Securities Fraud: Former Merrill Lynch Broker Admits to Bilking Banks of More than $8M, Theranos Investors Claim Company Threatened Bankruptcy if Sued, & Arkansas Retirement System’s Pension Fund Agrees to More than $28M Settlement

Ex-Merrill Lynch Broker Pleads Guilty to Bank Fraud
Jeffrey Kluge, a longtime Merrill Lynch broker, has pleaded guilty to defrauding two banks of more than $8.7M. His bank fraud ran from 2001 through November 2016.

Kluge’s plea agreement said that he fabricated account statements under Merrill Lynch’s name and pledged fake collateral to the banks so he could set up multi-million dollar credit lines. For instance, in 2001 he was able to get a $150K credit line with Alliance Bank in Minnesota by telling the financial institution that he had enough municipal bond funds as collateral. In fake account statements he sent the bank as evidence of these bond holdings, Kluge concealed from Alliance Bank that he had already promised the assets in the accounts for loans from the firm.

In 2007, Kluge was able to get a $1M credit line from Platinum Bank, which is also in Minnesota. He defrauded Platinum Bank in similar fashion.

By late last year, Kruge’s outstanding balance on his credit line with Alliance Bank was almost $6M. The outstanding balance he had on the Platinum Bank credit line was $2.7M.

Kluge also set up a fake Internet domain address and used a bogus email account address to send the fake account statements to one of the banks. He invented a fake identity of someone who was supposed to be a Merrill Lynch employee sending these emails.

Theranos Investors Claim Company Threatened to Go Bankrupt If They Sued
According to Bloomberg, investors of Theranos Inc. claim that the beleaguered blood testing company threatened to file for bankruptcy protection unless they promised not to sue.

The investors, Partners Investment LP and two other funds, had invested over $96M in Theranos shares. In the investor fraud lawsuit, brought in October, Partners officials accused Theranos of fooling them about its technology and performance.

The company has come under fire over reports that its tests are not reliable. It has since changed or nullified a lot of tests results.

Partners officials also are claiming that the blood testing company had set up a share offer in a manner that would have made it “impossible” for them to get any money back if it did file for Chapter 11 protection. Earlier his month, a judge in Delaware placed a temporarily ban on Theranos from being able to move forward with its plan for a share-exchange.

Meantime, a judge in California has ruled that a different investor fraud lawsuit against Theranos will proceed. Indirect investors brought the fraud case. These are investors who didn’t invest in Theranos shares directly but instead backed investment funds that were holding some of the company’s shares.

Theranos argued that the plaintiffs couldn’t hold it liable for securities fraud because they never directly purchased these shares. Although the judge agreed with the blood testing company that the plaintiffs couldn’t file their claims under part of the state code that allows for the rescission of shares that were sold under fraudulent conditions, he let the case proceed under another part of the code that seeks to bar fraudulent manipulation of the markets.

APERS Resolves Class Action Securities Case Against Harman International
Investors who bought Harman International Industries stock between 4/26/07 and 2/5/08 have settled their class action securities case against the company for $28.25M. The lead plaintiff in the institutional investor fraud lawsuit was the Arkansas Public Employees Retirement System. According to the plaintiffs, Harman International misled them regarding its personal navigation device business, and false statements made by the company caused the latter’s stock price to artificially inflate.

The class action securities case initially was dismissed. The U.S. Court of Appeals for the District of Columbia Circuit, however, reversed that ruling in 2015.

Ex-Merrill Lynch broker pleads guilty to $8.7 million bank fraud, InvestmentNews, April 19, 2017

Theranos Investors Say They Were Pressured to Abandon Lawsuit, Bloomberg, April 19, 2017

Theranos fails to win dismissal of fraud class action by ‘indirect’ investors, Reuters, April 19, 2017

$28M Settlement Ends Decade-Old Securities Fraud Case, National Law Journal, April 20, 2017