities’ asset value in its portfolio. They say that they sustained significant losses when Evergreen liquidated the Ultra Short Fund four years ago after the defendants’ alleged scam collapsed. By settling, however, no one is agreeing to or denying any wrongdoing.

Meantime, seeking to generally move investors’ claims forward faster, the Financial Industry Regulatory Authority has launched a pilot arbitration program that will specifically deal with securities cases of $10 million and greater. The program was created because of the growing number of very big cases.

Under the voluntary program, parties would be able to “customize” the arbitration process. The SRO says it wants parties to have a “formal” approach that gives them greater control and flexibility over their claims, including “additional control” over choosing arbitrators and “expanded” discovery.

In other securities news, the U.S. Court of Appeals for the Fifth Circuit has turned down ex-AmeriFirst Funding Inc. manager Jeffrey Bruteyn’s appeal to his criminal conviction. Bruteyn was convicted of 9 counts of securities fraud in 2010 for running a scam that used the sale of secured debt obligations to defraud investors of millions of dollars.

The SDO’s were sold to raise capital for AmeriFirst Funding, which financed used car buys. Bruteyn is accused of making the sales by generating promotional materials that overstated insurance coverage while understating investor risk and falsely telling investors that that his family, which owned Hess Corp. (HES) would cover any losses sustained. Bruteyn was ordered to pay $7.3M in restitution and sentenced to 25 years in prison and three years of supervised release.

In Europe, regulators are examining the recent decisions made by credit rating agencies Moody’s (MCO), Fitch, and Standard & Poor's to downgrade banks affected by the eurozone sovereign debt crisis and the economic contraction. The European Securities and Markets Authority says it wants make sure that “transparent” and “rigorous” analyses were part of the credit raters’ decision-making process. ESMA is especially interested in a “block” rating that Moody’s issued to a number of Spanish banks last month.

ESMA is allowed to fine credit rating agencies for not following correct methodology or applying proper resources. It can also force a credit rater’s “de-registration.”

Throughout the US, our institutional investment fraud lawyers are committed to helping our clients recoup their losses from securities fraud.

$25 Million Settlement Submitted In Re Evergreen Ultra Short Opportunities Fund Securities Class Action, Yahoo Finance, July 2, 2012

FINRA Announces Pilot Program for Large Cases, FINRA, July 2, 2012

US v. Bruteyn

EU market regulator is suspicious of rating agencies, RT, July 2, 2012


More Blog Posts:

CFTC Accuses Peregrine Financial Group of Securities Fraud Related to $200M Customer Funds Shortfall, Institutional Investor Securities Blog, July 10, 2012

Will the JOBS ACT Will Expand Private Offerings But Hurt Public Markets?, Institutional Investor Securities Blog, July 6, 2012

SEC to Push for Money Market Mutual Fund Reform Provisions Despite Opposition, Stockbroker Fraud Blog, July 6, 2012


July 10, 2012

CFTC Accuses Peregrine Financial Group of Securities Fraud Related to $200M Customer Funds Shortfall

The CFTC is accusing Peregrine Financial Group and its owner Russell R. Wasendorf, Sr. of misappropriating client monies, including statements that were untrue in financial statements submitted to the CFTC, and violating customer fund segregation laws. The Commission filed its securities fraud complaint against the registered futures commission merchant in the United States District Court for the Northern District of Illinois.

Per the CFTC’s complaint, during an audit by the National Futures Association, Peregrine misrepresented that it was holding more than $200M of client funds when it only held about $5.1M. The regulator says that the whereabouts of this at least $200 million in customer fund shortfall are not known at this time. In the wake of the allegations, Peregrine has told its clients that it was being investigated for “accounting irregularities.”

The Commission contends that beginning at least 2/2010 until now, Peregrine and Wasendorf did not meet CFTC Regulations and the Commodity Exchange Act by not maintaining enough client money in accounts that were segregated. The brokerage and its owner also are accused of making false statements about the funds that were being segregated for clients that were trading on US Exchanges in required filings.

Wasendorf, who reportedly tried to kill himself on Monday is now in a coma. The NFA just recently was given information that he may have been responsible for a number of falsified bank records.

The CFTC wants a restraining order to preserve records, freeze assets,, and establish a receiver. It is seeking disgorgement, restitution, financial penalties, and other appropriate financial relief.

Yesterday, Peregrine’s clearing broker Jefferies Group Inc. said that it had started unloading positions held for the futures brokerage’s clients after a margin call was not met. Jeffries Group doesn’t expect to sustain losses.

Meantime, the NFA and “other officials, have frozen all customer funds and Peregrine is not allowed to accept or solicit new client funds or accounts or make trades for customers unless it involves liquidating positions or distributing their money. Also looking into this financial matter is the US Federal Bureau of Investigation.

It was just this year that a court-appointed receiver in Minnesota sued Peregrine over allegedly disregarding warning signs that the futures brokerage’s client Trevor Cook was running a Ponzi scam. According to the securities lawsuit, investments by Cook and others with Peregrine that were supposedly profitable sustained over $30 million in losses as the allegedly culpable participants moved about $48 million from clients to Peregrine accounts.

According to Fox Business, the fallout from these latest allegations against Peregrine could be bigger than the MF Global collapse as traders blame regulators for not doing enough and industry members fight to recapture investor confidence.

CFTC Files Complaint Against Peregrine Financial Group, Inc. and Russell R. Wasendorf, Sr. Alleging Fraud, Misappropriation of Customer Funds, Violation of Customer Fund Segregation Laws, and Making False Statements
, CFTC, July 10, 2012

Peregrine Financial Allegedly Has $200 Million Shortfall, Bloomberg, July 10, 2012

PFG Scandal Deepens as CFTC Files Claim, Fox Business News/Reuters, July 10, 2012


More Blog Posts:
ABA Presses for Self-Funding for SEC and CFTC, Institutional Investor Securities Blog, May 31, 2012

CFTC and SEC May Need to Work Out Key Differences Related to Over-the-Counter Derivatives Rulemaking, Institutional Investor Securities Blog, January 31, 2012

SEC and CFTC Say They Found Out About JPMorgan’s $2B Trading Loss Through Media, Institutional Investor Securities Blog, May 31, 2012

Continue reading "CFTC Accuses Peregrine Financial Group of Securities Fraud Related to $200M Customer Funds Shortfall " »

June 9, 2012

Investor Fraud Claims Against Prescott City, AZ are Dismissed by District Court

In the wake of the US Supreme Court’s ruling in Janus Capital Group Inc. v. First Derivative Traders, the U.S. District Court for the District of Arizona is now saying that investors did not succeed in stating a securities fraud claim against Prescott City, Arizona related to the $35 million in revenue bond sales that paid for the construction of a 5,000 seat event center. The case is Allstate Life Insurance Co. Litigation, D. Ariz.

Allstate Life Insurance Co. and other investors had bought the bonds in accordance with the offering documents. Because the official statements failed to include key information that only the defendants knew, the plaintiffs contend that these omissions made parts of what was stated misleading and false. As a result, they are claiming that the defendants violated Section 10(b) of the 1934 Securities Exchange Act.

The district court, in a 2010 order, had said that case law indicates that a party could be held liable under Section 10(b) for “making” a statement that was untrue. Liability could also be held under this section of the Act if a party was involved in “substantially” taking part in preparing, creating, editing, or drafting a statement that was materially false or misleading even without saying or signing the statement in question. However, in the wake of the US Supreme Court’s Janus decision last June that rejected the “substantial participation” approach and found that under Role 10b-5, the statement’s maker is the one with the final authority over the statement, the defendants asked the district court to reconsider.

Now, after Janus, the district court is saying that the plaintiffs have failed to make valid Section 10(b) claims against Prescott City and the securities fraud claims against the town are therefore dismissed. Per the court, the plaintiffs did not allege any facts to make it plausible that Prescott City is the one that made the misleading statements or any of the alleged misrepresentations in the official statements.

Commenting on the district court’s May 24 ruling, Institutional investor securities lawyer William Shepherd said: “The Janus case and this one demonstrate further erosion of the liability standards for investors' claims. Almost 20 years ago, courts decided that Wall Street and other defendants cannot be held liable for ‘aiding and abetting’ in federal securities fraud cases. (Those who assist in other kinds of wrongdoing are not granted this kind of get-out-of-jail-free card.) Because of this free pass, most of those that assisted Enron in defrauding the public were not held liable for their actions. The Janus case is proving to be yet another case of ‘judicial activism’ to help big shots escape responsibility for their misdeeds and omissions.”

Janus Capital Group Inc. v. First Derivative Traders

Prescott Valley loses motion to dismiss investor lawsuit against events center, The Daily Courier, October 26, 2011


More Blog Posts:

Bank of America and Countrywide Financial Sued by Allstate over $700M in Bad Mortgaged-Backed Securities, Stockbroker Fraud Blog, December 20, 2010

Morgan Stanley Sued by MetLife for Securities Fraud Over $757 Million in Residential Mortgage-Backed Securities, Institutional Investor Securities Fraud, April 28, 2012

Not All Municipal Bond Issuers Are Adjusting Well to the SEC’s Efforts to Make the Market More Transparent, Institutional Investor Securities Fraud, February 22, 2012

Continue reading "Investor Fraud Claims Against Prescott City, AZ are Dismissed by District Court" »

June 7, 2012

Institutional Investor Securities Roundup: SEC Sues Investment Adviser Over $60M Ponzi Scam, Michigan Investment Club Manager Gets Prison Term for Defrauding Over 900 Investors, & IOSCO Seeks Comments on Report About Credit Raters’ Conflicts & Controls

The SEC is suing investment adviser John Geringer for allegedly running a $60M investment fund that was actually a Ponzi scheme. Most of Geringer’s fraud victims are from the Santa Cruz, California area.

According to the Commission, Geringer used information in his marketing materials for GLR Growth Fund (including the promise of yearly returns in the double digits) that was allegedly “false and misleading” to draw in investors. He also implied that the fund had SEC approval.

While investors thought the fund was making these supposed returns by placing 75% of its assets in investments connected to major stock indices, per the SEC claims, Geringer’s trading actually resulted in regular losses and he eventually ceased to trade. To hide the fraud, Geringer allegedly paid investors “returns” in the millions of dollars that actually came from the money of new investors. Also, after he stopped trading in 2009, he is accused of having invested in two illiquid private startups and three entities under his control. The SEC is seeking disgorgement of ill-gotten gains, financial penalties, preliminary and permanent injunctions, and other relief.

In an unrelated securities case, this one resulting in criminal charges, Michigan investment club manager Alan James Watson has been sentenced to 12 years behind bars for fraudulently soliciting and accepting $40 million from over 900 investors. Watson, who pleaded guilty to the criminal charges, must also forfeit over $36 million.

Watson ran and funded Cash Flow Financial LLC. According to the US Justice Department, he lost all of the money on risky investments—even as he told investors that their money was going to work through an equity-trading system that would give them a 10% return every month. In truth, Watson only put $6 million in the system, while secretly investing the rest in the undisclosed investments. He would go on to also lose the $6 million when he moved this money into risky investments, too.

Watson ran the club as a Ponzi scam so investors wouldn’t know what he was doing. He is still facing related charges in a securities case brought by the Commodity Futures Trading Commission.

In other institutional investments securities news, the International Organization of Securities Commissions' technical committee is asking for comments about a new consultation report describing credit rating agencies’ the internal controls over the rating process and the practices they employ to minimize conflicts of interest. The deadline for submitting comments is July 9.

The report was created following the financial crisis due to concerns about the rating process’s integrity. 9 credit rating agencies were surveyed about their internal controls, while 10 agencies were surveyed on how they managed conflict.

IOSCO’s CRA code guides credit raters on how to handle conflict and make sure that employees consistently use their methodologies. Two of the report’s primary goals were to find out how get a “comprehensive and practical understanding” of how these agencies deal with conflict when deciding ratings and find out whether credit ratings agencies have implemented IOSCO’s code and guiding principals.

Read the SEC's complaint against Geringer (PDF)

Investment Club Manager Sentenced To 12 Years In Prison For $40 Million Fraud, Justice.gov, May 24, 2012

Credit Rating Agencies: Internal Controls Designed to Ensure the Integrity of the Credit Rating Process and Procedures to Manage Conflicts of Interest, IOSCO (PDF)

More Blog Posts:
FINRA Initiatives Addressing Market Volatility Approved by the SEC, Institutional Investor Securities Blog, June 5, 2012

Several Claims in Securities Fraud Lawsuit Against Ex-IndyMac Bancorp Executives Are Dismissed by Federal Judge, Institutional Investor Securities Blog, May 30, 2012

Leave The 2nd Circuit Ruling Upholding Madoff Trustee’s “Net Equity” Method for Investor Recovery Alone, Urges SEC to the US Supreme Court, Stockbroker Fraud Blog, June 5, 2012

Continue reading "Institutional Investor Securities Roundup: SEC Sues Investment Adviser Over $60M Ponzi Scam, Michigan Investment Club Manager Gets Prison Term for Defrauding Over 900 Investors, & IOSCO Seeks Comments on Report About Credit Raters’ Conflicts & Controls" »

May 30, 2012

Several Claims in Securities Fraud Lawsuit Against Ex-IndyMac Bancorp Executives Are Dismissed by Federal Judge

In U.S. District Court for the Central District of California, federal judge Manuel Real threw out five of the seven securities claims made by the Securities and Exchange Commission in its fraud lawsuit against ex-IndyMac Bancorp chief executive Michael Perry and former finance chief Scott
Keys. The Commission is accusing the two men of covering up the now failed California mortgage lender’s deteriorating liquidity position and capital in 2008. Real’s bench ruling dilutes the SEC’s lawsuit against the two men.

The Commission contends that Keys and Perry misled investors while trying to raise capital and preparing to sell $100 million in new stock before July 2008, which is when thrift regulators closed IndyMac Bank, F.S.B and the holding company filed for bankruptcy protection. They are accusing Perry of letting investors receive misleading or false statements about the company’s failing financial state that omitted material information. (S. Blair Abernathy, also a former IndyMac chief financial officer, had also been sued by the SEC. However, rather that fight the lawsuit, he chose to settle without denying or admitting to any wrongdoing.)

Attorneys for Perry and Keys had filed a motion for partial summary judgment, arguing that five of the seven filings that the SEC is targeting cannot support the claims. Real granted that motion last month, finding that IndyMac’s regulatory filings lacked any misleading or false statements to investors and did not leave out key information.

The remaining claims revolve around whether the bank properly disclosed in its 2008 first-quarter earnings report (and companion slideshow presentation) the financial hazards it was in at the time. The judge also ruled that Perry could not be made to pay back allegedly ill-gotten gains.

Real’s decision substantially narrows the Commission’s securities case against Perry and Keys. According to Reuters, the ruling also could potentially end the lawsuit against Keys because he was on a leave of absence during the time that the matters related to the filings that are still at issue would have occurred.

Before its collapse in 2008, Countrywide spinoff IndyMac was the country’s largest issuers of alt-A mortgage, also called “liar loans.” These high-risk home loans are primarily based on simple statements from borrowers of their income instead of tax returns. Unfortunately, loan defaults ended up soaring and a mid-2008 run on deposits at IndyMac contributed to its collapse. The Federal Deposit Insurance Corp, which places its IndyMac losses at $13 billion, went on to sell what was left of the bank to private investors. IndyMac is now OneWest bank.

Judge dismisses parts of IndyMac fraud case, Los Angeles Times, May 23, 2012

3 Former IndyMac Executives Are Accused of Fraud, New York Times, February 11, 2011

Read the SEC Complaint (PDF)


More Blog Posts:
SEC Looks Likely to Win Appeal in $285M Securities Settlement that Judge Rakoff Rejected, Institutional Investor Securities Blog, March 15, 2012

Citigroup’s $75 Million Securities Fraud Settlement with the SEC Over Subprime Mortgage Debt Approved by Judge, Stockbroker Fraud Blog, October 23, 2010

Alleged Ponzi-Like Real Estate Investment Scam that Defrauded Victims of $9M Leads to SEC Charges Against New Jersey Man, Institutional Investor Securities Blog, May 24, 2012

Continue reading "Several Claims in Securities Fraud Lawsuit Against Ex-IndyMac Bancorp Executives Are Dismissed by Federal Judge" »

May 29, 2012

Institutional Investment Securities Round-Up: Citigroup Agrees to $3.5M FINRA FIne Related to Subprime RMBS, Ex-Broker Consents to $600K CFTC Fine Over Alleged Options Trading Scam, and Senate Ag Chair Presses Regulators To Fully Implement Dodd-Frank

Citigroup Global Markets Inc. (CLQ) has consented to pay the Financial Industry Regulatory Authority a $3.5M fine to settle allegations that he gave out inaccurate information about subprime residential mortgage-backed securities. The SRO is also accusing the financial firm of supervisory failures and inadequate maintenance of records and books.

Per FINRA, beginning January 2006 through October 2007, Citigroup published mortgage performance information that was inaccurate on its Web site, including inaccurate information about three subprime and Alt-A securitizations that may have impacted investors’ assessment of subsequent RMB. Citigroup also allegedly failed to supervise the pricing of MBS because of a lack of procedures to verify pricing and did not properly document the steps that were executed to evaluate the reasonableness of the prices provided by traders. The financial firm is also accused of not maintaining the needed books and records, including original margin call records. By settling, Citigroup is not denying or admitting to the FINRA securities charges.

In other institutional investment securities news, in U.S. District Court for the Southern District of New York, Kent Whitney an ex-registered floor broker at the Chicago Mercantile Exchange, agreed to pay $600K to settle allegations by the Commodity Futures Trading Commission that he made statements that were “false and misleading” to the exchange and others about a scam to trade options without posting margin. The CFTC contends that between May 2008 and April 2010, Whitney engaged in the scam on eight occasions, purposely giving out clearing firms that had invalid account numbers in connection with trades made on the New York Mercantile Exchange CME trading floors. He is said to have gotten out of posting over $96 million in margin.

The CFTC says that before an option was about to expire, Whitney would make orders to sell front-month out-of-the-money options. By doing this, he was “implicitly” representing that the accounts were open and had enough margin to cover trades (In truth, the accounts had no margin and were closed). When the clearing firms would turn the trades down because the accounts were closed, they would give back the trades to the executing floor brokers’ clearing firms. The following day, Whitney would give account numbers that were valid to clear the trades. The CFTC says that this process allowed him to avoid the margin posting. Also, when Whitney traded, he would allegedly collect the options premium. By settling, he is not denying or admitting to the CFTC allegations.

Meantime, Senate Agriculture Committee Chairman Debbie Stabenow (D-Mich.) has written a letter to the heads of the Securities and Exchange Commission, the CFTC, the US Treasury Department, the Federal Reserve Board, the Comptroller of the Currency, and Federal Deposit Insurance Corporation urging them to go ahead and complete its implementation of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Right now, regulators are a year behind on the deadline for most of the law’s rules.

Stabenow cited JPMorgan Chase's (JPM) recent over $2 billion trading loss and MF Global Inc.’s (MFGLQ) bankruptcy last fall as clear examples of the need to pass Dodd-Frank. She worried that there hasn't been sufficient rulemaking to enforce the act’s new derivatives laws. She said that now is the time to finish writing the rules and “fully” implementing the law.

Our institutional investment lawyers at Shepherd Smith Edwards and Kantas, LTD, LLP represents investors throughout the US. We also have clients that are located abroad.

FINRA fines Citigroup Global Markets $3.5 million, Reuters, May 22, 2012

Federal Court in New York Orders Chicago Resident and Former Floor Broker, Kent R.E. Whitney, to Pay $600,000 for Margin Call Avoidance Scheme, CFTC, May 23, 2012

Chairwoman Stabenow: It Is Time To Fully Implement Wall Street Reform, AG.Senate.gov, May 18, 2012


More Blog Posts:

SEC Practice of Settling Enforcement Actions Without Requiring Defendants to Deny or Admit to Allegations Gets Support from Federal Judges and Democrats, Institutional Investor Securities Blog, May 26, 2012

Alleged Ponzi-Like Real Estate Investment Scam that Defrauded Victims of $9M Leads to SEC Charges Against New Jersey Man, Institutional Investor Securities Blog, May 24, 2012

SEC Charges New York-Based Fund Manager and His Two Financial Firms Over Alleged $11M Ponzi Scheme, Stockbroker Fraud Blog, May 28, 2012

May 24, 2012

Alleged Ponzi-Like Real Estate Investment Scam that Defrauded Victims of $9M Leads to SEC Charges Against New Jersey Man

The SEC has charged David M. Connolly with running a Ponzi-like scam involving investment vehicles that bought and managed Pennsylvania and New Jersey apartment rental buildings. According to prosecutors in New Jersey, Connolly’s alleged victims were defrauded of $9 million. He also faces criminal charges.

None of Connolly’s securities offerings were registered with the SEC. (Since 1996, he had raised more $50 million from over 200 clients who invested in over two dozen investment vehicles.)

Per the Commission’s complaint, in 2006 Connolly allegedly started misrepresenting to clients that their funds were to be solely used for the property linked to the vehicle they had in invested in when (unbeknownst to them) he actually was mixing monies in bank accounts and using their funds for other purposes. Although clients were promised monthly dividends from cash-flow profits that were to come from apartment rentals and their principal’s growth from property appreciation, these projected funds did not materialize. Instead, Connolly allegedly ran a Ponzi-like scam that involved earlier investors getting their dividend payments from the money of newer investors.

He also allegedly made materially false and misleading omissions and statements about: investors’ money being placed in escrow until a purported real estate transaction closed, the financial independence and state of each property, the amount of equity victims had in properties, and the condition of each property. (Also containing allegedly false material misrepresentations and omissions was the “offering prospectus,” which provided information about how the investment vehicles would use the investor funds, the projected investment returns, prior vehicles performances, the mortgage financials for the real estate held in the investment vehicles, and the apartment buildings’ vacancy rates.)

Connolly is accused of improperly using proceeds from refinanced properties to keep his scheme running, and he even allegedly took $2 million of investors’ funds for himself. After he stopped giving dividend payments to investors in April 2009 (when money from new investors stopped coming in and the investment vehicles’ properties went into foreclosure), Connolly allegedly kept making sure he was getting dividends and a $250,000 income from the remaining client funds.

Meantime, a federal grand jury has charged him with one count of securities fraud, three counts of wire fraud, five counts of mail fraud, and seven counts of money laundering. A conviction for securities fraud comes with a 20-year maximum prison term and a $5 million fine. The other charges also come with hefty sentences and fines.

Read the SEC Complaint (PDF)

Multimillion-Dollar Real Estate Ponzi Schemer Indicted For Fraud And Money Laundering, Justice.gov, May 17, 2012


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Dallas Man Involved in $485M Ponzi Scams, Including the Fraud Involving Provident Royalties in Texas, Gets Twenty Year Prison Term, Stockbroker Fraud Blog, May 8, 2012

REIT Retail Properties of America’s $8 Public Offering Results in Major Losses for Fund Investors, Institutional Investor Securities Blog, April 17, 2012

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

Continue reading "Alleged Ponzi-Like Real Estate Investment Scam that Defrauded Victims of $9M Leads to SEC Charges Against New Jersey Man" »

May 17, 2012

JPMorgan Chase Shareholders File Securities Lawsuits Over $2B Trading Loss

Two securities lawsuits have been filed on behalf of shareholders and investors of JPMorgan Chase & Co. (JPM) over the financial firm’s $2 billion trading loss from synthetic credit products. According to CEO Jamie Dimon, the massive loss is a result of “egregious” failures made by the financial firm’s chief investment office and a hedging strategy that failed. Both complaints were filed on Tuesday in federal court.

One securities case was brought by Saratoga Advantage Trust -- Financial Services Portfolio. The Arizona trust is seeking to represent everyone who suffered losses on the stock that it contends were a result of alleged misstatements the investment bank had made. Affected investors would have bought the stock on April 13 (or later), which is the day that Dimon had minimized any concerns about the financial firm’s trading risk during a conference call.

Per Saratoga Advantage Trust v JPMorgan Chase & Co., the week after the call, losses from the trades went up to about $200 million a day. The Arizona Trust is accusing Dimon and CFO Douglas Braunstein of issuing statements during that conversation that were misleading and “materially false,” as well as misrepresenting not just the losses but also the risks from major bets placed on “derivative contracts involving credit indexes reflecting corporate bonds interest rates.” As a result, when the derivate bets faltered “horribly,” the company suffered “billions of dollars in lost capital,” as well as additional losses in the billions for JPMorgan shareholders in terms of market capitalization. The securities fraud lawsuit is seeking unspecified damages for investors.

The second complaint, submitted by plaintiff James Baker, is a shareholder derivative lawsuit. He is an individual investor seeking damages on behalf of JPMorgan Chase from Dimon, Braunstein and members of the bank’s board. In JPMorgan Chase & Co. v James Dimon, Baker accuses the CEO of publicly disputing that any investment safety regulation was warranted on the grounds that JPMorgan of its own accord was “purportedly so careful” with its investments. Baker says the financial firm failed to disclose that the losses were because of a “marked shift” in its “allowable risk model” and the “clandestine conversion” of a company unit, which was supposed to provide a “conservative risk-reduction function,” into one that touted high risk, short-term trading that ended up exposing JPMorgan to huge losses.

Baker who is charging bank officers and directors with waste of corporate assets, breach of fiduciary duty, and unjust enrichment, is seeking unspecified damages from the bank officers and directors. He also wants a court order mandating that JPMorgan install two shareholder representatives on its board, let shareholders vote on proposals regarding enhancing board supervision, and test internal audit and control policies to make sure that they immediately notify management about trading risks that are not acceptable.

If you are an investor that has lost money because of JPMorgan’s $2 Billion trading loss, please contact our securities fraud lawyers at Shepherd Smith Edwards and Kantas, LTD, LLP today.

JPMorgan Shareholders Sue Dimon Over $2 Billion Loss, Bloomberg, May 16, 2012

Saratoga Advantage Trust v JPMorgan Chase & Co., Justia.com

JPMorgan Chase & Co. v James Dimon

Dimon: Investment Portfolio is 'Very Conservative’, Bloomberg, April 13, 2012


More Blog Posts:

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

Investors Want JP Morgan Chase & Co. To Explain Over $95B of Mortgage-Backed Securities, Institutional Investor Securities Blog, December 17, 2011

JP Morgan Chase To Pay $150M to Settle Securities Lawsuit Over Lending Program Losses of Union Pension Funds, Stockbroker Fraud Blog, March 26, 2012


May 2, 2012

Global Investing Round Up: SEC Sues Chinese Company for Overstating Asset Values, 11th Circuit Reinstates Investor Claims Over Alleged Financial Scam in Involving India Entities, EC Calls for Delay in Imposing U.S. Swap Regulations, and Switzerland Propos

In SEC v. SinoTech Energy Ltd., Securities and Exchange Commission is suing SinoTech Energy Ltd. (CTESY), a Chinese oil field services company, for securities fraud. According to the Commission, SinoTech allegedly made misrepresentations about how its IPO proceeds were used, as well as misrepresented its assets’ value. The company also is accused of repeatedly deceiving both investors and the SEC, the latter with filings it submitted to the Commission in 2010 and 2011.

Per the SEC’s complaint, SinoTech claimed that $120 million of its IPO proceeds would be used to purchase lateral hydraulic drilling units when it spent less than $17 million to buy them. Also, its chairman, Qingzeng Liu, has admitted to skimming $40 million from a company bank account. This monetary withdrawal allegedly was not noted in SinoTech’s records or books. The Commission wants injunctive relief, disgorgement, and penalties from SinoTech and its chairman.

In other Global investment news, the 11th Circuit Appeals Court has decided to reinstate the unjust enrichment and racketeering claims made by investors over an alleged financial fraud involving City Group, which is based primarily in India, and the company’s affiliates in the US. The plaintiffs, Virendra Rajput and Mansingh Rajput, are claiming that they suffered financial losses after investing in a network of firms with ties to the Masood family. Rajput and Rajput are accusing the family of keeping the investments, running a financial racket, and never having intended to issue the payouts of high return rates that they promised investors. The two of them are also alleging that City Group’s US branches were set up to launder money from the scam in India.

The district court had dismissed the plaintiffs’ claims, but the appeals court vacated and remanded that decision. The 11th circuit found that dismissal of the claims is prevented by the plaintiffs’ pleadings, which “sufficiently” link the defendants to the alleged financial scam in India and their unjust enrichment.

Meantime, the European Commission wants to delay the implementation of new derivatives dealer registration rules over US swaps. According to the EC, the rules are causing confusion for European Union banks with operations in this country. The EC is seeking clarity regarding how the swap dealer registration rules would work with new EU rules that are pending. Concerns certain reforms potentially conflicting with one another and the potentially repercussions this might create.

Also in Europe, the Swiss government is looking to implement new rules regarding collective investment scams with the hope that these regulations will help brings its practices in alignment with the EU. The proposal would amend the country’s Collective Investment Schemes Act, which govern collective capital investment assets managers, and align them with the EU’s Directive on Alternative Investment Funds Managers.

The proposed amendments have been sent to Switzerland’s parliament. If all goes as planned, it would win lawmakers’ approval in the fall, be subject to a national referendum, and go into effect next year.

Contact Shepherd Smith Edwards and Kantas, LTD, LLP today to speak with an experienced institutional investment fraud lawyer.

SEC v. SinoTech Energy Ltd. (PDF)

Rajput v. City Trading LLC (PDF)

European Commission Calls for Delay in Implementation of U.S. Derivatives Regulationshttp://www.globallawwatch.com/2012/04/european-commission-calls-for-delay-in-implementation-of-u-s-derivatives-regulations/, Bloomberg/BNA, April 30, 2012

Amendment of the Collective Investment Schemes Act in response to the EU's AIFM Directive, News.Admin.Ch, November 3, 2011


More Blog Posts:
Stockbroker Fraud Roundup: SEC Issues Alert for Broker-Dealers and Investors Over Municipal Bonds, Man Who Posed As Investment Adviser Pleads Guilty to Securities Fraud, and Citigroup Settles FINRA Claims of Excessive Markups/Markdowns, Stockbroker Fraud Blog, April 10, 2012

Commodities/Futures Round Up: CFTC Cracks Down on Perpetrators of Securities Violations and Considers New Swap Market Definitions and Rules, Stockbroker Fraud Blog, April 20, 2012

SEC Institutional Round Up: Whistleblower Bounty Program May Be Reviving Internal Fraud Reporting Mechanisms and Investor Advocacy Group Wants Ban on Accounts Allowing Dually Registered Advisers and Brokers to Give Advice, Institutional Investor Securities Blog, April 20, 2012

March 29, 2012

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

The Securities and Exchange Commission is seeking district court approval of its proposed securities fraud settlement with two ex-Bear Stearns & Co. portfolio managers. The SEC presented its second plea to the U.S. District Court for the Eastern District of New York earlier this month.

In a letter to the court, the SEC cited the Second Circuit Appeals Court’s decision earlier this month to stay a district court judge’s ruling turning down the Commission’s proposed $285M settlement with Citigroup Global Markets Inc. It said that the order in that matter “supports approval and entry” of this pending consent judgment.

If the settlement is approved, former Bear Stearns portfolio managers Matthew and Tannin and Ralph Cioffi would settle SEC charges accusing them of misleading bank counterparties and investors about the financial condition of two hedge funds that failed because of subprime mortgage-backed securities in 2007. Per the terms of the proposed settlement, Tannin would pay $200,000 in disgorgement plus a $50,000 fine and Cioffi would pay $700,000 in disgorgement and a $100,000 fine.

This is the second attempt by the SEC and the defendants to the court for settlement approval after District Court Judge Frederic Block cited concerns made by Judge Rakoff, who is the one who threw out the proposed $285M settlement in the SEC-Citigroup case and ordered both parties to trial. The Second Circuit has since stayed those proceedings. (In the securities case between the SEC and Citigroup, the regulator had accused the financial firm of misrepresenting its involvement in a $1 billion collateralized debt obligation that the latter and structured and marketed five years ago.)

In other SEC news, the Commission has honored its commitment to providing greater transparency when it comes to cooperation credit by notifying the public that it credited an ex-AXA Rosenberg senior executive for his substantial help in an enforcement action against the quantitative investment firm. AXA Rosenberg is accused of concealing a material error in the computer code of the model it used to manage client assets.

The SEC said it would not take action against the former executive not just because of the help he provided, but also because the alleged misconduct in question was one that mattered so much. Fortunately, the SEC was able to give clients back the $217 million they lost, as well is impose penalties of $27.5 million. This was the Commissions first case over mistakes in a quantitative investment model.

Meantime, the International Organization of Securities Commissions' Technical Committee says it has updated the data categories for information it plans to collect in a global survey of hedge funds that will take place later this year. Modified reporting categories include general information about firms, funds, and advisors, geographical focus, market and product exposure for strategy assets, leverage and risk, trading and clearing.

According to IOSCO, responses to the survey will bring together an array of hedge fund information that regulators can look at to determine systemic risk. The committee believes that having securities regulators regularly monitor hedge funds for systemic risk indicators/measures will be beneficial and provide necessary insight into possible issues hedge funds might create for the global financial system. This will be IOSCO’s second survey on hedge funds.

SEC, Citing 2d Circuit Order, Asks Court To Approve Deal With Bear Stearns Execs, BNA Securities Law Daily, March 20, 2012

SEC Credits Former Axa Rosenberg Executive for Substantial Cooperation during Investigation, SEC, March 19, 2012

IOSCO publishes updated systemic risk data requirements for hedge funds, HedgeWeek, March 23, 2012


More Blog Posts:
Securities Fraud: Mutual Funds Investment Adviser Cannot Be Sued Over Misstatement in Prospectuses, Says US Supreme Court, Stockbroker Fraud Blog, June 16, 2011

Janus Avoids Responsibility to Mutual Fund Shareholders for Alleged Role in Widespread Market Timing Scandal, Stockbroker Fraud Blog, June 11, 2007

SEC Chairwoman Defends ‘No Wrongdoing’ Settlements, Institutional Investor Securities Blog, February 27, 2012

Continue reading "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" »

March 27, 2012

Citigroup Ordered by FINRA to Pay $1.2M Over Bond Markups and Markdowns

FINRA says that Citigroup Inc. subsidiary Citi International Financial Services LLC must pay over $1.2M in restitution, fines, and interest over alleged excessive markdowns and markups on agency and corporate bond transactions and supervisory violations. The financial firm must also pay $648,000 in restitution and interest to over 3,600 clients for the alleged violations. By settling, Citi International is not denying or admitting to the allegations.

According to FINRA, considering the state of the markets at the time, the expense of making the transactions happen, and the value of services that were provided, from July ’07 through September ’10 Citi International made clients pay too much (up to over 10%) on agency/corporate bond markups and markdowns. (Brokerages usually make clients that buy a bond pay a premium above the price that they themselves paid to obtain the bond. This is called a “markup.”) Also, from April ’09 until June ’10, the SRO contends that Citi International did not put into practice reasonable due diligence in the sale or purchase of corporate bonds so that customers could pay the most favorable price possible.

The SRO says that during the time periods noted, the financial firm’s supervisory system for fixed income transactions had certain deficiencies related to a number of factors, including the evaluation of markups/markdowns under 5% and a pricing grid formulated on the bonds’ par value rather than their actual value. Citi International will now also have to modify its supervisory procedures over these matters.

In the wake of its order against Citi International, FINRA Market Regulation Executive Vice-President Thomas Gira noted that the SRO is determined to make sure that clients who sell and buy securities are given fair prices. He said that the prices that Citi International charged were not within the standards that were appropriate for fair pricing in debt transactions.

If you believe that you were the victim of securities misconduct or fraud, please contact our stockbroker fraud law firm right away. We represent both institutional and individual investors that have sustained losses because of inadequate supervision, misrepresentations and omissions, overconcentration, unsuitability, failure to execute trades, churning, breach of contract, breach of promise, negligence, breach of fiduciary duty, margin account abuse, unauthorized trading, registration violations and other types of adviser/broker misconduct.

Before deciding to work with a brokerage firm that is registered with FINRA, you can always check to see if they have a disciplinary record by using FINRA’s BrokerCheck. Last year, 14.2 million reviews of the records of financial firms and brokers were conducted on BrokerCheck.

Read the Letter of Acceptance, Waiver, and Consent

Citigroup Fined for Bond Markup, The Wall Street Journal, March 19, 2012

FINRA BrokerCheck®


More Blog Posts:

Securities Claims Accusing Merrill Lynch of Concealing Its Auction-Rate Securities Practices Are Dismissed by Appeals Court, Stockbroker Fraud Blog, November 30, 2011

Merrill Lynch Faces $1M FINRA Fine Over Texas Ponzi Scam by Former Registered Representative, Stockbroker Fraud Blog, October 10, 2011

Bank of America’s Merrill Lynch Settles for $315 million Class Action Lawsuit Over Mortgage-Backed Securities, Institutional Investor Securities Blog, December 6, 2011

Continue reading "Citigroup Ordered by FINRA to Pay $1.2M Over Bond Markups and Markdowns" »

March 24, 2012

Institutional Investor Fraud Roundup: Decline in Securities Class Action Settlements, ESMA Recognizes US Credit Rating Agency Framework, and Court Dismisses Securities Lawsuit Against Mecox Lane

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

December 29, 2011

SEC Seeks to Impose Tougher Penalties for Securities Fraud

The Securities and Exchange Commission has issued a proposal seeking to impose larger penalties on wrongdoers. The proposal comes in the wake of criticism that the agency isn’t doing enough to punish the persons and entities that played a role in the recent credit crisis and calls for:

• Capping fines issued against individuals at $1 million/violation rather than just $150,000.
• Raising penalties against firms from $725,000/action to $10 million.
• Multiplying by three how much the SEC can seek using an alternative formula that calculates the violator’s gains.
• Permission to determine penalties according to how much investors lost because of an alleged misconduct.
• Permission to triple the penalty if the defendant is a repeat offender and has committed securities fraud within the last five years.

The proposal was included in a letter sent to Senator Jack Reed by SEC Chairman Mary Schapiro last month. Reed heads up a subcommittee that oversees the Commission. In her letter, Schapiro said she believed the proposed changes would “substantially” improve the agency’s enforcement program.

The SEC has come under fire for failing to detect a number of major scandals before they blew up, including the Madoff Ponzi scam and the Enron fraud. Recently, US District Judge Jed Rakoff, who rejected the SEC’s proposed $285 million securities settlement with Citigroup, questioned a system that allows wrongdoers to pay a fine, as well as other penalties, without having to admit or deny wrongdoing. Now, the Commission appears to be working hard to rehabilitate its image so that it can be thought of as an effective and credible regulator of the securities industry.

According to Investment News, another way that the SEC may be attempting to re-establish itself is by targeting investment advisers. The Commission has reported filing a record 140 actions against these financial professionals in fiscal 2011, which is a 30% increase from 2010. One reason for this may be that a lot of the actions deal with inadequate paperwork that can easily be identified, which is causing the agency to quickly score a lot of “successes.” This approach to enforcement is likely allowing the SEC to discover small fraud cases before they turn into huge debacles. (If only SEC staffers had requested the appropriate documents related to trades made by Bernard Madoff’s team years ago, his Ponzi scam may have been discovered before the losses sustained by investors ended up hitting $65 million.

The agency’s revitalized efforts are likely prompting some financial firms to work harder on compliance. Investors can only benefit from this.

SEC's Schapiro Asks Congress to Raise Limits on Securities Fines, Bloomberg/Businessweek, November 29, 2011


More Blog Posts:
SEC Files Charges in $27M Washington DC Ponzi Scam, Stockbroker Fraud Blog, November 21, 2011

Former Fannie Mae and Freddie Mac Executives Face SEC Securities Fraud Charges, Institutional Investor Securities Blog, December 16, 2011

Banco Espirito Santo S.A. Settles for $7M SEC Charges Alleging Violations of Investment Adviser, Broker-Dealer, and Securities Transaction Registration Requirements, Institutional Investor Securities Blog, November 5, 2011

Continue reading "SEC Seeks to Impose Tougher Penalties for Securities Fraud" »

December 16, 2011

Former Fannie Mae and Freddie Mac Executives Face SEC Securities Fraud Charges

The Securities and Exchange Commission has charged six ex-executives of the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) with securities fraud. The Commission claims that they not only knew that misleading statements were being made claiming that both companies had minimal holdings of higher-risk mortgage loans but also they approved these messages.

The six people charged are former Freddie Mac CEO and Chairman of the Board Richard F. Syron, ex-Chief Business Officer and Executive Vice President Patricia L. Cook, and former ex-Single Family Guarantee Executive Vice President Donald J. Bisenius. The three ex-Fannie Mae executives that the SEC has charged are former CEO Daniel H Mudd, ex-Fannie Mae's Single Family Mortgage Executive Vice President Thomas A. Lund, and ex- Chief Risk Officer Enrico Dallavecchia.

In separate securities fraud lawsuits, the SEC accuses the ex-executives of causing Freddie Mac and Fannie Mae to issue materially misleading statements about their subprime mortgage loans in public statements, SEC filings, and media interviews and investor calls. SEC enforcement director Robert Khuzami says that the former executives “substantially” downplayed what their actual subprime exposure “really was.”

The SEC contends that in 2009, Fannie told investors that its books had about $4.8 billion of subprime loans, which was about .2% of its portfolio, when, in fact, the mortgage company had about $43.5 billion of these products, which is about 11% of its holdings. Meantime, in 2006 Freddie allegedly told investors that its subprime loans was somewhere between $2 to 6 billion when, according to the SEC, its holdings were nearer to $141 billion (10% of its portfolio). By 2008, Freddie had $244 billion in subprime loans, which was 14% of its portfolio.

Yet despite these facts, the ex-executives allegedly continued to maintain otherwise. For example, the SEC says that in 2007, Freddie CEO Syron said the mortgage firm had virtually “no subprime exposure.”

It was in 2008 that the government had to bail out both Fannie and Freddie. It continues to control both companies. The rescue has already cost taxpayers approximately $150 billion, and the Federal Housing Finance Administration, which acts as its governmental regulator, says that this figure could rise up to $259 billion.

Today, Freddie Mac and Fannie Mae both entered into agreements with the government that admitted their responsibility for their behavior without denying or admitting to the charges. They also consented to work with the SEC in their cases against the ex-executives.

The Commission is seeking disgorgement of ill-gotten gains plus interest, financial penalties, officer and director bars, and permanent and injunctive relief.

Ex-Fannie Mae, Freddie Mac execs charged with fraud, USA Today/AP, December 16, 2011

SEC Charges Former Fannie Mae and Freddie Mac Executives with Securities Fraud, SEC, December 16, 2011


More Blog Posts:

Former US Treasury Secretary Henry Paulson Told Hedge Funds About Fannie Mae and Freddie Mac Bailouts in Advance, Institutional Investor Securities Blog, November 30, 2011

Morgan Keegan Settles Subprime Mortgage-Backed Securities Charges for $200M, Stockbroker Fraud Blog, June 29, 2011

Freddie Mac and Fannie May Drop After They Delist Their Shares from New York Stock Exchange, Stockbroker Fraud Blog, June 25, 2010

Continue reading "Former Fannie Mae and Freddie Mac Executives Face SEC Securities Fraud Charges " »

December 6, 2011

Bank of America’s Merrill Lynch Settles for $315 million Class Action Lawsuit Over Mortgage-Backed Securities

Bank of America, Corp. has agreed to pay investors $315 million to settle their class action claim accusing Merrill Lynch of misleading them about the risks involved in investing in mortgage-backed securities. If approved, the proposed settlement would be one of the largest reached over MBS that caused investors major losses when the housing market collapsed. The lead plaintiff in this securities case is the Public Employees' Retirement System of Mississippi pension fund.

The class action lawsuit accused Merrill of misleading investors about $16.5 billion of MBS in 18 offerings that were made between 2006 and 2007. They are claiming possible losses in the billions of dollars. (The offerings occurred before Bank of America bought Merrill.)

The plaintiffs contend that Merrill’s offering documents were misleading. They also believe that the original investment-grade ratings for the securities, which had been backed by loans from Countrywide, IndyMac Bancorp Inc., First Franklin Financial unit, and New Century Financial Corp. were unmerited. Most of these investments were later downgraded to “junk” status.

By agreeing to settle, Bank of America is not admitting to or denying wrongdoing.

This settlement must be approved by US District Judge Jed Rakoff, who just last week rejected the proposed $285M securities settlement between Citigroup Global Markets Inc. and the Securities and Exchange Commission. He ordered that the case be resolved through trial. Rakoff was also the one who refused to approve another proposed Bank of America securities settlement—the one in 2009 with the SEC—for $33 million over misstatements that were allegedly made regarding the purchase of Merrill. Rakoff would later go on to approve the revised settlement of $150 million.

Rakoff has criticized a system that allows financial firms to settle securities fraud allegations against them without having to admit or deny wrongdoing. He also has expressed frustration at the “low” settlements some investment banks have been ordered to pay considering the amount of financial losses suffered by investors.

Our securities fraud lawyers represent individual and institutional clients that sustained losses related to non-traded REITs, private placements, principal protected notes, auction-rate securities, collateralized debt obligations, mortgage-backed securities, reverse convertible bonds, high yield-notes and other financial instruments that were mishandled by broker-dealers, investment advisers, or their representatives. We also work with victims of Ponzi scams, affinity scams, elder financial fraud and other financial schemes.

BofA Merrill unit in $315 mln mortgage settlement, Reuters, December 6, 2011

Public Employees' Retirement System of Mississippi


More Blog Posts:

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

Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rakoff, Institutional Investor Securities Blog, November 9, 2011

Ex-Lehman Brothers Holdings Chief Executive Defends Request that Insurance Fund Pay Legal Bills, Stockbroker Fraud Blog, October 19, 2011

Continue reading "Bank of America’s Merrill Lynch Settles for $315 million Class Action Lawsuit Over Mortgage-Backed Securities " »

November 5, 2011

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

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

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

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

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

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

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

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

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


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

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

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

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

October 12, 2011

SEC Says Former United Commercial Bank Executives Concealed Millions of Dollars in Losses that Caused Bank’s Failure

The Securities and Exchange Commission has filed securities fraud charges against former United Commercial Bank executives accusing them of concealing loss from assets and loans from auditors that resulted in UCBH Holdings Inc., its public holding company, to understate its operating losses in 2008 by at least $65 million. As the bank’s loans continued to go down in value, the financial firm went on to fail and the California Department of Financial Institutions was forced to shut it down. This resulted in a $2.5 billion loss to the Federal Deposit Insurance Corporation’s insurance fund.

Per the SEC’s complaint, former chief operating officer Ebrahim Shabudi, chief executive officer Thomas Wu, and senior officer Thomas Yu were the ones that hid the bank’s losses. All three men are accused of delaying the proper recording of the loan losses and making misleading and false statements to independent auditors and investors and concealing from them that there had been the major losses on a number of large loans, property appraisals had gone down, property appraisals had been reduced, and loans were secured by worthless collateral.

Also accused of securities fraud by the SEC is former United Commercial Bank chief financial officer Craig On. The Commission said that he aided in the filing of false financial statements and misled outside auditors. To settle the SEC charges, On has agreed to pay a $150,000 penalty. He also agreed to an order suspending him from working before the SEC as an accountant for five years. He is permanently enjoined from future violations of specific recordkeeping, reporting, anti-fraud, and internal controls provisions of federal securities laws.

Criminal charges have also been filed against Shabudi and Wu. A grand jury indicted both men of conspiring to conceal loan losses, misleading regulators and investors, and lying to external auditors. Wu and Shabudi allegedly used accounting techniques and financial maneuvers, including concealing information that would have shown its decline, understating loan risks, and falsifying books, to hide the fact that that the bank was in trouble.

This is the first time such charges have been made against executives who worked at a bank that obtained government money—$298 million from TARP—to keep it running during the economic collapse.

Prior to its demise, United Commercial Bank, which was the first US bank to acquire a bank in China was considered a leader in the industry. It amassed assets of up to $13.5 billion in 2008. However, it also soon $67.7 million—way down from its $102.3 million profit in 2007. East West Bank acquired United Commercial Banks after regulators took it over in 2009.

Meantime, the FDIC is taking steps to bar 10 former United Commercial Bank officers from ever taking part in the banking industry.

SEC Charges Bank Executives With Hiding Millions of Dollars in Losses During 2008 Financial Crisis, SEC, October 11, 2011

Read the SEC Complaint (PDF)

Feds file charges against execs of failed United Commercial Bank, Mercury News, October 11, 2011


More Blog Posts:

Continue reading "SEC Says Former United Commercial Bank Executives Concealed Millions of Dollars in Losses that Caused Bank’s Failure" »

September 24, 2011

Some of the SEC Charges Against Investment Adviser Over Alleged Involvement In J.P. Morgan Securities LLC Collateralized Debt Obligation Are Dismissed

The U.S. District Court for the Southern District of New York has thrown out some of the Securities and Exchange Commission charges against GSCP (NJ) managing director Edward Steffelin for his alleged involvement in a JP Morgan Securities LLC collateralized debt obligation deal. GSCP (NJ) was the collateral manager for the CDO transaction.

While JP Morgan Securities settled for $153.6 million the SEC’s allegations that it misled investors about the CDO deal by agreeing to pay $153.6 million, Steffelin opted to fight the charges. He claimed that there was no reason for him to think that the CDO offering documents were problematic. He argued that nothing had been left out and nobody was “defrauded.”

In district court, Judge Miriam Goldman Cedarbaum granted Steffelin’s motion to dismiss the SEC’s 1933 Securities Act Section 17(a)(3) claims against him. Per the Act, any person involved in the sale or offer of securities is prevented from taking part in any transaction or practice that would deceive or be an act of fraud against the buyer. Cedarbaum said it would be a “big stretch” to conclude that Steffelin owed the investors that bought the CDO a fiduciary duty. However, she decided not to throw out the SEC’s securities claims related to the 1940 Investment Advisers Act, which has sections that make it unlawful to sell or offer securities to get property or money as a result of an omission or material misstatement. The act also prevents investment advisers from taking part in a transaction or practice that performs a deception or fraud on a client.

The SEC’s charges revolved around a JPM-structured CDO called Squared CDO 2007-1. It mainly included credit default swaps that referred to other CDOs linked to the housing market. Per the Squared CDO’s marketing collaterals, GSCP was noted as the one choosing the portfolio’s deals. What wasn’t included in the disclosure was the fact that Magnetar Capital LLC, a hedge fund, played a key part in choosing the CDOs and had a short position in over 50% of the assets. This meant that Magneta Capital stood to gain financially if the CDO portfolio failed.

JP Morgan Securities is JP Morgan Chase affiliate. Under the terms of its $153.6 million settlement, the financial firm agreed to fully pay back all monies that investors lost. By agreeing to settle, JP Morgan Securities did not admit to or deny wrongdoing. Other large financial firms that have settled SEC securities fraud cases related to CDOs in the last 16 months include Citigroup, which recently reached a $250 million settlement and Goldman Sachs, which settled its case with the SEC last year for $550 million.

JPMorgan to pay $153.6M to settle fraud charges, Boston Herald, June 21, 2011

Court Tosses Some SEC Claims Against IA Exec Over Role in JPM CDO Deal, BNA Securities Law Daily, October 28, 2011


More Blog Posts:
Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rackoff, Institutional Investor Securities Blog, November 9, 2011

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

Stifel, Nicolaus & Co. and Former Executive Faces SEC Charges Over Sale of CDOs to Five Wisconsin School Districts, Stockbroker Fraud Blog, August 10, 2011


***This post has been backdated.

Continue reading "Some of the SEC Charges Against Investment Adviser Over Alleged Involvement In J.P. Morgan Securities LLC Collateralized Debt Obligation Are Dismissed" »

August 16, 2011

Morgan Stanley Reports a Possible $1.7B in Mortgage-Backed Securities Losses

Morgan Stanley says it may sustain $1.7B in losses over a number of securities fraud cases related to subprime mortgage deals. Citigroup Inc.'s (C.N) Citibank is the plaintiff of the securities lawsuit over the Capmark VI CDO and STACK 2006-1 CDO deals, while there are 15 plaintiffs seeking punitive damages over Cheyne Finance, a structured investment vehicle. Morgan Stanley is also reporting losses over a mortgage-backed security deal involving MBIA Corp.

Our securities fraud attorneys would like you to contact us if you are someone who sustained financial losses in any of these MBS deals with Morgan Stanley. Here are more details about the cases:

• Morgan Stanley says the losses in the Citibank securities fraud lawsuit may be a minimum of $269M over a credit default swap on the Capmark VI CDO deal and another one on the credit default swap involving the STACK 2006-1 CDO deal.

• The financial firm is reporting that it may possibly incur $983 million in damages over the Cheyne deal.

• At least $223M may have been lost on an insurance contract with MBIA Corp. over a mortgage-backed security deal.

Morgan Stanley’s loss forecast doesn’t include interest, legal fees, costs, and other ancillary items. There are also other securities lawsuits involving Morgan Stanley, including:

• Allstate's complaint over investment losses related to residential mortgage-backed securities. The insurer, who purchased over $104 million in MBS from the financial firm and its affiliates, claims that financial firm misrepresented the quality of the mortgages while claiming it had performed due diligence on the loans and mortgage originators. Many of these originators have since closed office or filed for bankruptcy and they are the defendants in government investigations/securities lawsuits.

• MBIA is suing Morgan Stanley over claims that the financial firm made misrepresentations regarding the underwriting standards of bonds that it would go on to insure. The underwriting standards are for securities based on about 5,000 subordinate-lien residential mortgages. The bond insurer claims it has already paid out tens of millions of dollars in claims that were never reimbursed.

Mortgage-Backed Securities
These debt obligations represent claims to the cash flow from mortgage loan pools. Mortgage companies, banks, and other originators put together these pools by a private, governmental, or quasi-governmental entity, which then issues securities representing claims on principal and interest payments that borrowers made on the pool’s loans. This process is called securitization. Types of MBS include pass-through participation certificates, collateralized mortgage obligations, or mortgage derivatives.

If you are an investor who suffered financial losses from investing in mortgage-backed securities, you may have reason to file a securities case against the financial firm that handled your MBS. Our stockbroker fraud lawyers have helped thousands of clients recoup their losses.

M. Stanley may have to pay $1.7 billion in MBS cases, MSNBC, August 8, 2011

Bond Insurer Sues Morgan Stanley—What Are the Ramifications?, CNBC, December 9, 2010

Allstate Sues Morgan Stanley Over Mortgage-Backed Securities, Property Casualty 360, July 7, 2011


More Blog Posts:

AIG Files $10 Billion Mortgage-Backed Securities Lawsuit Against Bank of America, Institutional Investor Securities Blog, August 13, 2011

Investors in Oppenheimer Mutual Funds Considering Opting Out of $100M Class Action Settlement Have Until August 31, Institutional Investor Securities Blog, August 6, 2011

Morgan Keegan Settles Subprime Mortgage-Backed Securities Charges for $200M, Stockbroker Fraud Blog, June 29, 2011

August 10, 2011

SEC Charges Filed Against Stifel, Nicolaus & Co. and Former Sr. VP David Noack Over CDO Sales to Wisconsin School Districts

Three years after five Wisconsin school districts filed their securities fraud lawsuit against Stifel, Nicolaus & Company and the Royal Bank of Canada, the Securities and Exchange Commission has filed charges against the brokerage firm and former Stifel Senior Vice President David W. Noack over the same allegations. The charges stem from losses related to the sale of $200 million in high-risk synthetic collateralized debt obligations (CDOs) to the Wisconsin school districts of West Allis-West Milwaukee School District, the School District of Whitefish Bay, the Kimberly Area School District, the School District of Waukesha, and the Kenosha Unified School District No. 1.

The SEC says that not only were the CDOs inappropriate for the school districts that would not have been able to afford it if the investments failed, but also the brokerage firm did not disclose certain material facts or the risks involved. The school districts are pleased that the SEC has decided to file securities charges.

Robert Kantas, partner of Shepherd Smith Edwards & Kantas LTD LLP, is one of the attorneys representing the school districts in their civil case against Stifel and RBC. Attorneys for the school districts issued the following statement:

“It is our belief that the five Wisconsin school districts and the trusts established to make these investments were defrauded by Stifel, Royal Bank of Canada and the other defendants. Contrary to the way they were represented, the $200 million CDOs that were devised, solicited, and sold by the defendants to our clients in 2006 were volatile, complex, extremely high risk, and totally inappropriate for them. To protect residents and taxpayers, the districts later hired lawyers and others to investigate the investments and their fraud risk. Unfortunately, the failure of the investments did result in losses for the school districts, which in 2008 filed their Wisconsin securities fraud complaint in Milwaukee County Circuit Court. The school districts' goal was to obtain full recovery of the monies lost in this scheme, while protecting and maintaining the districts’ valuable credit ratings. The districts’ lawyers have already examined three million pages of documents regarding in this matter. Meantime, the districts have taken the proper steps to report to the SEC the nature and extent of the wrongdoing uncovered. In the past year, the districts have given the SEC volumes of documents and information for its investigation.”

The school districts had invested the $200 million ($162.7 million was borrowed) in notes that were tied to the performance of synthetic CDOs. This was supposed to help them fund retiree benefits. According the SEC, however, Stifel and Noack set up a proprietary program to facilitate all of this even though they knew that they were selling products that were inappropriate for the school districts and their investment needs.

Stifel and Noack allegedly told the school districts it would take “15 Enrons” for the investments to fail, while misrepresenting that 30 of the 105 companies in the portfolio would have to default and that 100 of the world’s leading 800 companies would have to fail for the school districts to lose their principal. The SEC claims that the synthetic CDOs and the heavy use of leverage actually exposed the school districts to a high risk of catastrophic loss.

By 2010, the school districts' second and third investments were totally lost and the lender took all of the trusts’ assets. In addition to losing everything they’d invested, the school districts experienced downgrades in their credit ratings because they didn’t put more money in the funds that they had set up. Meantime, despite the fact that the investments failed completely, Stifel and Noack still earned significant fees.

The SEC is alleging that Noack and Stifel violated the:
• The Securities Act of 1933 (Section 17(a))
• Securities Exchange Act of 1934 (Section (10b))
• The Securities Act of 1934 (Section 15(c)(1)(A))

The Commission wishes to seek disgorgement of ill-gotten gains along with prejudgment interest, permanent injunctions, and financial penalties.


Related Web Resources:
SEC Charges Stifel, Nicolaus & Co. and Executive with Fraud in Sale of Investments to Wisconsin School Districts, SEC.gov, August 10, 2011

SEC Sues Stifel Over Wisconsin School Losses Tied to $200 Million of CDOs, Bloomberg, August 10, 2011

Read the SEC Complaint

School Lawsuit Facts


More Blog Posts:

Stifel, Nicolaus & Co. and Former Executive Faces SEC Charges Over Sale of CDOs to Five Wisconsin School Districts, Stockbroker Fraud Blog, August 10, 2011

JP Morgan Settles for $153.6M SEC Charges Over Its Marketing of Synthetic Collateralized Debt Obligation, Institutional Investor Securities Blog, June 18, 2011

Wells Fargo Settles SEC Securities Fraud Allegations Over Sale of Complex Mortgage-Backed Securities by Wachovia for $11.2, Institutional Investor Securities Blog, April 7, 2011

Continue reading "SEC Charges Filed Against Stifel, Nicolaus & Co. and Former Sr. VP David Noack Over CDO Sales to Wisconsin School Districts" »

July 29, 2011

SEC and SIFMA Divided Over Whether Merrill Lynch Can Be Held Liable for Alleged ARS Market Manipulation

In Wilson v. Merrill Lynch & Co. Inc., the Securities Industry and Financial Markets Association and the Securities and Exchange Commission have submitted separate amicus curiae briefs to the U.S. Court of Appeals for the Second Circuit that differ on whether Merrill Lynch can be held liable for allegedly manipulating the auction-rate securities market. While SIFMA argued that an SEC order from 2006 that settled ARS charges against 15 broker-dealers affirmed the legality of the auction practices when they are properly disclosed, the SEC said that Merrill did not provide sufficient disclosures about its conduct in the ARS market and therefore what they did reveal was not enough to “preclude the plaintiff from pleading market manipulation.”

It was last year that the U.S. District Court for the Southern District of New York dismissed an investor claim that Merrill Lynch, which was acting as underwriter, manipulated the ARS market to attract investment. The court said that the claimant “failed to plead manipulative activity” and agreed with the brokerage firm that adequate disclosures were made. After appealing to the Second Circuit, the investor requested that the SEC provide its thoughts on five court-posed questions about the adequacy of the financial firm’s disclosures and how they impacted allegations of reliance and market manipulation.

The SEC said that the plaintiff’s claim that Merrill manipulated ARS auctions don’t preclude him from pleading, for fraud-on-the-market reliance purposes, an efficient market. SIMFA, however, said the plaintiff was precluded from claiming “manipulative acts” because investors have been made aware through “ubiquitous industry-wide disclosures about auction practices” that broker-dealers’ involvement in ARS actions is impacted by the “natural interplay” of demand and supply.


Related Web Resources:

Auction-Rate Securities UPDATE: SEC Brief May Help ARS Investors, Business Insider, July 26, 2011

SEC Backs Investors in ARS Case, Squares Off With SIFMA Over Firm's Liability, BNA Broker/Dealer Compliance Report, July 27, 2011


More Blog Posts:

Credit Suisse Ordered to Pay STMicroelectronics N.V. $404M Over Improper ARS Investment, Institutional Investor Securities Blog, June 15, 2011

Goldman Sachs and Wells Fargo Investments Repurchase $26.9M in Auction-Rate Securities from New Jersey Investors, Institutional Investor Securities Blog, May 25, 2011

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


Continue reading "SEC and SIFMA Divided Over Whether Merrill Lynch Can Be Held Liable for Alleged ARS Market Manipulation " »

July 26, 2011

$629M Mortgage-Backed Securities Lawsuit Blames RBS Securities and Other Financial Firms For Bankruptcy of Western Corporate Federal Credit Union in 2009

The National Credit Union Administration has filed a $629 million securities fraud lawsuit against RBS Securities, Wachovia Mortgage Loan Trust LLC, Nomura Home Equity Loan Inc., Greenwich Capital Acceptance Inc., Lares Asset Securitization Inc., IndyMac MBS Inc., and American Home Mortgage Assets LLC. The NCUA is accusing the financial firms of underwriting and selling subpar mortgage-backed securities, which caused Western Corporate Federal Credit Union to file for bankruptcy, as well as of allegedly violating state and federal securities laws.

The defendants are accused of misrepresenting the nature of the bonds and causing WesCorp to think the risks involved were low, which was not the case at all. NCUA says that the originators of the securities “systematically disregarded” the Offering Documents’ underwriting standards. The agency blames broker-dealers and securities firms for the demise of five large corporate credit union: WesCorp, US Central, Members United Corporate, Southwest Corporate, and Constitution Corporate.

Last month, NCUA filed separate complaints against JPMorgan Chase Securities and RBS Securities. The union believes that those it considers responsible for the issues plaguing wholesale credit unions should cover the losses that retail credit unions are having to cover. NCUA says it may file up to 10 mortgage-backed securities complaints seeking to recover billions of dollars in damages. As of now, it is seeking to recover $1.5 billion.

NCUA acts as the “liquidating agent” for failed credit unions. Wholesale credit unions provide electronic payments, check clearing, investments and other services to retail credit unions, which actively work with borrowers.

NCUA sues JPMorgan and RBS to recover losses from failed institutions, Housing Wire, June 20, 2011

NCUA seeks $629M in damages from RBS Securities, Credit Union National Association, July 19, 2011

Feds Sue Bankers Over Fall in Bonds, The Wall Street Journal, June 21, 2011

Continue reading "$629M Mortgage-Backed Securities Lawsuit Blames RBS Securities and Other Financial Firms For Bankruptcy of Western Corporate Federal Credit Union in 2009" »

July 9, 2011

Securities Fraud Plaintiffs Don’t Have to Show Loss Causation to Obtain Class Action Status, Rules US Supreme Court

In Erica P. John Fund Inc. v. Halliburton Co., the US Supreme Court said that securities fraud plaintiffs don't have to demonstrate loss causation to receive class certification. The unanimous ruling reinstated claims made by investors that defendant Halliburton Inc. (HAL) made material misrepresentations and misstatements.

In its securities complaint, Archdiocese of Milwaukee Supporting Fund Inc.—now known as Erica P. John Fund Inc.—wanted to certify as a class all investors who had obtained Halliburton stock between June 3, 1999 and December 7, 2001. The plaintiff contends that investors in the proposed class lost money because of securities fraud committed by the defendant, including making material misstatements about litigation expenses, a merger’s benefits, and accounting methodology changes, making misrepresentations in order to up Halliburton stocks' price rise, and making corrective disclosures to make the price fall.

The district court, however, refused to give class certification on the ground that the plaintiff did not demonstrate loss causation regarding the claims it made. The U.S. Court of Appeals for the Fifth Circuit affirmed that ruling.

The Supreme Court, however, said that even though private securities plaintiffs must show that the defendant’s misconduct was the cause of their economic loss, loss causation does not have to be demonstrated to obtain class certification. Chief Justice John G Roberts authored the decision, which also said that the court didn’t have to address questions related to its in 1988 ruling Basic Inc. v. Levinson, 485 U.S. 224.


Related Web Resources:
Erica P. John Fund Inc. v. Halliburton Co. (PDF)

Basic Inc. v. Levinson


More Blog Posts:

Securities Fraud: Mutual Funds Investment Adviser Cannot Be Sued Over Misstatement in Prospectuses, Says US Supreme Court, Stockbroker Fraud Blog, June 16, 2011

Number of Securities Class Action Settlements Reached in 2010 Hit Lowest Level in a Decade, Says Report, Stockbroker Fraud Blog, March 31, 2011

Sonoma Valley Bank Shareholders File Both a Class Action Lawsuit and An Insurance Claim Seeking to Recoup Millions, Institutional Investor Securities Blog, June 30, 2011

Continue reading "Securities Fraud Plaintiffs Don’t Have to Show Loss Causation to Obtain Class Action Status, Rules US Supreme Court " »

July 8, 2011

Two Years of Wall Street Executives’ Pay To Be Seized For Role Played in a Financial Firm’s Collapse, Says FDIC

Federal regulators have approved a plan that would make Wall Street executives forfeit two years’ pay if it was discovered that he/she played a part in a major financial firm’s collapse. Executives who are considered “negligent” and “substantially responsible” are subject to this rule, which clarifies that “negligence,” rather than “gross negligence,” is the standard.

Banks had complained that an earlier version of the rule, which said that any executive who had made strategic decisions could be found responsible for a financial firm’s failure. They were worried that key executives would quit upon initial signs of trouble rather than risk their pay.

The provision is part of a Federal Deposit Insurance Corporation rule, which is supposed to help retain stability within the economy by unwinding beleaguered firms in a manner that is less disruptive than major bankruptcies and taxpayer-financed bailouts. The rule lets the government take over a failing financial company, break it apart, and sell it off.

The liquidation authority is a significant part of the Dodd-Frank financial oversight law. It also designates the order that creditors will be paid whenever a government liquidates a large financial firm. For example, FDIC or the receiver that carried part of the expense of taking over a firm, administrative costs, and employees that are owed money for benefits are among those that would top the list. General creditors fall lower down in order of priority.

It is not enough that a Wall Street executive pay the government or other entities for any misconduct that caused a financial firm to fail. There are also the investors who sustained financial losses as a result of his/her negligence. Here is where our securities fraud attorneys step in. We are committed to helping institutional investors recoup their money.

Related Web Resources:
FDIC allows seizure of failed bank execs' pay, Pittsburgh Live/AP, July 7, 2011

F.D.I.C. Rule Puts at Risk 2 Years of Executives’ Pay, Reuters/NY Times, July 6, 2011

Federal Deposit Insurance Corporation


More Blog Posts:

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

SEC Needs to Keep a Closer Eye on FINRA, Says Report, Stockbroker Fraud Blog, March 15, 2011

SEC is Finalizing Its Whistleblower Rules, Says Chairman Schapiro, Stockbroker Fraud Blog, April 28, 2011

Continue reading "Two Years of Wall Street Executives’ Pay To Be Seized For Role Played in a Financial Firm’s Collapse, Says FDIC" »

June 28, 2011

Ex-Colonial Bank Chairman is Sentenced to 30 Years in Prison Over $2.9B Bank Fraud

A federal judge has sentenced ex- Taylor, Bean & Whitaker chairman Lee Farkas to 30-years behind bars for heading up a $2.9 billion financial scheme that led to the downfall of both mortgage lender Taylor Bean and Colonial Bank. The bank fraud cheated the government and investors of billions.

Farkas, who was convicted by a jury of numerous criminal counts, conspiracy to bank fraud, wire fraud, and securities fraud, is accused of making $40 million from the scam. He must now turn over about $35 million.

Also paying a price for her involvement in the fraud is ex-Colonial Bank senior vice president Catherine Kissick. The 50-year-old former head of Colonial’s’ mortgage-warehouse lender pleaded guilty to one count of conspiracy to commit bank fraud, wire fraud, and securities fraud.

The SEC is accusing Kissick of enabling the sale of impaired and bogus securities and mortgage loans to Taylor Bean. She also is accused of mischaracterizing the securities as liquid, quality assets to investors.

Assistant Attorney General Lanny Breuer has said that not only did Kissick assist in the execution of the largest bank fraud ever, but also she used her position at Colonial to purchase hundreds of million dollars in assets from TBW that were worthless to fool investors, shareholders, and regulators. Kissick is sentenced to 8-years in prison.

Several others have pleaded guilty to the financial scam, including Teresa Kelly, a former operations supervisor who worked under Kissick. Kelly, who pleaded guilty to the same charge as Kissick, is sentenced to three months behind bars. She is accused of abusing her access to the accounting systems at Colonial Bank to perpetuate the fraud.

Others who have pleaded guilty for their involvement are ex-Taylor Bean president Raymond E. Bowman and former firm treasurer Desiree Brown. Former chief executive Paul Allen was sentenced to 40 months for his participation in the bank scam.

Related Web Resources:

Mortgage Executive Receives 30-Year Sentence, The New York Times, Jhttp://online.wsj.com/article/BT-CO-20110617-711800.htmlJune 30, 2011

Ex-Colonial Bank Executive Kelly Admits to Conspiracy in Taylor Bean Fraud, Bloomberg, March 16, 2011

Ex-Colonial Bank Exec Gets 8-Year Prison Sentence In $2.9B Fraud, The Wall Street Journal, June 17, 2011


More Blog Posts:

Washington Mutual Bank Bondholders’ Securities Fraud Lawsuit Against J.P. Morgan Chase & Co. is Revived by Appeals Court, Institutional Investors Securities Blog, June 29, 2011

JP Morgan Chase Agrees to Pay $861M to Lehman Brothers Trustee, Stockbroker Fraud Blog, June 28, 2011

Texas Securities Fraud: Planmember Securities Corp. Registered Representatives Accused of Improperly Selling Life Settlement Notes, Stockbroker Fraud Blog, June 27, 2011


Continue reading "Ex-Colonial Bank Chairman is Sentenced to 30 Years in Prison Over $2.9B Bank Fraud " »

June 11, 2011

US Supreme Court Declines Review of Appeals Court Rulings Involving Issues of Antifraud Liability and Institutional Investment Managers’ Disclosure Obligations

The nation’s highest court has decided not to review three federal appeals court rulings that brought up the securities law issues of disclosure obligations and antifraud liability. The cases are Amorosa v. Ernst & Young LLP, Pacific Investment Management Co. v. Mayer Brown LLP, and Full Value Advisors LLC v. SEC.

In the liability case against Ernst & Young, the U.S. Court of Appeals for the Second Circuit held that the district court was correct in turning down the investor’s lawsuit, which alleged fraudulent accounting practices at America Online and later at AOLTime Warner. The court had found that the plaintiff failed to adequately allege loss causation.

The appeals court also affirmed the dismissal of the second liability-related securities fraud case, this one against Mayer Brown LLP, over the latter’s alleged involvement in the fraud at Refco Inc. The court concluded that secondary actors can only be held liable for false statements that they made at the time it issued them (this finding rejected the SEC’s broader view of liability for secondary actors in securities fraud cases) and that without attribution the plaintiffs cannot demonstrate that they depended on the defendants’ false statements. The court also said that “participation in the creation of those statements amounts, at most, to aiding and abetting securities fraud.”

In Full Value Advisors LLC v. SEC, the U.S. Court of Appeals for the District of Columbia Circuit had found that the hedge fund adviser’s constitutional challenge to the SEC’s disclosure requirements for large investment advisers was not ripe for judicial review. This ruling prevented the plaintiff from receiving a ruling on the merits of its claims unless the SEC puts together a report that is accessible to the public and includes the allegedly proprietary information.

High Court Won't Review Rulings On Secondary Disclosure, Antifraud Liability, BNA Securities Law Daily, June 21, 2011

Amorosa v. Ernst & Young LLP

Pacific Investment Management Co. v. Mayer Brown LLP

Full Value Advisors LLC v. SEC (PDF)


More Blog Posts:

SEC Securities Settlements Often Don’t Come with Admission of Wrongdoing, Institutional Investors Securities Blog, March 29, 2011

CalPERS Files Securities Fraud Lawsuit Against Lehman Brothers, Institutional Investors Securities Blog, February 10, 2011

Securities Fraud: Mutual Funds Investment Adviser Cannot Be Sued Over Misstatement in Prospectuses, Says US Supreme Court, Stockbroker Fraud Blog, June 16, 2011


Continue reading "US Supreme Court Declines Review of Appeals Court Rulings Involving Issues of Antifraud Liability and Institutional Investment Managers’ Disclosure Obligations " »

May 30, 2011

New Bill Would Strengthen the US Justice Department’s Ability to Prosecute Fraud

The 2011 Fighting Fraud to Protect Taxpayers Act is a new bill that would enhance the ability of the US Justice Department to fight fraud. The legislation would channel part of the money recovered from fines and penalties toward the prosecution and investigation of mortgage fraud, financial fraud, foreclosure fraud, and health care fraud.

In a joint release put out by Senate Judiciary Committee Chairman Patrick Leahy (D-Vt.) and Sen. Charles Grassley (R-Iowa), who is a ranking committee member, the Justice Department collected more than $6 billion in penalties and fines over the last fiscal year. The proposed bill would up the percentage of funds that the agency can retain in its Working Capital Fund from 3% to 3.5%. That additional 5% would go toward fraud enforcement. This would give the DOJ approximately another $15 million to investigate and prosecute fraud. It would also lead to greater accountability and transparency at DOJ.

In addition, bill would authorize more funds to DOJ that would go toward the prosecution and investigation of False Claims Act violations. It would also expand the Secret Service’s authority to use funds to advance under cover operations.

Grassley also recently submitted a separate action to FINRA Chairman Richard Ketchum talking about how insider trading is “alive and well” in the US financial markets. He noted the recent criminal charges against hedge fund SAC Capital Advisors LP employees Noah Freeman and Donald Longueuil, who are among those that the Securities and Exchange Commission filed charges against over the alleged $30 million insider trading scheme involving at least six public companies. Grassley wants FINRA to provide more information about any referrals from self-regulatory organizations involving SAC Capital Advisors.

Related Web Resources:
Leahy, Grassley Roll Out New Anti-Fraud Legislation, May 5, 2011

S. 890: Fighting Fraud to Protect Taxpayers Act of 2011


More Blog Posts:

SEC to Propose Rule Banning “Felons and Bad Actors” From Involvement in Private Offerings, Institutional Investors Securities Blog, May 29, 2011

FINRA Chief Ketchum Says Securities Regulators Worried Whether Investors Betting on High-Yield Corporate Bonds Really Know What They Are Getting Into, Stokbroker Fraud Blog, March 21, 2011

SEC Staff Wants an SRO to Oversee Investment Advisers, Stokbroker Fraud Blog, January 31, 2011

Continue reading "New Bill Would Strengthen the US Justice Department’s Ability to Prosecute Fraud" »

April 30, 2011

Tribune Bondholders Can Sue Shareholders for Over $8.2B

A bankruptcy court judge has cleared the way for Tribune Co. (TRBCQ) bondholders to file securities complaints in state court against ex-shareholders who made money from the 2007 leveraged buyout that is thought to have caused the media giant’s demise. They contend that for real estate magnate Sam Zell to raise the money to pay off the shareholders and gain control of the Tribune, the company ended up taking on level of debt that it could not sustain and which resulted in bankruptcy in 2008.

The bondholders claim that the 2007 buyout was made at their expense and they want to get back the over $8.2 billion that was paid out to ex-shareholders. Unfortunately, seeing as there are billions of dollars in secured debt, it is not likely that bondholders will recover all of the over $2 billion in notes that the media giant issued before the buyout unless creditors prevail in their lawsuits against shareholders, Zell, lenders, and other parties.

The bondholders needed to get permission to file their lawsuits outside the bankruptcy court. Led by Aurelius Capital Management, they say the action was necessary because the statute of limitations for pursuing such claims under state laws in Illinois and Delaware ends in June, when it will have been four years since the buyout. The bondholders are worried that Tribune, which is based in Illinois, won’t get out of bankruptcy by then. Possible securities lawsuit targets are the Robert R. McCormick Foundation, which sold $1.5 billion in company stock for a $963 million profit for the buyout and Stark Investments, a hedge fund that invested in Tribune.

Related Web Resources:
Tribune Bondholders Get OK To Sue, MyFOXla, April 26, 2011

Bondholders Can Sue Over Tribune, The Wall Street Journal, April 27, 2011


More Blog Posts:
Lincoln Financial Advisors Corp. Ordered by FINRA to Pay Wright Family Trust $1.6M, Institutional Investor Securities Blog, April 29, 2011

AIG Trying to Get More Investors to Buy Life Settlements, Institutional Investor Securities Blog, April 26, 2011

SEC is Finalizing Its Whistleblower Rules, Says Chairman Schapiro, Stockbroker Fraud Blog, April 28, 2011

Continue reading "Tribune Bondholders Can Sue Shareholders for Over $8.2B" »

April 23, 2011

Securities Lawsuits Expected to Reach Record High in ’11, Says Advisen Ltd. Report

Per Advisen Ltd’s latest quarterly report on securities litigation, the number of securities lawsuit filings will likely set a new record high for yet another year in a row. Records were set in 2008, 2009, and 2010 following the credit crisis. Advisen’s quarterly report was sponsored by ACE.

John Molka III , the report’s author, says that even with the credit crisis has eased up, the submission of securities lawsuits has not. 1,293 securities lawsuits were filed in 2010. Now, Advisen is saying that based on the number of securities complaints filed during the first quarter of 2011, you can expect the number of lawsuits for this year to beat that number. Molka speculates that this “elevated level of filings” could be the “new normal.”

During Q1 2011, 362 securities lawsuits were filed—a 47% jump from the number of complaints that were submitted in Q1 2010. Compare this first quarter to last year’s last quarter when 342 securities complaints were filed. Also, with 1,448 new filings as this year’s first quarter annualized rate, that’s already12% more than last year’s total filings. The complaints include those for breach of fiduciary duty, shareholder derivative cases, securities fraud, and securities class actions.

Although securities fraud complaints comprised the greatest portion of filings for the first quarter, breach of fiduciary duties lawsuits, which include merger objection complaints, are the real cause of securities lawsuit growth. Meantime, 18% of new filings were securities class action complaints, which in the past made up over 1/3rd of securities lawsuits. Securities class action lawsuits, however, still make up for the majority of the largest settlements. During this first quarter, the average securities class action case settled for $54.6 million.

Related Web Resources:
2011 on Track for Record Securities Lawsuit Filings, Advisen, April 19, 2011

Securities Litigation Reaches a Crescendo (The Full Report)


More Blog Posts:
Pump & Dump Scam Alleged in $600 Million Lawsuit Against Law Firm Baker & McKenzie, Institutional Investor Securities Blog, April 13, 2011

Class Members of Charles Schwab Corporation Securities Litigation Can Still Opt Out to File Individual Securities Claim, Stockbroker Fraud Blog, December 6, 2010

Securities Fraud Lawsuit Against Calamos Investments Filed on Behalf of Calamos Convertible Opportunities and Income Fund Shareholders, Stockbroker Fraud Blog, September 17, 2010

Continue reading "Securities Lawsuits Expected to Reach Record High in ’11, Says Advisen Ltd. Report" »

April 15, 2011

Goldman Sachs Group Made Money From Financial Crisis When it Bet Against the Subprime Mortgage Market, Says US Senate Panel

The Senate's Permanent Subcommittee on Investigations says that because Goldman Sachs Group Inc. bet billions against the subprime mortgage market it profited from the financial crisis. The panel’s findings come following a two-year bipartisan probe and were released in a 639-page report on Wednesday.

The subcommittee released documents and emails that show executives and traders attempting to get rid of their subprime mortgage exposure, which was worth billions of dollars, and short the market for profit. Their actions ended up costing their clients that purchased the financial firm’s mortgage-related securities.

The panel says that Goldman allegedly deceived the investors when failing to tell them that the investment bank was simultaneously shorting or betting against the same investments. The subcommittee estimates that Goldman’s bets against the mortgage markets in 2007 did more than balance out the financial firm’s mortgage losses, causing it to garner a $1.2 billion profit that year in the mortgage department alone. Also, when Goldman executives, including Chief Executive Lloyd Blankfein appeared before the committee in 2010, the panel says that they allegedly misled panel members when they denied that the financial firm took an a position referred to as being “net short,” which involves heavily tilting one’s investments against the housing market.

It was just last year that the Securities and Exchange Commission ordered Goldman to pay $550 million to settle securities fraud charges over its actions related to the mortgage-securities market. The allegations in this report go beyond the claims covered by the SEC case. The report also names mortgage lender Washington Mutual, credit rating firms, the Office of Thrift Supervision, and a federal bank regulator as among those that contributed to the financial crisis.

Goldman is denying many of the subcommittee’s claims and says its executives did not mislead Congress.

Related Web Resources:
Goldman Sachs shares drop on Senate report, Reuters, April 14, 2011

Senate Panel: 'Goldman Sachs Profited From Financial Crisis', Los Angeles Times, April 14, 2011

Senate Permanent Subcommittee on Investigations

More Blog Posts:
Goldman Sachs Sued by ACA Financial Guaranty Over Failed Abacus Investment for $120M, Institutional Investor Securities Blog, January 10, 2011

Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million, Stockbroker Fraud Blog, July 30, 2010

Goldman Sachs COO Says Investment Firm Shorted 1% of CDOs Mortgage Bonds But Didn’t Bet Against Clients, Stockbroker Fraud Blog, July 14, 2010

Continue reading "Goldman Sachs Group Made Money From Financial Crisis When it Bet Against the Subprime Mortgage Market, Says US Senate Panel " »

April 12, 2011

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

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" »

April 7, 2011

Wells Fargo Settles SEC Securities Fraud Allegations Over Sale of Complex Mortgage-Backed Securities by Wachovia for $11.2M

For a payment of $11.2 million, Wells Fargo & Co. will settle US Securities and Exchange Commission allegations that Wachovia Capital Markets LLC misled investors and improperly sold two collateralized debt obligations in 2007 and 2006. Wachovia was bought by Wells Fargo in 2008.

Wells Fargo Securities now manages Wachovia. By agreeing to settle, the investment bank is not admitting to or denying the findings.

According to the SEC, Wachovia Capital Markets LLC, now called Wells Fargo Securities, violated securities law anti-fraud provisions when it sold the complex mortgage-backed securities to investors despite the red flags indicating that there was trouble brewing with the US housing market.

The SEC says that Wachovia charged excessive markups in the sale of part of a $1.5 billion CDO called Grand Avenue II. Unable to sell the CDOs $5.5 million equity portion in October 2006, it kept the shares on the trading desk while dropping their value to 52.7 cents on the dollar. Wachovia later sold the shares for 90 and 95 cents on the dollar to an individual investor and the Zuni Indian tribe. Both did not know that they had purchased the shares at a price that was 70% above their accounting value. The transaction went into default in 2008.

The SEC claims that in 2007, Wachovia Capital Markets misrepresented to investors in Longshore 3, a $1.3 billion CDO, that assets had been acquired from Wachovia affiliates on an “arms’-length basis” when actually, 40 residential mortgage-backed securities were transferred at $4.6 million over market prices. The SEC contends that Wachovia was trying to avoid sustaining losses by transferring the assets at “stale” prices.

Related Web Resources:
Wells to pay $11.2 M in case, Seeking Alpha, April 6, 2011

Wells Fargo-Wachovia settles CDO claim with SEC for $11 million, Housing Wire, April 5, 2011

CDO News, New York Times

Mortgage-Backed Securities, SEC.gov


More Blog Posts:
Goldman Sachs Sued by ACA Financial Guaranty Over Failed Abacus Investment for $120M, Institutional Investor Securities Blog, January 10, 2011

Houston Man Indicted in Alleged $17M Texas Securities Fraud, Stockbroker Fraud Blog, December 23, 2010

Goldman Sachs COO Says Investment Firm Shorted 1% of CDOs Mortgage Bonds But Didn’t Bet Against Clients, Stockbroker Fraud Blog, July 14, 2010

Continue reading "Wells Fargo Settles SEC Securities Fraud Allegations Over Sale of Complex Mortgage-Backed Securities by Wachovia for $11.2M" »

March 29, 2011

SEC Securities Settlements Often Don’t Come with Admission of Wrongdoing

As Bloomberg News columnist Ann Woolner points out, in most US Securities and Exchange Commission where a settlement is reached, the defendant usually ends up not having to admit to doing anything wrong. Instead, the securities fraud agreement is accompanied by the boilerplate caveat that says that by settling, the plaintiff is doing so without “without admitting or denying” wrongdoing.

Granted, there are certain cases where a conviction or guilty plea in a related criminal case makes it clear that a wrongful action did take place. One might also say that by agreeing to settle and pay a huge financial sum, the plaintiff is admitting to the wrongdoing without actually admitting to doing anything wrong. However, as Woolner points, not all defendants of US Securities and Exchange Commission cases are also charged in criminal court over the alleged securities fraud. Even when a settlement is reached, without an admission, the exact nature of the fraud is often left unclear.

SEC spokesperson John Nestor says that of the over 600 securities lawsuits filed every year, only about 20 of them ever go to trial. Nestor notes that the SEC’s primary objective in any civil case is to secure the proper sanctions against wrongdoers and not making them admit wrongdoing is a way to get this done. Many violators will give up a great deal to avoid being held liable in civil court. They also have little incentive to confess because this could help the securities fraud lawsuits of plaintiffs.

U.S. District Judge Jed Rakoff says that letting securities defendants get away with not admitting what they have done is a “disservice to the public.” Meantime, SEC commissioner also says that he wants defendants to “take accountability” and “issue mea culpas.” He also wants companies to stop putting out press releases suggesting that the SEC overreacted.

Related Web Resources:
Uncle Sam Wants Your Cash, Not Confession: Ann Woolner, Bloomberg, March 24, 2011

US Securities and Exchange Commission


More Blog Posts:
Bank of America to Pay $137M Over Alleged Investment Scam To Pay Municipalities Low Interest Rates on Investments and $9M Over Alleged Bid-Rigging Scheme to Nonprofits, Institutional Investors Securities Blog, December 16, 2010

NJ Settles Municipal Bond Offering Fraud Charges with SEC, Institutional Investors Securities Blog, September 30, 2010

Federal Judge to Approve Citigroup’s $75M Securities Settlement with SEC Over Bank’s Subprime Mortgage Debt Reporting to Investors, Institutional Investors Securities Blog, September 29, 2010

Continue reading "SEC Securities Settlements Often Don’t Come with Admission of Wrongdoing" »

March 23, 2011

Juno Mother Earth Asset Management LLC and Its Founders Face SEC Securities Fraud Lawsuit Over Alleged $1.8M Looting of Hedge Fund Assets

The US Securities and Exchange Commission has filed a securities fraud complaint accusing Juno Mother Earth Asset Management LLC and its founders Arturo Rodriguez and Eugenio Verzilli of looting over $1.8 million in assets from a hedge fund.

The two hedge fund managers allegedly used the assets to cover Juno’s operating expenses, including rent, payroll, entertainment, and travel. They also are accused of submitting false SEC filings, including telling the SEC that it managed $40 million more than what it in fact did.

The SEC says that Juno’s partners falsely claimed that they had placed $3 million of their own capital in a client fund, when in fact, they never used their own money. In addition to selling securities in client brokerage and commodity accounts, Juno allegedly directed 41 separate transfers of cash to Juno’s bank account and made false claims that they were expense reimbursements for costs incurred on the client fund’s behalf. Rodriguez and Verzilli then issued false promissory notes to cover up the fraud and make it seem as if the fund had invested money in Juno.

The SEC further contends that the three defendants marketed investments in the Juno fund but did not reveal that the hedge fund advisor was having financial problems. When offering and selling the securities, Juno would misrepresent and inflate its assets, even claiming at one point that it was managing up to $200 million.

The government is trying to crack down on hedge fund managers who make it appear as if they’ve invested more personal money than what they’ve actually put in. The agency is seeking disgorgement plus prejudgment interests, permanent injunctions, and civil monetary penalties.

Related Web Resources:
SEC Charges Two Hedge-Fund Managers, The Wall Street Journal, March 16, 2011

Read the SEC Complaint (PDF)


More Blog Posts:
Trueblue Strategies LLC Owner Settles SEC Charges that He Hid Investor Trading Losses in Hedge Fund Case, Institutional Investor Securities Blog, December 18, 2010

3 Hedge Funds Raided by FBI in Insider Trading Case, Stockbroker Fraud Blog, November 3, 2010


Continue reading " Juno Mother Earth Asset Management LLC and Its Founders Face SEC Securities Fraud Lawsuit Over Alleged $1.8M Looting of Hedge Fund Assets" »

March 17, 2011

Michael Kenwood Capital Management, LLC Principal Pleads Guilty to Securities Fraud Involving Ponzi Scam

Last month, our stockbroker fraud lawyers reported on a Securities and Exchange Commission order to freeze the assets of Michael Kenwood Capital Management, LLC and its principal Francisco Illarramendi for their alleged misappropriation of $53 million in investor funds. This month, Illarramendi pleaded guilty to securities fraud, wire fraud, conspiracy to obstruct justice, and investment adviser fraud.

Per the US Department of Justice’s release, a hedge fund that Illarramendi was advising sustained losses in the millions. He had been tasked with investing the money. However, instead of telling clients about their failed investments, the DOJ says that Illarramendi decided to cover up this information by taking part in a securities fraud scam. The hedge funds and other entities that he advised ended up with “outstanding liabilities” far beyond their assets’ values. U.S. Attorney David B. Fein says this securities case this is the largest white-collar prosecution that the office has ever pursued.

Two other men have been detained and criminally charged over their alleged involvement in the hedge fund scam and of aiding Illaramendi. Juan Carlos Horna Napolitano and Juan Carlos Guillen Zerpa are charged with investment adviser fraud and conspiracy to obstruct justice.

Meantime, the SEC says it has amended its civil complaint against Illaramendi and MK Capital Management, LLC. The agency is now alleging that the “breadth” of the securities fraud may be in the “hundreds of millions.”

Our institutional investment fraud law firm represents clients in arbitration and litigation with claims against investment advisers, broker-dealers, brokers, and others in the financial industry. We are dedicated to recovering investor losses.


Related Web Resources:
Connecticut Hedge Fund Exec Admits Guilt In Ponzi Scheme, WIBW, March 7, 2011

Hedge fund mgr pleads guilty over Ponzi scheme, Reuters, March 7, 2011

Order to Freeze Assets in $53M Fund Fraud Allegedly Involving Michael Kenwood Asset Management LLC Obtained by SEC, Stockbroker Fraud Blog, February 21, 2011

Connecticut Hedge Fund Adviser Admits Running Massive Ponzi Scheme, Justice.gov, March 7, 2011

SEC adds new charges Connecticut-based hedge fund manager in Ponzi scheme, SEC, March 7, 2011

Continue reading "Michael Kenwood Capital Management, LLC Principal Pleads Guilty to Securities Fraud Involving Ponzi Scam" »

March 15, 2011

SEC Files Securities Charges Against DHB Industries and Three Ex-Board Members

The Securities and Exchange Commission has filed and settled securities charges against DHB Industries Inc. without the US defense contractor receiving any penalty. The maker of bulletproof vests for US law enforcement and military agencies, now called Point Blank Solutions, has consented to not committing the alleged violations in the future. SEC charges, however, are still pending against ex-DHB Industries board members Gary Nadelman, Cary Chasin, and Jerome Krantz.

The SEC claims that between 2003 and 2005, the three men let senior managers overstate data in financial reports. The federal agency also contends that as a result of the ex-board members’ “willful blindness,” ex-DHB Industries CEO David Brooks was able to take $10 million from the company and move the funds into another company under his control. Brooks, who is also accused of using another $4.7 million for personal expenses, and ex-DHB Industries COO Sandra Hatfield, were convicted of securities fraud and other charges in criminal court last year.

The SEC wants restitution and civil fines from Krantz, Chasin, and Nadelman. According to the New York Times, it is surprising that the federal regulator has actually filed civil charges against the three men. Save for perhaps a tarnished reputation, corporate directors tend to remain unscathed in cases of securities fraud. For example, no financial firms’ outside directors were named as defendants in SEC cases related to the credit crisis.

While some are expressing hope that the SEC is charting a new course with this case, it is difficult to discern at this point whether this is a one-time deal or the start of a new trend. For a while, there were concerns that the independent director post, assigned specific duties under the Sarbanes-Oxley law in 2002, might be harder to fill because of fear of liability. However, the SEC has only filed cases against them in incidents of alleged severe recklessness. Also, in an attempt to bring in good directors, companies have been offering better pay.

Are board directors held to too low of a standard that allows them to get away with too much?


Related Web Resources:
SEC Charges Military Body Armor Supplier and Former Outside Directors With Accounting Fraud, SEC, February 28, 2011

SEC charges defense contractor, 3 ex-directors, Bloomberg, February 28, 2011

For Directors at DHB Securities, SEC Keeps the Bar Low, New York Times, March 3, 2011

The Sarbanes-Oxley Act of 2002


More Blog Posts:

Former DHB Industries CEO and COO Found Guilty of Nearly $200M Securities Fraud Scam, Stockbroker Fraud Blog, September 16, 2010

$35.2 Million Shareholder Settlement Against DHB Industries Overturned by Circuit Court, Institutional Investor Securities Blog, October 21, 2010

Continue reading "SEC Files Securities Charges Against DHB Industries and Three Ex-Board Members" »

March 2, 2011

Goldman Sachs Reports $3.4 Billion in “Reasonably Possible” Losses from Legal Claims

In its latest 10-K filing with the US Securities and Exchange Commission, Goldman Sachs Group Inc. says that its “reasonably possible” losses from legal claims may be as high as $3.4 billion. The investment bank’s admission comes after the SEC told corporate finance chiefs that the should disclose losses “when there is at least a reasonable possibility” they may be incurred regardless of whether the risk is so low that reserves are not required.

Goldman admits that it hasn’t put side a “significant” amount of funds against such possible losses and its estimate doesn’t factor in possible losses for cases that are in their beginning stages. The $3.4 billion figure comes from a calculation of three categories of possible liability. Also factored in were the number of securities sold in cases where purchasers of a deal underwritten by Goldman Sachs are now suing the financial firm and cases involving parties calling for Goldman Sachs to repurchase securities.

Between 2009 and 2010, the financial firm reported a 38% decline in net income from $13.4 billion to $8.35 billion. Trading revenue dropped while non-compensation expenses, which were affected by regulatory proceedings and litigation, went up 14%. It was just last year that the investment bank paid $550 million to settle SEC charges that it misled investors when selling a mortgage-linked investment in 2007. Goldman Sachs is still contending with state and federal securities complaints alleging improper disclosure related to mortgage-related products. As of the end of 2010, estimated plaintiffs’ aggregate cumulative losses in active cases against Goldman Sachs was at approximately $457 million.

Related Web Resources:
Goldman Sachs Puts ‘Possible’ Legal Losses at $3.4 Billion, Bloomberg Businessweek, March 1, 2011

Form 10-K, SEC

Worst-Case Scenario Losses for JP Morgan & Chase May Be As High as $4.5 Billion, Institutional Investors Securities Blog, February 28, 2011

Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million, Stockbroker Fraud Blog, July 30, 2010

Continue reading "Goldman Sachs Reports $3.4 Billion in “Reasonably Possible” Losses from Legal Claims " »

February 17, 2011

Ex-Goldman Sachs Broker’s Request for SEC Help in Obtaining Documents from Germany Denied by District Court

The U.S. District Court for the Southern District of New York says it will not direct the Securities and Exchange Commission to contact German authorities on behalf ex-Goldman Sachs & Co. (GS) executive Fabrice Tourre, who is seeking to obtain certain documents related to the securities fraud case against him. Per Magistrate Judge Michael Dolinger’s ruling, a discovery request based on Federal Rule of Civil Procedure 34(a) doesn’t “extend” to having a
“government agency make requests to a foreign government under the terms of” a memorandum of understanding between both parties. Dolinger notes that while MOU between the SEC and its German equivalent allows both regulators to help each other in the enforcement of their respective securities laws, “there is no indication” that the MOU is supposed to offer a right or a benefit to a private party, such as allowing a securities fraud litigant to obtain discovery in Germany.

The SEC charged Goldman Sachs and Tourre over alleged misstatements and omissions related to collateralized debt obligations called Abacus 2007-AC1, a derivative product linked to subprime mortgages. The broker-dealer settled its securities case for $550 million. Meantime, Tourre, who is accused of giving Goldman Sachs “substantial assistance” in its alleged efforts to mislead investors, is seeking to have the SEC case against him dismissed. He is pointing to Morrison v. National Australia Bank Ltd., a US Supreme Court decision that was issued two months after the SEC filed charges against him.

This week, his lawyers argued that the SEC was attempting to circumvent the Supreme Court ruling, which limits the reach of civil claims over acts that occurred outside the country. The transactions involving Tourre that are under dispute took place abroad.

Goldman’s Tourre Shouldn’t Face SEC Lawsuit, His Lawyers Say, Bloomberg Businessweek, February 15, 2011

The SEC Complaint (PDF)

Morrison v. National Australia Bank Ltd., US Supreme Court


More Blog Posts:
Goldman Sachs Sued by ACA Financial Guaranty Over Failed Abacus Investment for $120M, Institutional Investors Securities Blog, January 10, 2011

Goldman Sach’s $550 Million Securities Fraud Settlement Not Tied to Financial Reform Bill, Says SEC IG, Institutional Investors Securities Blog, October 27, 2010

Goldman Sachs International Fined $27M by UK’s FSA for Not Reporting SEC Investigation into Abacus 2007-AC1 Synthetic Collateralized Debt Obligation, Institutional Investors Securities Blog, October 7, 2010

Continue reading "Ex-Goldman Sachs Broker’s Request for SEC Help in Obtaining Documents from Germany Denied by District Court" »

February 10, 2011

CalPERS Files Securities Fraud Lawsuit Against Lehman Brothers

The California Public Employees' Retirement System is suing Lehman Brothers Holdings Inc., its ex-executives, and a number of bond underwriters for fraud and of making materially false statements about mortgage-backed securities losses. CalPERS, a $229 billion public pension fund, owned about $700 million Lehman bonds and 3.9 million shares of Lehman bonds when Lehman filed for bankruptcy in September 2008. Because of the economic crisis, CalPERS funds lost $100 billion in value from September 2008 and March 2009.

In its securities fraud complaint, CalPERS accused Lehman of “dramatically” borrowing to fund its real estate investments from 2004 to 2007—high-risk activity that investors were not told about. Other defendants include ex-Lehman Chief Executive Richard S. Fuld Jr., ex-Lehman Chief Financial Officers Erin Callan and Christopher O'Meara, 9 Lehman directors, and 33 others firms, including Wells Fargo Securities, Citigroup Global Markets Inc., and Mellon Financial Markets. The defendants allegedly failed to disclose not just Lehman’s exposure to Alt-A lending and subprime, but also its mortgage-related assets' true value.

This securities complaint is CalPERS second action against members of Wall Street that sold mortgage-backed securities. In July 2009, CAlPERS sued Standard & Poor’s, Moody’s Investors Services Inc., and Fitch Inc. The complaint accused the financial rating companies of giving top grades to bonds that ended up sustaining huge financial losses when the subprime mortgage securities market collapsed.

Also, CalPERS has a shareholder lawsuit against Bank of America Corp. (BAC) over its Merrill Lynch acquisition. The pension fund also has a case against BofA’s Countrywide Financial.

Related Web Resources:
Calpers Alleges Top Lehman Execs Misled On Exposures, Financials, The Wall Street Journal, February 8, 2011

CalPERS suit accuses Lehman Bros. of fraud, Los Angeles Times, February 9, 2011

CalPERS


Related Blog Posts About Pension Funds:
Quadrangle Cofounder and CalPERS Partner Steven Rattner Settles NY Pension Fund Corruption Probe for $10M, Institutional Investors Securities Blog, January 4, 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

In Securities Fraud Case Against Morgan Stanley Pension Fund Doesn’t Have Standing to Bring Certain Claims, Says Court, Institutional Investors Securities Blog, October 4, 2010

Continue reading "CalPERS Files Securities Fraud Lawsuit Against Lehman Brothers" »

February 2, 2011

Financial Fraud Verdict: Jury Orders BDO Seidman to Pay Aviation Pioneer George Batchelor's Estate and Foundation $91M

Nine years after the death of aviation pioneer and philanthropist George Batchelor, a circuit court verdict has issued a jury awarding his estate and foundation $91 million in its financial fraud case against BDO Seidman. The lawsuit, which was filed in 2002, accused BDO Seidman of covering up inaccurate financial statements when Grand Court Lifestyles, a company that Batchelor had invested tens of millions of dollars in, was audited.

Of the $91 million verdict, $36 million is compensatory damages, $55 million is punitive damages. All of the award will go to the Foundation, which means that the dozens of organizations that it supports may get more funds. Prior to his death, Batchelor, who founded Batch Air and Arrow Air, gave about $100 million to causes related animals, kids, medical facilities, and the environment.

The law firm that represents Batchelor’s estate says that until the end, BDO “denied it had a public duty” and “was willing to look the other way” for Grand Court, which let go of another accounting firm that wanted to know how the manager/owner of “senior” communities valued certain properties. Deloitte & Touche, which was the original accounting firm for Grand Court, has settled its securities case with the Batchelor Foundation.

Financial fraud and its concealment are against the law. If you are a victim of financial fraud you may have grounds for a civil case.

Related Web Resources:
$91M awarded in Batchelor case, Miami Herald, February 1, 2011

Jury Rules Against BDO, The Wall Street Journal, February 1, 2011

Continue reading "Financial Fraud Verdict: Jury Orders BDO Seidman to Pay Aviation Pioneer George Batchelor's Estate and Foundation $91M" »

January 17, 2011

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

January 6, 2011

School Districts Files Securities Fraud Lawsuit San Mateo County Over Lehman Brothers-Related Investment Losses

12 San Mateo County school districts have filed a $20 million securities fraud lawsuit against the county and its former treasure Lee Buffington. The securities complaint says that the plaintiffs lost approximately that amount in school district funds when Lehman Brothers filed for bankruptcy in 2008. The school districts contend that Buffington should have made smarter investments to protect their money. Instead, they claim that San Mateo County put too much of its pulled investment funds in the Lehman Holdings. The county lost approximately $155 million in the funds.

According to county schools Superintendent Anne Campbell, who is also a plaintiff of the securities case, the intention is to recover the $20 million, which has exacerbated the districts’ financial problems, and make the county change its investment policy so that it gets “specific” about the terms of the portfolio’s diversification. The plaintiffs are accusing Buffington and other county investment managers of negligent management and breach of fiduciary duty.

Meantime, Stuart Gasner, the county’s attorney, has called his client a “victim of Lehman Brothers' nondisclosures.” He contends that the county did not do anything wrong. Also, not only is he accusing the school districts of failing to follow proper procedures when filing their securities complaint, but he also says that the complaint is not beneficial to taxpayers because it won’t “bring in any new money” while costing funds for the county's defense.

School districts who are plaintiffs of the securities lawsuit against San Mateo County include Woodside Elementary School District, Belmont-Redwood Shores Elementary School District, San Mateo Union High School District, Burlingame Elementary School District, San Carlos Elementary School District, Cabrillo Unified School District, San Bruno Park Elementary School District, Jefferson Elementary School District, Ravenswood City Elementary School District, Las Lomitas Elementary School District, Portola Valley Elementary School District, and Menlo Park City Elementary School District.

Related Web Resources:
School Districts Sue San Mateo County For $20 Million, KTVU, January 5, 2011

Schools sue San Mateo County, The Daily Journal, January 5, 2011

School Districts, San Mateo County

San Mateo County

Lehman Brothers, Stockbroker Fraud Blog

Continue reading "School Districts Files Securities Fraud Lawsuit San Mateo County Over Lehman Brothers-Related Investment Losses " »

December 24, 2010

Wells Fargo & Co. May Have to Pay Another $15M to Minnesota Nonprofits For Securities Fraud

A district court judge in Minnesota has ruled that Wells Fargo & Co. must pay four Minnesota nonprofits $15 million or more in costs, fees, and interests for breach of fiduciary and securities fraud. The investment bank has already been slapped with a $29.9 million verdict in this case against plaintiffs the Minnesota Medical Foundation, the Minneapolis Foundation, the Minnesota Workers' Compensation Reinsurance Association, and the Robins Kaplan Miller & Ciresi Foundation for Children.

Judge M. Michael Monahan, in his order filed on Wednesday, scolded Wells Fargo for its “management complacency, if not hubris” that led to investment losses for clients of its securities-lending investment program. He said that he agreed with the jury’s key findings that the financial firm failed to fully disclose that it was revising the program’s risk profile, impartially favored certain participants, and advanced the interest of borrowing brokers. Monahan said that it was evident that Wells Fargo knew of the increased risks it was adding to the securities lending program and that its line managers did not reasonably manage these, which increased the chances that plaintiffs would suffer financial huge harm.

Monahan noted that because Minneapolis litigator Mike Ciresi provided a “public benefit” by revealing the investment bank’s wrongdoing, Wells Fargo has to pay plaintiffs’ legal fees, which Ciresi’s law firm says is greater than $15 million. Also, the financial firm has to give back to the Minnesota nonprofits an unspecified figure in fees (plus interest) that it charged for managing the investment program, in addition to interest going as far back as 2008 on the $29.9 million verdict.

Monahan also overturned the part of the jury verdict that was in Wells Fargo’s favor and is ordering a new trial regarding allegations that the investment bank improperly seized $1.6 million from a bond account of children’s charity as the lending program was failing. The district judge, however, denied the plaintiffs’ motion for a new trial to determine punitive damages.

Judge unloads on Wells Fargo with order on investment program, Poten.com, December 24, 2010

Wells Fargo ordered to pay $30 million for fraud, Star Tribune, June 2, 2010

Wells Fargo to Pay $30M in Compensatory Damages to Four Nonprofits for Securities Fraud, Stockbroker Fraud Blog, June 3, 2010

Continue reading "Wells Fargo & Co. May Have to Pay Another $15M to Minnesota Nonprofits For Securities Fraud" »

December 18, 2010

Hedge Fund Owner of Trueblue Strategies LLC Settles SEC Charges that He Hid Investor Trading Losses

Hedge fund manager and investment adviser Trueblue Strategies LLC owner Neil Godbole has agreed to settle for $40,000 Securities and Exchange Commission charges that he hid his investors’ trading losses. Godbole also agreed to an advisory industry bar for a minimum of five years and to cease and desist from future 1940 Investment Advisers Act violations. By settling, he is not denying or agreeing that he committed any wrongdoing.

Per the securities fraud charges, Godbole started to manage the Opulent Lite LP, a now failed hedge fund, in 2005. At its height, the hedge fund managed about $30 million in assets and had about 70 investors. Until 2008, Godbole invested mainly in S&P index options and short term Treasury bonds.

In February 2008, he lost about $8.3 million as a result of a number of unprofitable deals, which he did not disclose. Also, the SEC claims that Godbole told investors that the fund was valued at $28.7 million when it was actually worth $18.5 million.

In attempt to make up the financial losses, Godbole started to use what he called a “rollover strategy” that involved the opening of options positions when each monthly trading period ended. The SEC says that throughout that year, the hedge fund manager misrepresented the fund’s trading results and asset value. When he told investors in December 2008 that the fund’s asset value was more than $26 million, the asset value had actually dropped to under $14.4 million.

The SEC says that any losses for that year that Godbole did disclose were “paper losses” related to the rollover strategy and in 2008, he had the hedge fund pay his management fees based on the inflated fund value. Investors were harmed when he had the fund redeem units at an inflated value.

It wasn’t until 2009 that Godbole notified investors of the funds’ losses and actual financial state. Many investors sought to pull out. The hedge fund was liquidated by March of that year.

Related Web Resources:
SEC Charges San Francisco’s Opulent Lite Hedge Fund For Concealing Losses, Newsroom Magazine, December 1, 2010

Saratoga fund manager settles with SEC, Business Journal, December 2, 2010

1940 Investment Advisers Act, SEC


Continue reading "Hedge Fund Owner of Trueblue Strategies LLC Settles SEC Charges that He Hid Investor Trading Losses " »

December 16, 2010

Bank of America to Pay $137M Over Alleged Investment Scam To Pay Municipalities Low Interest Rates on Investments and $9M Over Alleged Bid-Rigging Scheme to Nonprofits

Bank of America has agreed to pay $137 million to settle charges that it was involved in a financial scheme that allowed it to pay cities, states, and school districts low interest rates on their investments. The financial firm allegedly conspired with rivals to share municipalities’ investment business without having to pay market rates. As a result, government bodies in “virtually every state, district, and territory” in this country were paid artificially suppressed yields or rates on municipal bond offerings’ invested proceeds.

Bank of America has agreed to pay $36 million to the Securities and Exchange Commission and $101 million to federal and state agencies. The Los Angeles Times is reporting that $67 million will go to 20 US states. BofA will also make payments to the Office of the Comptroller of the Currency and the Internal Revenue Service. The SEC contends that from 1998 to 2002 the investment bank broke the law in 88 separate deals.

In its Formal Agreement with the Office of the Comptroller of the Currency, Bank of America agreed to strengthen its procedures, policies, and internal controls over competitive bidding in the department where the alleged illegal conduct took place, as well as take action to make sure that sufficient procedures, policies, and controls exist related to competitive bidding on an enterprise wide basis. The OCC is accusing the investment bank of taking part in a bid-ridding scheme involving the sale and marketing of financial products to non-profit organizations, including municipalities.

Per their Formal Agreement, the bank must pay profits and prejudgment interest from 38 collateralized certificate of deposit transactions to the non-profits that suffered financial harm in the scam. Total payment is $9,217,218.


Related Web Resources:
Bank of America settles allegations of kickbacks, collusion, Los Angeles Times, December 8, 2010

Bank of America to Pay $137 Million in Muni Cases, Bloomberg, December 7, 2010

OCC, Bank of America Enter Agreement Requiring Payment of Profits Plus Interest to Municipalities Harmed by Bid-Rigging on Financial Products, Office of the Comptroller of the Currency, December 7, 2010

Bank of America, Stockbroker Fraud Blog

Continue reading "Bank of America to Pay $137M Over Alleged Investment Scam To Pay Municipalities Low Interest Rates on Investments and $9M Over Alleged Bid-Rigging Scheme to Nonprofits " »

December 14, 2010

Goldman Sachs & Co. Clearing Unit Must Pay Unsecured Creditors of Bayou Hedge Funds $20.5M FINRA Arbitration Award, Says District Court

A district court has rejected Goldman Sachs & Co.’s (GS ) challenge to a $20.5 million securities fraud award for unsecured creditors of the failed Bayou hedge funds. The unsecured creditors are blaming the investment bank of failing to look at certain red flags and, as a result, facilitating the massive scam. The U.S. District Court for the Southern District of New York said it was sustaining the award issued by the Financial Industry Regulatory Authority arbitration panel.

The court said that contrary to Goldman’s argument, the FINRA panel “did not ‘manifestly disregard the law’ when reaching its conclusion. Also, the court noted that the panel had found that Goldman Sachs Execution and Clearing unit was not innocent of wrongdoing in that it failed to take part in a “diligent investigation” that could have uncovered the fraud.

The Bayou Hedge Funds group collapsed in 2005. According to regulators, investors lost over $450 million as a result of the false performance data and audit opinions that were issued. The Securities and Exchange Commission and the Justice Department sued the group’s founders, Daniel Marino and Samuel Israel III over the investors’ financial losses and the firm’s collapse. Both men have pleaded guilty to criminal charges and are behind bars.

The court not only disagreed with the Goldman Sachs clearing unit that the panel was not in manifest disregard of the law, but also, it found that as Goldman’s client agreements with the Bayou funds provided it with “broad discretion” over the use of securities and money in the funds’ accounts, it was not unusual for a “reasonable arbitrator” to find that Goldman’s rights in relation to the accounts provided it with “sufficient dominion and control to create transferee liability.”

Related Web Resources:
Goldman Sachs Execution & Clearing L.P. v. Official Unsecured Creditors' Committee of Bayou Group LLC, FINRA Dispute Resolution (PDF)

Court Rebuffs Goldman ChallengeTo $20.5M Bayou Arbitration Award, BNA, December 9, 2010

Goldman Sachs, Stockbroker Fraud Blog

Continue reading "Goldman Sachs & Co. Clearing Unit Must Pay Unsecured Creditors of Bayou Hedge Funds $20.5M FINRA Arbitration Award, Says District Court" »

December 11, 2010

SEC IG Investigating Whether Examiners Were Told by Regional Official to Ignore "Red Flags" Indicating Massive Fraud

Securities and Exchange Commission Inspector General H. David Kotz says that his office is looking into a complaint that a regional official told examiners to not go after “red flags” that were found in an exam of an investment adviser where a “massive fraud” was discovered. The official in question reportedly played a significant part in an earlier exam of the investment firm, and although the securities fraud was going on then, it was not uncovered at the time.

The anonymous complaint also claims that the regional office had a hostile work environment because management failed to discipline the official even after an earlier OIG investigation found that the person had watched pornography on an SEC computer. In his semiannual report to Congress, Kotz says that the OIG is almost done with its probe and will present its findings.

The OIG also determined that Bank of America Inc.’s Troubled Asset Relief Program fund's status played a role in the “favorable” $33 million settlement that SEC staffers had initially recommended to resolve charges that the investment bank issued misleading proxy disclosures related to its Merrill Lynch acquisition. U.S. District Judge Jed S. Rakoff, however, refused to approve that settlement, and Bank of America eventually settled the case for $150 million.

Kotz says that the OIG has probed into allegations from an ex-Enforcement attorney that the division was negligent in how it handled an insider trading probe. A report of its findings will be issued during the next semiannual reporting period.

Other pending OIG investigations involve:
• Allegations that attorneys at a regional office did not properly investigate a law firm for alleged obstruction of justice related to an SEC case. Improper preferential treatment may have been a factor.
• Allegations that an SEC official violated ethics rules while providing testimony to a congressional committee.
• Allegations that a staff member acted in an abusive and intimidating manner toward contract staff.
• Complaints that SEC staff leaked information about an investigation of an examination to the media.
• Allegations that at least one contractor worked at the SEC before a background probe had been completed.


Related Web Resources:
OIG Semiannual Report, SEC

Bank of America To Settle SEC Charges Regarding Merrill Lynch Acquisition Proxy-Related Disclosures for $150 Million, Stockbroker Fraud Blog, February 15, 2010

Bank of America Agrees to settle SEC Charges of Merrill Lynch Bonuses for $33 Million But Judge Blocks Settlement, Stockbroker Fraud Blog, August 6, 2009


Continue reading "SEC IG Investigating Whether Examiners Were Told by Regional Official to Ignore "Red Flags" Indicating Massive Fraud " »

December 9, 2010

Actions of Former Ferris, Baker Watts, Inc. General Counsel Accused of Supervising Rogue Broker to be Reviewed by SEC

The Securities and Exchange Commission will be taking a closer look at the actions of ex- Ferris, Baker Watts, Inc. General Counsel Theodore Urban. Urban has been accused of failing to reasonably supervise stockbroker Stephen Glantz, who was involved a stock market manipulating scam with Innotrac Corp. stock.

It is rare for the SEC to examine the actions of a general counsel. However, the agency says it is looking at the case because the proceedings bring up key “legal and policy issues," such as whether Urban acted reasonably in the manner that he oversaw Glantz and chose to respond to signs of broker misconduct. The case also brings up the questions of whether securities professionals such as Urban should be made to “report up” and if his status as a lawyer and his role as “FWB’s general counsel affect is liability for supervisory failure.”

Earlier this year, Securities & Exchange Commission Administrative Law Judge Brenda Murray ruled that Urban did not inadequately supervise Glantz and that the proceedings against him be dropped. Murray said that per the 1934 Securities Exchange Act, a person cannot be held liable for supervisory deficiencies if appropriate procedures for detecting and stopping the violations were applied, She said that Urban had no reasonable grounds to think that procedures had not been followed.

However, Murray’s decision isn’t final until the SEC enters its final order, and on Tuesday the commission declined Urban’s motion requesting that the SEC affirm Murray’s ruling. Division lawyers have said that Murray’s decision was not consistent with previous SEC precedent, lowers the standards that supervisors at dealers, brokers, and investment advisers must meet, and did not protect the investing public by making Urban accountable to sanctions.

SEC to Review Actions of Bank General Counsel Who Supervised Rogue Broker, Law.com, December 9, 2010

Read the SEC order denying motion for summary affirmance (PDF)

Read the administrative law judge's ruling (PDF)

Ex-Ferris, Baker Watts, Inc. General Counsel Did Not Fail to Properly Supervise Broker Fraudster, Says SEC Judge, Stockbroker Fraud Blog, September 30, 2010

Continue reading "Actions of Former Ferris, Baker Watts, Inc. General Counsel Accused of Supervising Rogue Broker to be Reviewed by SEC" »

December 7, 2010

Operation Broken Trust Investment Fraud Sweep Has Ended

According to the Financial Fraud Enforcement Task Force, the largest investment fraud sweep ever conducted by the United States has ended. Called Operation Broken Trust, the probe involved 231 cases and over 120,000 fraud victims who sustained over $8 billion in investment losses.

Operation Broken Trust’s objective was to discover and expose large scale investment fraud schemes in the US and notify the public about bogus financial scams. The probe focused on schemes that directly targeted individual investors as opposed to long-term complex corporate fraud issues. In many case, the criminals involved were trusted members of the victims’ communities, such as a coworker or a fellow church attendee. A number of investors lost their homes and/or life savings as a result of the scams.

Victims were targeted by other individuals who were promoting “investment opportunities” that were either not structured the way they were promoted or totally bogus. Scams include Ponzi schemes, high-yield investment fraud schemes, foreign exchange fraud, commodities fraud, pump-and-dump scams, market manipulation, business opportunity fraud, real estate investment fraud, and affinity fraud.

The FBI says that Los Angeles, Dallas, New York, San Francisco, and Salt Lake City were the leading cities for Ponzi scams. More than 200 Ponzi cases have been opened since the beginning of 2009. Many of these schemes resulted in over $20 million in losses. The FBI says it has been able to shut down many of the scams and many of those responsible have been arrested.

Operation Broken Trust includes civil and criminal enforcement actions that took place between August 16 and December 1, 2010.

Related Web Resources:
Operation Broken Trust, FBI, December 6, 2010

Financial Fraud Enforcement Task Force , US Department of Justice

Stockbroker Fraud Blog


Continue reading "Operation Broken Trust Investment Fraud Sweep Has Ended " »

November 29, 2010

Financial Firms File Securities Fraud Lawsuits Against Each Other Over 2008 Credit and Subprime Crisis

In what one investment banking official is calling a “second wave” of securities litigation stemming from the credit and subprime crisis of 2008, financial firms are now suing other financial institutions for damages. While speaking on a Practising Law Institute panel, Morgan Stanley managing director D. Scott Tucker noted that this “second wave” is the “exact opposite of the first wave,” which was primarily brought by smaller pension funds or states claiming violations of the 1933 Securities Act and the 1934 Securities Exchange Act.

Tucker said that with this new wave, most of the plaintiffs are financial institutions, including investment managers and hedge funds, that are asserting common law fraud and making other state law claims. Also, these latest lawsuits are primarily individual cases, rather than class actions. The securities at the center of this latest wave of litigation are complex structured products, such as credit default swaps, collateralized debt obligations, and mortgage-backed securities, as well as complaints involving private placements and derivatives or securities that don’t trade on liquid markets.

Our securities fraud lawyers at Shepherd Smith Edwards & Kantas LTD LLP represent institutional investors who suffered financial losses because of their dealings with investment companies. Unlike other law firms, our stockbroker fraud lawyers will never represent brokerage firms.

Over the years, we have represented thousands of investors and recovered millions of dollars for them. We are dedicated to protecting our clients' right to financial recovery.

Related Web Resources:
Panel: 2008 Credit Crisis Now Spawning New Wave of Suits Between Financial Firms, BNA, November 16, 2010

Can’t Grasp Credit Crisis? Join the Club, New York Times, March 19, 2008

Stockbroker Fraud Blog

November 23, 2010

Class Action Securities Fraud Lawsuit Accuses SEC of Gross Negligence Related to Bernard Madoff Ponzi Scam

Three individuals, Judith Welling, Robert Mick, and Charles Mederrick, have filed a purported securities class action against the Securities and Exchange Commission over financial losses related to investments they made in Bernard L. Madoff Investment Securities LLC. In their amended complaint, the plaintiffs are seeking damages sustained because of the “grossly negligent acts of the Defendant in connection with the SEC's deficient review of complaints and information” that Madoff was running a Ponzi scheme. Mick, Welling, and Mederrick contend that their investments, which they made over a 16-year period, caused them to suffer “catastrophic” consequences.

In their complaint, the plaintiffs accuse the SEC of “repeatedly and grossly failing to adequately apprise itself” of the facts related to the Madoff Ponzi scam allegations despite the fact that for years there had been numerous complaints. Last year, the SEC’s Inspector General put out a 457-page report detailing the agency’s failure to detect Madoff’s fraud scheme despite the signs.

The class action lawsuit is on behalf of those who invested in Madoff Investment Securities between November 1992 and December 2008 and have filed administrative damage claims seeking to recover damages for the SEC’s alleged negligence. The class could be comprised of more than 100 victims. The plaintiffs’ securities fraud lawyer says that to his firm’s knowledge, this is the first class action filed against the SEC over its handling of Madoff.

Madoff’s $50 billion Ponzi scam defrauded many institutional and individual investors. Some of these investors lost everything.


Related Web Resources:
SEC Hit With Class Action Alleging Gross Negligence in Oversight of Madoff, BNA Securities Law Daily

Madoff Investors Sue SEC for Incompetence, Daily FInance, November 12, 2010

Bernie Madoff's $50 Billion Ponzi Scheme, Forbes, December 12, 2008

Continue reading "Class Action Securities Fraud Lawsuit Accuses SEC of Gross Negligence Related to Bernard Madoff Ponzi Scam" »

November 22, 2010

SEC Proposes Antifraud Derivatives Rule Related to Securities-Based Swaps

The Securities and Commission has agreed to propose an antifraud rule that deals with the issue of security-based swaps-related fraud, manipulation, and deception. The proposed Rule 9j-1 would bar fraud and manipulation in the offer, sale, and purchase of the swaps. Unlike regular securities transactions, securities-based swaps involve ongoing payments and deliveries between when they are bought and sold. The issues of payments, deliveries, and other rights and obligations are also tackled.

SEC Chairman Mary Schapiro says that the proposed rule would be an important way to make sure that the swap market is run with integrity while allowing the Commission the chance to target potential fraud or other misconduct through enforcement. The relevant change with this proposed rule from current antifraud provisions Section 17(a) of the 1933 Securities Act and Section 10(b) of the 1934 Act is that the proposed rule is applicable to ongoing rights and activities.

The Dodd-Frank Wall Street Reform and Consumer Protection Act has given oversight of security-based swaps to the SEC, while the Commodity Futures Trading Commission is charged with overseeing non-security-based swaps. The CFTC had already proposed its anti-manipulation rule amendments dealing with manipulative and fraudulent conduct of swaps under its jurisdiction.

The SEC has also agreed to propose rules to effect a whistleblower bounty program.


Related Web Resources:
SEC Targets Security-Based Swaps, FuturesMag.com, November 19, 2010

SEC reveals security-based swap rules, GFSNews, November 22, 2010

Securities and Exchange Commission

Continue reading "SEC Proposes Antifraud Derivatives Rule Related to Securities-Based Swaps" »

November 3, 2010

Should Global Securities Fraud Lawsuits By Private Litigants Be Allowed? The SEC Wants To Know

The Securities and Exchange Commission is seeking comments on whether amendments should be made to federal securities laws so that private litigants can file transnational securities fraud lawsuits. Comments are welcomed until February 18, 2011. The SEC says to refer to File No. 4-617.

In its request, the SEC points to the US Supreme Court's ruling in Morrison v. National Australia Bank. The decision placed significant limits on Section 10(b) antifraud proscriptions’s extraterritorial reach. That said, Congress, through Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 929Y, gave back to the government its ability to file transnational securities fraud charges. It is under the new financial reform law that Congress has ordered the SEC to determine whether a private remedy should apply to just institutional investors or all private actors and/or others.

Included in what the study will analyze are how this right of action could impact international comity, the economic benefits and costs of extending such a private right of action, and whether there should be a narrow extraterritorial standard. The SEC also wants to know if it makes a difference whether:

• The security was issued by a non-US company or a US firm.
• A firm’s securities are traded only outside the country.
• The security was sold or bought on a foreign stock exchange or a non-exchange trading platform or another alternating trading system based abroad.

Related Web Resources:
Morrison v. National Australia Bank (PDF)

US Securities and Exchange Commission

Dodd-Frank Wall Street Reform and Consumer Protection Act, SEC (PDF)

SEC Seeks Comments on Extension Of Private Actions to Global Securities Fraud, Alacrastore, October 27, 2010

Continue reading "Should Global Securities Fraud Lawsuits By Private Litigants Be Allowed? The SEC Wants To Know " »

October 30, 2010

Securities Claims Against Goldman Sachs Over Mortgage-Backed Certificates are Partially Dismissed by Court Due to Lack of Injury

The U.S. District Court for the Southern District of New York has ruled that without an injury, a mortgage-backed certificates holder cannot maintain a securities claim against MBS underwriter Goldman Sachs & Co. (GS) and related entities for allegedly misstating the risks involved in the certificates in their registration statement. Judge Miriam Goldman Cedarbaum says that plaintiff NECA-IBEW Health & Welfare Fund knew that the investment it made could be illiquid and, therefore, cannot allege injury based on the certificates hypothetical price on the secondary market at the time of the complaint. The court, however, did deny Goldman's motion to dismiss the plaintiff's claims brought under the 1933 Securities Act’s Section 12(a)(2) and Section 15.

The Fund had purchased from Goldman a series of MBS certificates with a face value of $390,000 in the initial public offering on Oct. 15, 2007. The fund then bought another series of MBS certificates with a $49,827.56 face value from Goldman, which served as underwriter, creator of the mortgage loan pools, sponsor of the offerings, and issuer of the certificates after securitizing the loans and placing them in trusts.

Per the 1933 Act’s Section 11, the Fund alleged that in the resale market the certificates were valued at somewhere between “‘between 35 and 45 cents on the dollar.” However, instead of alleging that it did not get the distributions it was entitled to, the plaintiff contended that it was exposed to a significantly higher risk than what the Offering Documents represented. The court said that NECA failed to state any allegation of an injury in fact. The court granted the defendants’ motion to dismiss.

Following the court’s decision, Shepherd Smith Edwards and Kantas Founder and Securities Fraud Attorney William Shepherd said, “It is sad that large and small investors have little clout in the processes of selecting judges. Thus, Wall Street continues to gain advantages in court—especially federal court.”

Related Web Resources:
NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co.

Court Partially Dismisses Claims Against Goldman Over Mortgage-Backed Certificates, AlacraStore

NECA-IBEW

Continue reading "Securities Claims Against Goldman Sachs Over Mortgage-Backed Certificates are Partially Dismissed by Court Due to Lack of Injury" »

October 27, 2010

Goldman Sach’s $550 Million Securities Fraud Settlement Not Tied to Financial Reform Bill, Says SEC IG

According Securities and Exchange Commission Inspector General H. David Kotz, there is no evidence that the SEC’s enforcement action against Goldman Sachs or the $550 million securities fraud settlement that resulted are tied to the financial services reform bill. Kotz also noted that it does not appear that any agency person leaked any information about the ongoing investigation to the press before the case was filed last April. The SEC says that the IG’s report reaffirms that the complaint against Goldman was based only on the merits.

That said, Kotz did find that SEC staff failed to fully comply with the administrative requirement that they do everything possible to make sure that defendants not find out about any action against them through the media. Kotz notes that this, along with the failure to notify NYSE Reg[ulation] before filing the action and the fact that the action was filed during market hours caused the securities market to become more volatile that day. Goldman had settled the SEC’s charges related to its marketing of synthetic collateralized debt obligation connected to certain subprime mortgage-backed securities in 2007 on the same day that the Senate approved the financial reform bill.

Last April, several Republican congressman insinuated that politics may have been involved because the announcement of the case came at the same time that Democrats were pressing for financial regulatory reform. SEC Chairman Mary Schapiro denied the allegation.

Earlier this month, Rep. Darrell Issa (R-Calif.) wrote Schapiro asking to see an unredacted copy of the internal investigative report by the IG. Issa is the one who had pressed Kotz to examine the decision-making process behind the Goldman settlement. Issa's spokesperson says the lawmaker is concerned that the SEC can redact parts of its IG reports before the public and Congress can see them. However, at a Senate Banking Committee last month, Kotz, said that the SEC redacts information because the data could impact the capital markets.


Related Web Resources:
SEC Investigation Finds No Evidence Politics Drove Goldman Suit, MMC-News, October 21, 2010

Goldman Settles With S.E.C. for $550 Million, The New York Times, July 15, 2010

SEC's Inspector General to Investigate Timing of Suit Against Goldman Sachs, Fox News, April 25, 2010

General H. David Kotz, SEC


Continue reading "Goldman Sach’s $550 Million Securities Fraud Settlement Not Tied to Financial Reform Bill, Says SEC IG" »

October 21, 2010

$35.2 Million Shareholder Settlement Against DHB Industries Overturned by Circuit Court

The U.S. Court of Appeals for the Second Circuit overturned the $32.5 million Shareholder settlement against DHB Industries because the agreement improperly released, under the Sarbanes-Oxley Act, the body-armor maker’s former CEO and CFO from liability. The case involves a shareholder complaint that was filed against DHB and a number of executives in 2005.

Company officers agreed to settle but only on the condition that CFO Dawn M. Schlegel and ex-CEO CEO David H. Brooks be released from liability. A district judge approved the settlement, but then the government objected on the grounds that only the Securities and Exchange Commission can “exempt” executives from requirements under Sarbanes-Oxley. The three-judge panel agreed.

Judge Peter Hall wrote that allowing the settlement to move forward would be “flying in the face of” lawmakers and their efforts to hold senior corporate officers of public companies directly liable for their actions that have “caused material noncompliance with financial reporting requirements.”

Last month, a jury found Brooks and former DHB Industries COO Sandra Hatfield guilty of insider trading, obstruction of justice, and fraud. Brooks was also found guilty of lying to auditors. The two defendants were accused of conspiring to loot DHB for personal gain, falsely inflating inventory at a subsidiary so that reported profits could be artificially boosted, lying to auditors, concealing Brooks’ control of a related company that would then funnel funds toward his thoroughbred horse-racing business, and accounting fraud. The Justice Department say the defendants reaped close to $200 million.

Related Web Resources:
Court Tosses $35.2 Million Body-Armor Settlement, Courthouse News Service, September 30, 2010

David H. Brooks, Founder and Former Chief Executive Officer of DHB Industries, Inc. and Sandra Hatfield, Former Chief Operating Officer, Convicted of Insider Trading, Fraud, and Obstruction of Justice, FBI, September 14, 2010

Continue reading "$35.2 Million Shareholder Settlement Against DHB Industries Overturned by Circuit Court" »

October 19, 2010

Oregon Files Securities Fraud Lawsuit Against University of Phoenix Parent Company Apollo Group Inc. of Arizona

This week, Oregon Attorney General John Groger and Treasurer Ted Wheeler announced that the state is suing University of Phoenix’s parent company, Apollo Group Inc. of Arizona, and several of its executives for securities fraud. The state officials claim that the plaintiffs misled investors in the firm’s financial statements about the for-profit college’s revenue.

The alleged misconduct is said to involve the school’s revenue between 2007 and 2010. Because of the misrepresentation, the Oregon Public Employee Retirement Fund lost approximately $10 million. Oregon’s securities lawsuit, which joins a class action case while seeking lead plaintiff status, accuses the defendants of violating securities law with materially false and misleading statements that misrepresented or did not disclose information that could have helped investors determine their investments’ risk levels.

The state contends that Oregonians seeking higher education were also injured by the Apollo Group’s financial practices. For example, the company is accused of not taking the proper steps when handling federal student loans. The firm also is accused of improperly dealing with canceled loans, causing students to be held financially responsible for classes that they didn’t take.

After the company’s alleged misconduct was disclosed in an October 2009 filing and the SEC investigation became publicly known, shares of Apollo dropped 17.7% in one day. With the pre-disclosure price sinking from $72.97/share to $60.06/share, almost $2 billion in market capitalization was wiped out.

Apollo’s stock price continued to drop this year, following calls for greater oversight over the for-profit college industry. Apollo’s improper business practices were also brought to light during Congressional hearings. Recently, a Senate probe and a Government Accountability Office report revealed that Apollo also committed fraud when marketing its services to prospective students. Apollo shares were trading at $38.94 on August 13, 2010.

Related Web Resources:
Oregon Sues University of Phoenix Firm for Fraud, KTVZ, October 18, 2010

State Of Oregon Joins Class-Action Suit Against Apollo Group, The Wall Street Journal, October 18, 2010

Apollo Group Inc. of Arizona

Oregon Public Employee Retirement Fund

Continue reading "Oregon Files Securities Fraud Lawsuit Against University of Phoenix Parent Company Apollo Group Inc. of Arizona" »

October 16, 2010

Wall Street Complains Financial Reform Will Mean More Lawsuits. Is This Bad?

Public companies and employers may have to contend with an unlimited number of expensive securities lawsuits under the whistleblower provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which not only includes provisions for an expanded statute of limitations under which employees can sue employers for discriminatory action but also sets up a new Securities and Exchange Commission bounty program. Labor and Employment Attorney Goldsmith recently spoke about this possibility while participating in a Practicing Law Institute panel. Goldsmith also noted that Dodd-Frank extends the whistleblower protections of the 2002 Sarbanes-Oxley Act to companies' affiliates or subsidiaries and nationally recognized statistical rating organizations’ employees.

Goldsmith contends that by enacting Dodd-Frank, Congress was showing “overt hostility” toward predispute arbitration agreements by not having them apply to whistleblower issues. He notes that while the Dodd-Frank provisions are supposed to make up for the limitations and loopholes of SOX, certain questions have arisen that have yet to be addressed.

Under section 922 of Dodd-Frank, the SEC is allowed to award whistleblowers between 10% and 30% of any penalty that above $1 million. Cases may include those brought by the Justice Department, the SEC, other federal agencies, and state attorneys general. The SEC started getting tips and complaints even before the statute was enacted.

With its new bounty program, the SEC is expected to increase its enforcement efforts. This could result in huge payments to whistleblowers, who can also receive cooperation credit if they were violators. However, former Chief Litigation Counsel Luis Mejia, who recently spoke at a DC bar event, said that he believes that Dodd-Frank’s whistleblower provision is “the most dangerous” of issues and could undermine corporate compliance programs. Rather than reporting problems internally, giving the company a chance to self-remediate or weed out old or unfounded claims, an individual might be more likely to “blow the whistle” because of the financial rewards.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker Fraud Lawyer William Shepherd had a different perspective to offer: “Regulation of Wall Street and business – or the lack of it - has obviously been a disaster over the last decade. Meanwhile the business community clamors for privatization to cure government waste and ineptness. From the birth of this nation lawsuits have been a form of privatization of government power. Why hire more police when lawyers can handle the job much more efficiently and at no cost to the taxpayers? The same is true of whistleblowers. Why use taxpayer dollars to investigate when those on the inside already understand the problem? Believe me, white collar criminals are more afraid of lawyers and whistleblowers than they are of regulators, many of whom they own! That is why they are afraid of the proposed reforms.”

According to a recent Senate report, whistleblowers can take credit for exposing 54.1% of fraud scams in public companies. Meantime, the SEC and auditors reportedly have uncovered just 4.1% of the schemes.


Related Web Resources:
Dodd-Frank Wall Street Reform and Consumer Protection Act (PDF)

Assessment of the SEC's Bounty Program, SEC Office of Inspector General, Office of Audits

Continue reading "Wall Street Complains Financial Reform Will Mean More Lawsuits. Is This Bad?" »

September 30, 2010

NJ Settles Municipal Bond Offering Fraud Charges with SEC

The state of New Jersey has settled Securities and Exchange Commission charges involving the alleged fraudulent marketing of municipal bonds. This is the first time that the SEC has filed charges against a US state for allegedly violating federal securities law.

The charges, brought by the SEC’s Municipal Securities and Public Pensions Unit, involved $26 billion in approximately 79 bond offerings that were offered between August 2001 and April 2007. The SEC accused New Jersey of concealing from bond investors the fact that the state didn’t have the money to fulfill its obligations under two of its largest pension plans for state employees and teachers. New Jersey also allegedly using accounting tricks to avoid increasing taxes to fund a 2001 benefits increase for both plans and hid this information from investors. As a result, the SEC contends that losses totaling approximately $2.4 billion were covered up.

The SEC says that New Jersey did not have written procedures on how to review bond documents and failed to train employees about its disclosure obligations. A training program regarding disclosures is now in place.

By agreeing to settle, New Jersey is not admitting to or denying the charges. It has, however, agreed to cease and desist from future violations. The SEC did not order a monetary fine or penalty as part of the settlement.

Related Web Resources:
State of New Jersey Resolves Three Year Inquiry by The U.S. Securities and Exchange Commission in Connection With Bond Offerings Between 2001 and 2007, New Jersey.gov, August 18, 2010


SEC Charges State of New Jersey for Fraudulent Municipal Bond Offerings, SEC.gov, AUgust 18, 2010

NJ Settles SEC Charges Of Fraudulent Municipal Bond Offerings, The Wall Street Journal, August 18, 2010

Continue reading "NJ Settles Municipal Bond Offering Fraud Charges with SEC" »

September 14, 2010

Allegations Against Goldman Sachs in $56M Securities Fraud Lawsuit Meet Morrison Standard, Says Australian Hedge Fund

Basis Yield Alpha Fund says that its $56 million securities fraud lawsuit against Goldman Sachs Group Inc. should go to trial. The Australian hedge fund contends that its securities complaint, which accuses the investment bank of inflating certain collateralized debt obligations’ value, meet the standard recently articulated by the US Supreme Court in Morrison v. National Australia Bank. Goldman, however, contends that the transactions and securities under dispute do not meet the Morrison standard.

In the Supreme Court's ruling, The judges limited Section 10(b) of the 1934 Securities Exchange Act’s extraterritorial reach by determining that the law was applicable only to transactions involving securities that took place in the United States or were listed on US exchanges. Following the decision, a district court ordered Goldman and Basis to use Morrison for determining whether there is grounds to drop the case. Goldman submitted its motion to dismiss and noted that the securities in the CDOs were not included on any US exchange list and that the underlying agreements were subject to English law and executed in Australia.

Meantime, Basis is arguing that its case is a “quintessential” securities fraud case involving a US sales transaction. The Australian hedge fund, which invested $42 million in “Timberwolf,” an AAA-rated tranche, and $36 million in an AA-rated tranche of CDOs, maintains that the CDO assembled mortgage-backed securities in Timberwolf came from the subprime real estate market in the US and was a New York sales transaction from beginning to end. The hedge fund was forced into insolvency when after investing in Timberwolf the CDOs value dropped dramatically and the fund sustained over $50 million in losses.

Basis contends that Goldman’s effort to make the transaction an Australian one that is not subject to federal securities laws has no legal or factual basis. It argues that adopting Goldman’s theory would nullify US securities law whenever a US seller committed securities fraud when effecting the sale of a security to a foreign buyer.


Related Web Resources:
Basis Yield Alpha Fund v Goldman Sachs Complaint, Scribd

Timberwolf Lawsuit: Goldman Sachs Sued By Australian Hedge Fund Over 'Sh--ty Deal, Huffington Post, June 9, 2009

Read the Supreme Court Ruling (PDF)

Continue reading "Allegations Against Goldman Sachs in $56M Securities Fraud Lawsuit Meet Morrison Standard, Says Australian Hedge Fund " »

September 9, 2010

US Closed-End Funds Continue to Hold $26.4 Billion in Auction-Rate Preferred Shares, Says Fitch Ratings

Even though it’s been awhile the auction-rate securities market froze in 2008, credit-ratings firm Fitch Ratings’s new report says that US closed-end funds still hold $26.4 billion in auction-rate preferred shares (ARPS). Researchers say that even though this figure is a 57% drop from the $61.8 billion that was trapped in ARS in January 2008 they are still surprised by the current amount.

While ARPS holders have obtained liquidity through many redemptions, there is still a significant amount that is outstanding. Fitch says that 61% (250) of closed-end funds continue to be leveraged with auction-rate preferred shares. This is down from the 347 in January 2008. Fitch’s report is based on a review of 437 US closed-end funds’ publicly available financial statements.

Since the ARS market collapse in February 2008, closed-end funds have redeemed shares at par value via refinancing or by lowering the funds' leverage. Still others have offered to purchase the shares at below par value. 22% of the funds that Fitch reviewed has fully redeemed about $22.9 billion in ARPS, while 50% undertook partial redemptions of shares totaling $12.7 billion.

Recently, some of the funds’ common shareholders have alleged that fund boards redeemed shares at par while favoring ARPS holders and as a result were in breach of fiduciary duty. Refinancing has slowed as a result of the charges but Fitch says that the redemptions should start up again soon.

The funds must maintain a 200% minimum asset coverage when it comes to senior securities and at least 300% in regards to debt securities. For every $1 of preferred stock issued, a fund must have a minimum of $2 in assets. Fitch reports that along with the recovery of asset values, refinancings started up again during the second half of last year and the first half of this year. Senior, short-term financing has served as the most common type of alternate leverage.

If you are an institutional investor that was the victim of securities fraud, please contact our stockbroker fraud law firm immediately to request your free case evaluation.

Funds Hold Billions in 'Auction' Paper, Wall Street Journal, September 1, 2010

Fitch Ratings

September 3, 2010

Eaton Vance and Closed-End Trusts Sued for Breach of Fiduciary Duty Related to Redemption of Auction Preferred Securities

Eaton Vance Management says that five of the closed-end management investment companies that it advises have each received a demand letter on behalf of a putative common shareholder of the “Trusts” alleging breach of fiduciary duty related to the redemption of auction preferred securities after the auction markets failed in February 2008.

The “Trusts”:
• Eaton Vance Floating-Rate Income Trust (NYSE:EFR - News)
• Eaton Vance Tax-Advantaged Global Dividend Income Fund (NYSE:ETG - News)
• Eaton Vance Limited Duration Income Fund (NYSE Amex: EVV)
• Eaton Vance Insured Municipal Bond Fund (NYSE Amex: EIM)
• Eaton Vance New Jersey Municipal Income Trust (NYSE Amex: EVJ)

The letters seeks to have the Trusts’ Board of Trustees take certain steps to remedy the alleged breaches of duty. Eaton Vance Management is an Eaton Vance Corp. subsidiary.

Also, purported class action complaints have been filed against ETG and EVV on behalf of a putative common shareholder of each Trust. The securities lawsuits are claiming breach of fiduciary duty related to the redemption of auction preferred securities. Eaton Vance Management, Eaton Vance Corp., and the Trustees of the Trusts also are defendants. Eaton Vance provides institutional and individual investors with a wide range of wealth management solutions and investment strategies.

Our securities fraud lawyers represent institutional investors throughout the US. We are here to help you recoup your investment losses.

Related Web Resources:
Eaton Vance Provides Statement on Closed-End Fund Demand Letters and Lawsuits, Yahoo! Finance/PRNewswire, June 21, 2010

Institutional Investors, Eaton Vance

Closed-End Management Company, Investopedia

Read our Stockbroker Fraud Blog

Continue reading "Eaton Vance and Closed-End Trusts Sued for Breach of Fiduciary Duty Related to Redemption of Auction Preferred Securities" »

September 1, 2010

Raymond James Must Pay $925,000 Over Auction-Rate Securities Dispute

A Financial Industry Regulatory Authority panel says that Raymond James and financial advisor Larry Milton must pay Sherese and Rex Glendenning $925,000 over an auction-rate securities dispute. This is the third time this summer that Raymond James Financial Inc. (NYSE: RFJ) subsidiaries have been involved in an ARS dispute that was decided in FINRA arbitration. Since July 1, independent broker-dealer Raymond James Financial Services Inc. and brokerage firm Raymond James & Associates have been ordered to repurchase $3.5 million in ARS from clients.

The Glendennings set up their account with Raymond James in January 2008 before the market meltdown. Milton placed the couple’s $1.4 million in an ARS that contained sewer revenue bonds while failing to tell them about the risk involved.

The couple contends that Milton’s behavior wrongly gave them the impression that their investment was highly liquid and could be easily sold. However, Raymond James turned down their request to buy the ARS back at full value.

According to the Glendennings’ securities fraud attorney, the timing of the purchase was key to winning the award. The securities that they bought came up for auction for the first time thirty five days after they made the purchase. The auction failed and the couple were never able “ to go to auction.”

At the time of the ARS market crash in February 2008, Raymond James Financial clients held $1.9 billion in auction rate debt—now down to $600 million. To date, none of the securities regulators have sued the firm over ARS sales. Other financial firms, including Oppenheimer & Co. Inc. and Charles Schwab & Co. haven’t been as lucky.

Related Web Resources:
Raymond James pays more auction rate claims, Investment News, August 26, 2010

FINRA rules against Raymond James in auction rate securities case, Tampa Bay Business Journal, August 26, 2010

Stockbroker-Fraud Blog

Continue reading "Raymond James Must Pay $925,000 Over Auction-Rate Securities Dispute" »

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