Broker-Dealers

Wachovia Brokerage Buying A.G. Edwards to Become Second Only to Merrill Lynch

Published on: May 31, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Wachovia Corporation agreed to acquire A.G. Edwards Corporation for $6.8 billion in stock. This will vault the company into the second-largest U.S. retail brokerage, behind only Merrill Lynch, with $1.1 trillion in client assets.

This transaction is the largest of the recent takeovers of regional brokerage firms, which are having difficulty fending off hiring of their representatives. Falling commissions in the industry have caused disruptions in sales staff.

For years there has been speculation over whether A.G. Edwards, a mostly employee-owned firm, could maintain its independence and raises new speculation about other large regional brokerages like Raymond James.

SIPC Insurance of Brokerage Accounts to be Disclosed to Investors But Not Explained

Published on: May 21, 2007 | by Shepherd Smith Edwards & Kantas, LLP

For decades investors have been told their accounts were protected by the Securities Investor Protection Corporation (SIPC) without being told what was covered by this insurance. Few realize this protection only provided that whatever securities and cash are in an account when a firm goes out of business would be returned to the investor. (Furthermore, such claims are difficult to file and often take years to process.)

Thus, if investors are defrauded into purchasing investments, if their accounts are churned for commissions or if other wrongdoing occurs in their accounts, they are NOT protected by this Federal insurance. Even claims for unauthorized transactions, including the sale of viable securities in order to purchase worthless securities from the firm or its officers are not always refunded. In short: Fraud is not covered by SIPC!

After years of complaints, efforts by attorneys representing investors and pressure by some consumer-friendly legislators, the National Association of Securities Dealers, Inc. (NASD) and the Securities Exchange Commission (SEC) were finally persuaded to act. However, rather than force brokerage firms to disclose the insurance coverage (or lack of it) the NASD and SEC passed a much less effective requirement.

Micah S. Green, Expected New CEO of Largest Securities Industry Group, Resigns During Scandal

Published on: May 18, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The Securities Industry and Financial Markets Association (SIFMA) was recently formed by a merger of The Securities Industry Association and The Bond Market Association. On its website the SIFMA claims “We are committed to enhancing the public’s trust and confidence in the markets…” and that in 2007 it will focus on goals including “Ensure the public’s trust in the securities industry and financial markets.”

Yet, within months, SIFMA has already fallen prey to its own financial scandal. The trade group today acknowledged that Micah S. Green resigned after it was learned that he approved improper loans to employees while he headed the Bond Market Association before the merger. Mr. Green made one of the loans to himself (later paid in full).

Mr. Green was widely thought to be in line for leadership of the newly-merged group until it was suddenly announced in late March that he would resign and that his co-chair Marc E. Lackritz would head the organization. Lackritz was though to be planning to resign before the investigation over the loan improprieties was revealed.

NASD Fines Two Fidelity Brokerage Subsidaries $400,000 for Distributing Misleading Sales Literature Regarding Systematic Investment Plans Sold to Military Personnel

Published on: May 10, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The NASD announced this week that it fined two Fidelity brokerage firms $400,000 for preparing and distributing misleading sales literature promoting Systematic Investment Plans, which were sold primarily to U.S. military personnel. Issuance and sales of new systematic investment plans after these were prohibited by Congress last fall.

The NASD found that between January 2003 and January 2006, the two firms violated NASD advertising rules by preparing and distributing misleading sales literature. From May 2003 through January 2006, the Fidelity firms prepared and distributed a brochure entitled “Time is Money” that included misleading performance claims about its “Destiny Plans”. According to “mountain charts” contained in the brochures, these plans significantly outperformed the S&P 500 Index over a 30-year period. Yet, during the most recent 10- and 15-year periods-the time frame most relevant to current and prospective investors – Destiny Plans substantially underperformed the S&P 500 Index.

The brochures also showed average annual total returns for 1, 5 and 10 years as well as the life of the Plan, without showing comparable returns for the S&P 500 Index. This also created the misleading impression that the plans outperformed the S&P 500 Index when instead that index significantly outperformed the plans.

SEC Orders Morgan Stanley to Pay $7.9 Million for Failing to Provide “Best Execution” on Client Trades

Published on: May 9, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley & Co. Inc., the world’s second largest securities firm, will pay $7.9 million for its failure to provide best execution to certain retail orders for over-the-counter securities, the Securities and Exchange Commission announced today. Morgan Stanley embedded undisclosed mark-ups and mark-downs on certain retail OTC orders processed by its automated market-making system and delayed the execution of other retail OTC orders, for which Morgan Stanley had an obligation to execute without hesitation.

“By recklessly programming its order execution system to receive amounts that should have gone to retail customers, Morgan Stanley violated its duty of best execution and defrauded its customers,” said Linda Chatman Thomsen, Director of the regulator’s Division of Enforcement. “Best execution is a fundamental duty of a broker- dealer,” Thomsen, added. “Morgan Stanley violated its duty” and committed fraud by setting-up its order-execution system “to receive amounts that should have gone to retail customers.”

The company began overcharging clients after embedding undisclosed fees on some trades when it adopted a new computer system to handle transactions in 2001, the SEC said. The lapses affected more than 1.2 million transactions valued at about $8 billion from 2001 through 2004. A Morgan Stanley trader stumbled onto the problem in December 2004 when unusually high trading in a company’s stock generated a $400,000 profit within a few minutes, the SEC said. The trader alerted his supervisor, and by that afternoon a technician pinpointed the programming “error”.

NASD Warns Investors – Not Brokers – of the Risks Associated with Using Margin to Purchase Securities

Published on: April 11, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Washington, DC – The NASD today issued an updated Investor Alert warning investors – not brokers – about the risks associated with trading on margin. Since the release of a previous Alert on this topic in 2003, the amount of debt taken on by investors to buy securities has reached a record high of $321.2 billion in February 2007.

“We are concerned too many investors are unaware they could suffer substantial financial losses by using debt to purchase securities,” said Mary L. Schapiro NASD Chairman and CEO. “By updating our Alert on this topic, we hope to remind investors not to underestimate the risks involved.”

The Alert, Investing with Borrowed Funds: No “Margin” for Error, explains that investors who cannot satisfy margin calls can have large portions of their accounts liquidated under the market conditions at the time, favorable or unfavorable. That liquidation can result in substantial losses. Some of the risks associated with opening a margin account explained in the Alert are:

Citigroup May Reduce Compliance in Cost Cutting Move.

Published on: April 10, 2007 | by Shepherd Smith Edwards & Kantas, LLP

At a time when The New York Stock Exchange is paying-off National Association of Securities Dealers members to take over its compliance responsibilities, private firms are seeking to reduce oversight evern further. For decades the securities industry has insisted its self-regulatory structure works best to protect the public. Yet, after massive fraud was discovered on Wall Street and billions lost by investors, instead of tighter reins on the industry oversight is shrinking.

The latest to reduce compliance may be Citigroup, now the largest financial firm on Wall Street, culminating with the amalgamation of Smith Barney and a number of other fiancial firms. According to the New Yok Times, after “a series of messy scandals”, including questionable research and alleged participation in such failures as Enron and WorldCom, Citigroup increased its compliance efforts. Yet, in an article this week, the Times states that that firm is now poised to reduce oversight of its operations.

Under pressure from investors, Citigroup CEP Charles O Prince, III will soon to release plans for a cost-cutting overhaul. Prince’s plan is reportedly to eliminate or reassign more than 26,000 jobs, or about 8 percent of the work force, as part of a broad effort to streamline the bank’s unwieldy global operations and get its costs under control. Citigroup’s consumer and investment banking businesses are expected to face severe cuts, but legal and compliance departments are likely to also take a hit, according to those who have been briefed on the plans.

Former Prudential and E.F. Hutton Exec. Weighing Problems at Current Firm.

Published on: February 27, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Apparently unscathed by scandals at his former firms, 67 year old George Ball serves as Chairman of Sanders Morris Harris Group, Inc., a Houston based investment bank and wealth management firm.

Ball served as the No. 2 executive at E.F. Hutton & Co. Inc. from 1980 to 1982. Three years after he left, the now-defunct New York firm pleaded guilty to 2,000 counts of mail and wire fraud in a check-kiting scheme that occurred during Ball’s tenure.

Ball left Hutton to become chairman of Prudential Bache Securities. That firm thereafter became involved with what some have called “the biggest swindle in Wall Street History.” Regulators charged the company with defrauding hundreds of thousands of customers by misstating risks involved in investment partnerships. Prudential paid restitution and penalties totaling $2 billion – the costliest settlement ever for a brokerage firm – and was forced to resolve thousands of civil claims by investors for its role in these investments.

Morgan Stanley and LVMH Settle Analyst Defamation Suit

Published on: February 26, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The international financial services firm of Morgan Stanley and French luxury goods leader LVMH announced an out-of-court settlement of a lengthy legal dispute over allegations that Morgan Stanley issued financial analysis reports which were biased against LVMH.

The settlement, with terms not disclosed, ends nearly five years of legal proceedings in French courts over the potential conflicts of interest between equity analysts and investment banking activities of financial services firms. The case marked the first time the French judiciary was asked to decide potential conflicts of interest of financial analysts at investment banking firms.

The dispute began in 2002, when LVMH accused Morgan Stanley of publishing biased analyst reports and sought 100 million euros ($131.4 million) in damages. In 2004, the Paris Commercial Court heard arguments that the Morgan Stanley analyst report had skewed its analysis of LVMH in order to aid an investment banking client of Morgan Stanley, the Italian luxury goods holding company Gucci. The Court then ordered damages of 30 million euros ($39.4 million) to be paid to LVMH by Morgan Stanley.

According to NASD, Banc of America Investment Services Inc. Agrees To Pay $3 Million For Failing To Comply With Anti-Money Laundering Requirements

Published on: February 13, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Banc of America Investment Services (BAI) Inc. says that it will pay $3 million in disciplinary charges for its alleged violation of anti-money laundering (AM) requirements.

The NASD says that BAI failed to acquire customer information for a number of high-risk accounts. It is also accusing BAI of failing to communicate sufficiently with its parent bank to make sure that BAI’S independent SAR (suspicious activity report) filing obligations were fulfilled. In addition, the NASD says that BAI did not properly investigate or pursue certain red flags, especially when its own clearing company had made repeated requests for additional information pertaining to certain account holders.

The NASD claims that BAI did not get the mandated additional information from customers who had 34 accounts involving trust and private investment corporations that were affiliated with one family and domiciled in the Isle of Man. The offshore accounts, collectively containing assets worth $79 Million to $93 Million, participated in multimillion-dollar wire transfers internationally.