Broker Fraud

Securities Class Action Against Morgan Stanley by Xerox and Kodak Retirees Dismissed by Appeals Court

Published on: July 20, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Second Circuit Court of Appeals in New York has upheld a lower court’s ruling to dismiss that the securities class action filed by Eastman Kodak Co. and Xerox Corp. against Morgan Stanley. The plaintiffs, retirees from both companies, are accusing the broker-dealer of advising them that if they retired early their investments would be enough to support them during retirement. They also claim that the investment bank persuaded them to open accounts that cost them the bulk of their wealth. According to the plaintiffs’ attorney, the retirees gave up job security and employment rights after they were told that if they retired early they could avail of a 10% withdrawal rate from their individual retirement accounts.

However, upon retiring, the retirees that invested lump-sum retirement benefits with Morgan Stanley experienced “disastrous” value declines. Also, they had invested with two Morgan Stanley broker, Michael Kazacos and David Isabella, that were later barred from the securities industry. Last year the broker-dealer settled FINRA charges over the two men’s activities by paying over $7.2 million.

The appeals court says that because of the 1998 Securities Litigation Uniform Standards Act, the plaintiffs are precluded from pursuing class state law claims, including misrepresentation claims. While the statute lets plaintiffs file lawsuits in state court to get around 1995 Private Securities Litigation Reform Act’s securities fraud pleading requirements, federal preemption of class actions claiming “misrepresentations in connection with the purchase or sale of a covered security” are allowed. The three-judge panel also said that because the retirees waited too long to file their securities fraud lawsuit, they cannot raise other federal securities law claims.

Related Web Resources:
Xerox, Kodak retirees lose Morgan Stanley appeal, Reuters, June 29, 2010
Morgan Stanley to Pay More than $7 Million to Resolve FINRA Charges Relating to Misconduct in Early Retirement Investment Promotion, FINRA, March 25, 2009
1998 Securities Litigation Uniform Standards Act, The Library of Congress Continue Reading ›

Citigroup to Pay $1.5 M for Supervisory Violations Related to Broker’s Handling of Trust Funds

Published on: May 28, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to the Financial Industry Regulatory Authority, Citigroup Global Markets Inc. has consented to pay $1.5 million in disgorgement and fines for failing to properly supervise broker Mark Singer and his handling of trust funds belonging to two cemeteries. By agreeing to settle, Citigroup is not denying or admitting to the charges. Also, the disgorgement amount of $750,000 will be given back to the cemetery trusts as partial restitution.

FINRA says that from September 2004 and October 2006, Singer and his clients Craig Bush and Clayton Smith were engaged in securities fraud. Their scheme involved misappropriating some $60 million from cemetery trust funds. Bush and Smart were the successive owners of the group of cemeteries in Michigan that the funds are believed to have been stolen from. Smart bought the cemeteries from Bush in August 2004 using trust funds that were improperly transferred from the cemeteries to a company that Smart owned.

When Singer went to work for Citigroup as a branch manager in September 2004, he brought Bush’s cemetery trust accounts with him. FINRA says that Singer then helped Smart and Bush open a number of Citigroup accounts in their names and in the names of corporate entities that the two men controlled or owned. The broker also helped them deposit cemetery trust funds into some of the accounts, as well as effect improper transfers to third parties. Some of the fund transfers were disguised as fictitious investments made for the cemeteries.

FINRA says that Citigroup failed to properly supervise Singer when it did not respond to “red flags” and that this lack of action allowed the investment scheme to continue until October 2006. As early as September 2004, Singer’s previous employer warned Citigroup of irregular fund movements involving the Michigan cemetery trusts. Within a few months, Citigroup management also noticed the unusual activity.

Citigroup failed to “conduct an adequate inquiry” even after finding out in February 2005 that Smart may have been making misrepresentations about his acquisition of hedge fund investments that belonged to the Michigan cemetery trusts and had used the hedge funds as collateral for a $24 million credit line. Although the investment bank had received a whistleblower letter in May 2006 accusing Singer of broker misconduct related to his handling of the cemetery trusts, it still failed to restrict Singer’s activities or more strictly supervise him.

Related Web Resources:
Citi Sanctioned $1.5M By Finra In Supervisory Lapse, The Wall Street Journal, May 26, 2010
Stealing from the dead, CNN Money, August 13, 2007 Continue Reading ›

Five Years Later Ex- Knight Securities Supervisors are Exonerated? Just Call it “Par for the Course.”

Published on: March 16, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority’s National Adjudicatory Council has dismissed the charges against former Knight Securities, L.P. CEO Ken Pasternak and John Leighton, the investment firm’s ex- Institutional Sales Desk head. The two men were accused of supervisory failures over allegedly fraudulent sales. Specifically, they allegedly inadequately supervised Leighton’s brother Joseph Leighton, who, at the time, was the firm’s top institutional sales trader. Regulators had accused Joseph of inflating the price of securities when selling them to institutional clients and keeping the extra profit.

The National Association of Securities Dealers found that the two former executives failed to take reasonable steps to make sure that Joseph was in compliance with industry standards. He settled with NASD and the Securities and Exchange Commission in 2005.

A lower FINRA panel had also ruled against two men. Pasternak was suspended from supervisory positions for two years and John was barred from supervisory roles. Both men were each ordered to pay $100,000.

Now, however, NAC is disagreeing with the lower panel, claiming that FINRA failed to establish that Joseph Leighton violated regulatory and market standards. The council also found that John Leighton did enforce Knight’s compliance procedures and that there was evidence that does not support allegations accusing Pasternak of not responding properly to “red flags” that surfaced over the way that Joseph handled his institutional client orders. However, institutional clients have come forward to testify that the pricing they received was fair. Also, in 2008, a federal judge threw out similar charges that the SEC filed against Pasternak and Joseph Leighton.

“This is another case at FINRA of the soldiers getting punished while the officers in charge ultimately get a walk,” said Shepherd Smith Edwards and Kantas founder and securities fraud lawyer William Shepherd. “The primary regulator of brokerage firms may have recently changed its name to the ‘Financial Industry Regulatory Authority’ but it remains a ‘National Association of Securities Dealers’ – a non-profit private corporation (similar to a country club) with a vested interest in seeing to it that favored members do not have to answer for misdeeds. After all, a precedent of fines or sanctions for the bosses might affect the treatment of other bosses in the future.”

Related Web Resources:
COMPLIANCE WATCH: Complying As Your Brother’s Keeper, The Wall Street Journal, March 5, 2010
National Adjudicatory Council, FINRA Continue Reading ›

Stifel, Nicolaus, and Co. to Pay Back $78,000 to Missouri Investors for Broker Fraud

Published on: March 11, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Stifel, Nicolaus and Co. Inc. has reached an agreement with Missouri Secretary of State Robin Carnahan over the broker fraud committed by former Stifel securities broker Girard Munsch. As part of the deal, the three Missouri investors will get back $78,000 in commissions that they paid and the broker-dealer will pay over $130,000 in payments, penalties, and costs.
Over three years, Munsch made over 500 trades in accounts owned by three Missouri investors. He has admitted that during some of the transactions, he was the only one to benefit. One investor, Marie Ganninger, says that she started investing with the former Stifel broker after her husband passed away. She chose to go with Munsch because he was the broker of one of her relatives. She will be getting back the commissions she paid.
The state of Missouri went after Stifel for failing to properly supervise Munsch and neglecting to notice or take action when he made unsuitable recommendations and excessive trades.
In 2007, the former Stifel broker entered into a consent order. He was ordered to pay $50,000 in investor restitution for broker misconduct, and his license was suspended. He retired and can no longer work as a broker in Missouri.
Please do not despair if you lost money because of broker fraud. There are legal remedies available that can allow you to recoup your investment losses.
Stifel to return $78,000 to investors, pay $130,000 in penalties, St. Louis Business, March 11, 2010
Consent order in the matter of Girard Augustus Munsch, Jr., State of Missouri Continue Reading ›

Texas Securities Fraud: SEC Freezes Assets of Fourth Person Involved in Alleged $485 Million Ponzi Scheme

Published on: December 23, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Earlier this month, the US Securities and Exchange Commission was able to get a temporary restraining order to the freeze the assets of Joseph Blimline, the fourth person accused of masterminding a $485 million Ponzi scheme involving Provident Royalties LLC. The SEC charged three other individuals, Brendan Coughlin, Paul Melbye, and Henry Harrison, in July. Their assets were also frozen.

In its amended complaint, the SEC alleged that Provident, owned by the four defendants, advanced approximately $93 million of investor funds to Blimline and entities that he controlled for the purchase of gas and oil interests. The fund repayments and the title, however, frequently did not go to Provident. The SEC also accuses Blimline of failing to disclose that he received the funds, was involved with Provident management, and had been sanctioned in the past by Michigan securities authorities.

The SEC’s amendment complaint charges the four men with violating the Securities Act of 1933 (Section 17a) and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The SEC is seeking preliminary and permanent injunctions, financial penalties, disgorgement of ill-gotten gains, and prejudgment interest.

Director and officer bars are also being sought against the four defendants for allegedly committing Texas securities fraud. 36 affiliated entities are named as relief defendants for disgorgement purposes.

FINRA Bars Former Piper Jaffray & Co. Broker from Industry for Insider Trading

Published on: November 25, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is barring a former Piper Jaffray & Co. broker from the securities industry. The broker was accused of insider trading. He has agreed to the ban and has settled the FINRA charges without denying or admitting wrongdoing.

From 2007 until this July, the broker worked in Piper Jaffray & Co.’s investment banking department. Piper Jaffray was the confidential adviser of SoftBrands while the company considered potential buyers. Those at the advisory firm with access to information about the acquision were not allowed to buy SoftBrands shares. Yet on June 4 and 5, this broker bought 27,161 SoftBrands shares. On June 12, when SoftBrands announced its acquisition by Golden Gate Capital and Infor Global Solutions-an $80 million transaction. SoftBrands’s stock price almost doubled.

The shares at issue, previously bought at $.42 and.$.45 per share, were then sold at $.89 per share resulting in a profit of $11,955 on the transactions.

Stifel, Nicolaus & Co. and AXA Advisors Broker Charged in Ponzi Scheme Victimizing Church Members

Published on: November 5, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Former Stifel, Nicolaus & Co. and AXA Advisors broker Kenneth Neely has pled guilty to one count of mail fraud for setting up a Ponzi scheme that targeted at least 16 investors. Yesterday, Missouri Secretary of State Robin Carnahan announced that she has shut down the scam.

The 56-year-old St. Peters, Missouri broker got his clients to invest in a bogus St. Charles real estate investment trust. He promised high return rates and “no risk,” raising over $640,000 in investor funds. Federal prosecutors say clients paid about $3,000/share or unit.

At the time Neely was committing securities fraud (from 2001 – July 2009) he worked for broker dealers AXA Advisors and Stifel, Nicolaus & Co. He told clients to make checks payable to him and his wife.

Missouri Securities Law makes it illegal for a broker to “sell away,” which involves selling investments off a firm’s books.

Neely has 30 days to respond to Missouri’s cease-and-desist order. Federal brokers have barred him from working as a broker. Investor victims that lost some $400,000 included people that belonged to his church, friends, relatives, and acquaintances. Some people lost their savings because of the Ponzi scheme. Nealy used some of the money to pay for his personal expenses and debt.

Neely’s sentencing is scheduled for January 2010. He faces up to 20 years in prison, restitution, and up to $250,000 in fines.

Related Web Resources:
Carnahan Uncovers Ponzi Scheme in Saint Charles, SOS.Mo.Gov, November 4, 2009
St. Peters broker admits Ponzi scheme, St. Louis Business Journal, November 4, 2009
FINRA Permanently Bars Former Broker for Stifel, Nicolaus & Co. Inc and AXA Advisors For Ponzi Scheme, Stockbroker Fraud Blog, August 3, 2009 Continue Reading ›

Elder Securities Fraud: FINRA Bars Former Broker From Industry

Published on: October 20, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has barred former broker Sergio M. Del Toro from the industry for allegedly defrauding an elderly investor, age 90, of over half a million dollars. Del Toro has agreed to the bar but is not admitting to or denying wrongdoing.

FINRA says that between 2004 and 2006, Del Toro recommended that the elderly investor, who died in 2006, invest $511,000 in 3rd Dimensions Inc, a speculative, development-stage company. FINRA is accusing Del Toro of promising to buy back at $400,000 the securities that the senior investor had bought for $351,000 if the latter was dissatisfied. The elderly client bought additional stock at Del Toro’s suggestion. The former broker received about $76,650 in commissions.

FINRA claims that not only did the client pay $3-$4 for 3rd Dimension stock, which was not appropriate given the investor’s financial situation and age, but also, Del Toro allegedly did not have any reasonable grounds for valuing the stock at those prices when he sold them to his client.

FINRA claims Del Toro knew 3rd Dimension was making little if no revenue at the time and did not notify the two broker-dealers that he was registered with about his activities.

Elder Financial Fraud
Unfortunately, elderly senior investors can be easy prey for brokers that are willing to take advantage of them. It can be devastating to have your life savings (that you worked so hard for and hoped could cover your retirement or be passed on to your children and grandchildren) stolen from you by a financial professional.

Elder investment fraud is a crime. It is also a form of elder abuse when the victim is an older senior investor. Continue Reading ›

UBS Securities, Citigroup Global Markets, and Deutsche Bank Securities Agree to FINRA Sanction Over Vonage IPO

Published on: September 28, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup Global Markets, Deutsche Bank Securities, and UBS Securities have agreed to pay fines for Financial Industry Regulatory Authority sanctions over their handling of Vonage LLC stock’s initial public offering in 2006. FINRA says that the firms’ failure to adequately supervise communications with customers cost investors hundreds of thousands of dollars. By agreeing to settle, none of the broker-dealers are agreeing to or denying wrongdoing.

The three firms acted as the Vonage offering’s lead underwriters. A “directed share program” was included. Clients used accounts with the broker-dealers to purchase about 4.2 million shares.

An external company designed and administered a Web site for DSP participants that the firms’ clients used to communicate about the IPO. According to the SRO, however, inadequate supervision and the failure to follow procedures regarding outside sourcing and directed share programs resulted in the broker-dealers being unable to respond appropriately or take effective action when certain clients obtained misinformation about their orders.

By the time customers were finally notified that shares were allocated to them, the Vonage stock price had dropped significantly compared to the offering price. In addition to paying the higher price, investors sustained financial losses when the stocks were sold.

UBS, Citigroup, and Deutsche Bank have agreed to fines totaling $845,000. UBS will pay a $150,000 fine and a maximum of $118,000 to 26 clients who are potentially eligible. In addition to its $175,000 fine, Citigroup will pay 284 potentially eligible customers a maximum of $250,000. Deutsche Bank will pay 59 potentially eligible clients a maximum of $52,000, plus its $100,000. Customers are to be compensated the difference between Vonage stock’s price when clients found out they had been allocated shares and the $17/share IPO price that they paid.

Related Web Resources:
FINRA Fines Citigroup Global Markets, UBS and Deutsche Bank $425,000, Orders Customer Restitution for Supervisory Failures in Vonage IPO, FINRA, September 22, 2009
Citi, UBS, Deutsche Fined Over Vonage IPO
Continue Reading ›

Regions Bank Settles SEC Charges Over Latin American Investment Fraud Scam

Published on: September 24, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Regions Bank has agreed to a $1 million fine to settle SEC allegations that it helped defraud some 14,000 investors. Most of the affected investors are based in Latin America.

According to the SEC, Regions Bank helped two unregistered broker-dealers, U.S. College Trust Corp. and U.S. Pension Trust Corp., commit securities fraud against Latin American investors.

Beginning October 2001, Regions Bank played the role of “trustee” to the broker-dealers’ investment plans. It continued to accept USPT clients until January 2008. The SEC contends that this affiliation with a US bank gave the securities fraud scheme an aura of “legitimacy” and became a big draw for Latin American investors.

The SEC says that by taking on the role of trustee, Regions Bank formed individual trust relationships with investors, processed client contributions, and bought mutual funds on their behalf.

Investor had the option of paying one lump sum or making yearly contributions. Investors were not notified until March 2006 that USPT deducted substantial chunks of investors’ contributions-up to 85% of initial contributions made by investors who took part in an annual plan and up to 18% of single contributions-and used the money to pay for commissions and other fees.

The SEC says that Regions Bank either knew or should have known about USPT’s deceptive sales practices. The Commission is accusing Regions Bank of dispatching representatives to Latin America to meet prospective investors and allowing USPT to use the bank’s name in marketing and promotional materials.

The $1 million penalty will be placed in a Fair Fund to compensate investment fraud victims. Regions bank has also agreed to a cease-and-desist order.

SEC charges Regions Bank for role in Latin American fraud scheme, Investment News, September 21, 2009
Read the SEC Complaint (PDF)
Continue Reading ›