Articles Posted in Financial Firms

Merrill Lynch Told to Pay $3.6M to Brazilian Heiress for Brother’s Alleged $389M in Unauthorized Trading

Published on: September 22, 2012 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority panel is ordering Merrill Lynch (MER), a Bank of America Corp. (BAC) unit, to pay $3.6 million to a Brazilian heiress who contends that she lost millions of dollars because of unauthorized trades that her brother made in her account. The securities arbitration case was submitted on behalf of Sophin Investments SA, which was established to manage Camelia Nasser de Kassin’s inheritance from a relative.

Sophin contended that Merrill allowed Camelia’s brother, Ezequiel Nasser, to make unauthorized trades worth $389 million using her accounts at two Merrill Lynch units. He allegedly invested in high risk securities, including naked puts in Lehman Brothers and Bear Stearns (BSC) that created a deficit of at least $8 million.

The plaintiff claimed inadequate supervision, civil fraud, unauthorized trading, and other alleged wrongdoings, and asked for compensatory damages of $21 million for the $9.5 million that had been placed in the accounts, $9.5 million as an investment return, and the rest for commissions that went to Merrill. The financial firm then submitted a counterclaim alleging that their contract together had been breached. It asked the FINRA panel for almost $2.5 million in damages for the deficit in Sophin’s retail account and close to $3 million for the swap account. Merrill also filed claims against Marc Bonnant, who is the lawyer who set up the accounts on Sophin’s behalf, as well as against Ezequiel.

The FINRA panel found both Sophin and Merrill liable. While it told Merrill to pay $6.1 million in compensatory damages to Sophin, the latter was told to pay the financial firm $2.5 million-hence the $3.6 million that Merrill was ultimately ordered to pay Sophin. Also, while the panel acknowledged that Bonnant paid less than adequate attention to his fiduciary duties to Sophin, it said that Merrill exhibited “lapses” in hits own supervising and record keeping.

The claims made against Ezequiel Nasser by Merrill were denied. The arbitration panel said Bonnant, who has been based in Europe, isn’t under its jurisdiction. (Merrill has accused him of authorizing the trades that it had made for Sophin and misrepresenting the client’s investment experience, financial state, and tolerance for risk.)

This case is just one aspect of the bigger dispute between Merrill Lynch and members of the Nasser banking family over alleged trading losses. For example, in 2008, the financial firm sued the Nassers for huge trading losses that result in a $99 million judgment. A New York appeals court upheld that ruling.

Unauthorized Trades
A broker or advisor has to get an investor’s permission to sell or buy securities for an investor. Otherwise, the trade is not authorized. When “trading authorization” is obtained to sell or buy in that client’s account, trades can be made without getting in touch with the client. However, this is a limited power of attorney.

Unfortunately, many investors suffer losses because of unauthorized trades.

Merrill Lynch must pay $3.6 million to Brazilian banking heiress, Merrill Lynch, Reuters, September 12, 2012

Merrill Lynch Ordered to Pay $3.6 Million to Brazilian Heiress, Wall Street Journal, September 12, 2012

Bonnant V. Merrill Lynch (PDF)

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Shepherd Smith Edwards and Kantas LLP Pursue Securities Fraud Cases Against Merrill Lynch, Pierce, Fenner, & Smith, Purshe Kaplan Sterling Investments, and First Allied Securities, Inc., Stockbroker Fraud Blog, May 10, 2012

Merrill Lynch Agrees to Pay $40M Proposed Deferred Compensation Class Action Settlement to Ex-Brokers, Stockbroker Fraud Blog, August 27, 2012

Shepherd Smith Edwards and Kantas LLP Pursue Securities Fraud Cases Against Merrill Lynch, Pierce, Fenner, & Smith, Purshe Kaplan Sterling Investments, and First Allied Securities, Inc., Stockbroker Fraud Blog, May 10, 2012 Continue Reading ›

Rodman & Renshaw Exits Brokerage Business

Published on: September 19, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Rodman & Renshaw LLC is getting out of the brokerage business. It turned in its Form BDW – the Uniform Request for Withdrawal of Broker Dealer- to the Financial Industry Regulatory Authority on Friday. Just two days before, on September 12, the brokerage firm, which is a Direct Markets Holdings Subsidiary, told the SRO that it isn’t in compliance anymore with the Securities and Exchange Commission’s Net Capital Rule 15c3-1. Because of this, besides liquidating transactions, the once leading investment bank will no longer be involved in the securities business. Rodman & Renshaw may also sell its assets.

Just last month, FINRA fined Rodman & Renshaw $315,000 for alleged supervisory and information barrier violations involving interactions that took place between its investment banking and research functions. FINRA maintains that because of supervisory deficiencies, at least two incidents occurred involving a research analyst taking part in attempts to solicit investment banking business and an incident involving another research analyst trying to organize a payment from a public company happened. Both individuals have been sanctioned and will serve out suspensions.

According to Investment News, failing to meet regulatory-net-capital levels is often a sign that the end is near for a financial firm-unless it manages to recoup and stay in operation. Since the 2008 economic crisis, a number of brokers-dealers have struggled to keep their reserves up. Unfortunately, hundreds of brokerage firms have been unable to do so, and many of them have had to close down. FINRA says that in the last five year, there has been a 13% drop in the number of broker-dealers. Compare the 4,370 brokerage firms in operation last month to the 5,005 that were in business in 2007.

Class Action MBS Securities Lawsuit Against Goldman Sachs is Reinstated by 2nd Circuit

Published on: September 14, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Second Circuit has reinstated a would-be class action securities lawsuit accusing Goldman Sachs (GS) (in the role of underwriter) and related entities of misstating the risks involving mortgage-backed securities certificates. The revival is based on 7 of 17 challenged offerings, causing the appeals court to conclude that the plaintiff can sue on behalf of investors in mortgaged-back certificates whose lenders originated the mortgages backing the certificates that were bought. The 2nd Circuit said that those investors’ claims and the pension fund’s claims implicate the same concerns.

Per the court, NECA-IBEW Health & Welfare Fund is alleging violations of the Securities Act of 1933’s Sections 15, 12(a)(2), and 11 involving a would-be class of investors who bought certain certificates that were backed by mortgages that Goldman had underwritten and one of its affiliates had issued. The certificates were sold in 17 offerings pursuant to the same shelf registration statement but with 17 separate prospectus supplements that came with specific details about each offering.

In its class action securities lawsuit, the plaintiff alleged that the shelf registration statement had material misrepresentations about both the risks involving the instruments and underwriting standards that are supposed to determine the ability of a borrower to repay. A district court dismissed the lawsuit.

The Second Circuit acknowledged that NECA suffered personal injury from the defendants’ use of allegedly misleading statements in the offering documents linked to the certificates that it bought. However, whether the defendants’ behavior implicates the same concerns as their decision to include similar statements in the Offering Documents associated with other certificates is more difficult to answer.

While the plaintiff’s claims are partially based on general allegations of a deterioration in loan origination practices that is industry wide, the most specific claims link the allegedly abusive conduct to the 17 trusts’ 6 main originators. However, Wells Fargo Bank (WFC) and GreenPoint Mortgage Funding Inc., the only two entities that are the originators of the loans behind the certificates that the fund bought, are not defendants in this securities lawsuit.

That the alleged misrepresentations showed up in separate Offering Documents doesn’t alone bring up fundamentally different concerns because their location doesn’t impact a given buyer’s “assertion that the representation was misleading,” said the court. Because of this, and other reasons, the plaintiff has class standing to assert the claims of the buyers of the Certificates from the 5 other Trusts that have loans that were originated by Wells Fargo, Greenpoint, or both.

The second circuit said that the fund didn’t need to “to plead an out-of-pocket loss” to allege a cognizable diminution in the value of a security that was not liquid under that statute. Finding the “requisite inferences” in favor of the plaintiff, the appeals court said that not only was it “plausible,” but also it was obvious that mortgage-backed securities, such as the Certificates, would experience a drop in value because of ratings downgrades and uncertain cash flows. The fund “plausibly alleged” a distinction between how much it paid for the certificates, their value, and when the class action MBS lawsuit was filed.

NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., Justia (PDF)

Citigroup Inc.’s $590M CDO Putative Class Action Settlement Gets Preliminary Approval from District Court

Published on: September 13, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York has given preliminary approval to the putative class action settlement reached between Citigroup Inc. (C) and its shareholders. Citigroup has agreed to pay $590 million over allegations that it misled the plaintiffs about its exposure to tens of billions of dollars collateralized debt obligations that were backed by residential mortgaged-backed securities and instead hid its toxic assets on its books. The plaintiffs contend that they sustained huge losses as a result. A settlement hearing for final approval is scheduled in January 2013.

The preliminary deal reached between the parties is the third largest shareholder class action settlement to be reached related to the 2008 financial crisis. Automated Trading Desk LLC shareholders, led by founder David Whitcomb and ex-ATD executive Jonathan Butler, are spearheading this securities case. (Citigroup had paid $680 million to buy ATD in 2008.) Other plaintiffs include pension funds in Ohio, Colorado, and Illinois.

Per the plaintiff shareholders, who purchased Citigroup shares between February 26, 2007 and April 18, 2008, it was around this time that Citigroup was involved in a “quasi-Ponzi scam” to make it seem as if its assets were doing well. The financial firm allegedly made material misrepresentations about CDO exposure-instead, claiming that it had sold CDOs worth billions of dollars and was no longer contending with their related risks-and failed to let investors know that it had guaranteed the securities (even transferring the guarantees it had established so the risks would be hidden).

The plaintiffs are also accusing Citibank of failing to do write-downs of the instruments in a timely manner during the class period ,even though it was aware that the subprime crash would cause great harm to its CDO holdings, and repackaging securities that no one wanted to buy into new CDOs so its exposure to the securities would be concealed. Also, per the amended complaint, Citigroup allegedly failed to modify its valuations when the CDO indexes revealed a huge drop in the securities values. Instead, the financial firm depended on higher valuations provide by sales it made to itself or from ratings firms.

Although Citibank is settling, it continues to deny the shareholder plaintiffs’ allegations. It claims it reached the agreement to get rid of the “burden and expense” of allowing this litigation to proceed. It also is saying that it is a different company now than what it was at the start of the economic crisis. Meantime, the interim lead plaintiffs have said they agreed to settle because it would be a “significant benefit” especially in light of the risk that the Settlement Class might not get anything if they had lost the CDO securities lawsuit.

Citigroup agrees to $590 million subprime settlement, The Washington Post, August 29, 2012

Citigroup Pays ATD Executives Again in $590 Million Deal, Bloomberg, August 30, 2012

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IRS Pays Whistleblower $104M for Exposing Tax Evasion at UBS AG

Published on: September 13, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In the largest individual federal payout in our nation’s history, the Internal Revenue Service has awarded ex-UBS AG (UBSN) Bradley Birkenfeld $104 million for acting as a whistleblower and exposing wide scale tax evasion involving the Swiss Bank. Birkenfeld, who was released from prison last month after serving 2.5 years in prison for fraud conspiracy related to this matter, is the one who revealed to the IRS how the Swiss bank helped thousands of Americans evade paying their taxes. He reported that in handling $20 billion in undeclared assets annually, UBS made $200 million a year.

The information that he provided led to UBS paying a $780 million fine so that it wouldn’t be prosecuted over the allegations. The Swiss bank also consented to an unprecedented agreement for it to give over the names of thousands of US citizens suspected of tax evasion and admitted that it fostered tax evasion between 2000 and 2007. UBS would eventually hand over information on 4,700 of its accounts.

At least 33,000 Americans have since voluntary disclosed to the IRS that they have offshore accounts. This resulted in over $5 billion.

Ex-MF Global CEO John Corzine Says Bankruptcy Trustee’s Bid to Join Investors’ Class Action Securities Litigation is Hurting His Defense

Published on: September 5, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to Jon Corzine, the ex-CEO of MF Global Holdings Ltd. (MFGLQ), bankruptcy trustee James Giddens’s efforts to be part of some of the investor class action lawsuits against the firm’s former and current executives are negatively impacting his defense. Corzine, who is also Goldman Sachs Group Inc.’s (GS) (GS) former co-chairman, left his position at MF Global last year, mere days after the brokerage giant failed in the wake of losses it sustained on European sovereign debt and its overwhelming inability to account for about $1.6 billion in customer funds. MF Global would go on to file for bankruptcy protection.

Rather than file his own securities lawsuit, Giddens has decided to work with the lawyers of the firm’s customers. He won’t join them as a plaintiff but he will “assign” his legal claims to their attorneys and fully participate in their cases. Giddens considers it totally “appropriate” for his office to join forces with the plaintiffs’ securities fraud lawsuits, and he believes that this cooperation agreement is the “most efficient, expedited and cost-effective” means of getting back additional assets for MF Global clients and creditors.

Meantime, Corzine and other ex- and current MF Global executives are complaining that this arrangement would give Giddens complete and total authority over the documents and books they would be able to get in their defense and that this unfairly limits them. Per the former executives’ lawyers, restricting the objectors’ rights to obtain discovery deprives them of the chance to a proper defense, violates due process principals, and is not in line with the goals and requirements of the federal rules that preside over civil litigation. (Also opposing Giddens’s cooperation agreement with the plaintiffs and their lawyers is ex-FBI director Louis Freeh, who is tasked with wrapping up MF Global Holdings Ltd.’s affairs. He believes that the deal oversteps Giddens’s authority and that the bankruptcy trustee is moving claims that belong to the holding company’s creditors and not the brokerage’s customers.)

Citigroup to Pay $590M to Settle Shareholder Class Action CDO Lawsuit Over Subprime Mortgage Debt

Published on: August 30, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup (C) has agreed to pay $590 million settle a shareholder class action collateralized debt obligation lawsuit filed by plaintiffs claiming it misled them about the bank’s subprime mortgage debt exposure right before the 2008 economic collapse By settling, Citigroup is not admitting to denying any wrongdoing. A federal judge has approved the proposed agreement.

Plaintiffs of this CDO lawsuit include pension funds in Illinois, Ohio, and Colorado led by ex-employees and directors of Automated Trading Desk. They obtained Citigroup shares when the bank bought the electronic trading firm in July 2007. The shareholders are accusing bank and some of its former senior executives of not disclosing that Citigroup’s CDOs were linked to mortgage securities until the bank took a million dollar write down on them that year. Citigroup would later go on to write down the CDOs by another tens of billions of dollars.

The plaintiffs claim that Citigroup used improper accounting practices so no one would find out that its holdings were losing their value, and instead, used “unsupportable marks” that were inflated so its “scheme” could continue. They say that the bank told them it had sold billions of dollars in collateralized debt obligations but did not tell them it guaranteed the securities against losses. The shareholders claim that to conceal the risks, Citi placed the guarantees in separate accounts.

Prior to the economic collapse of 2008, Citi had underwritten about $70 billion in CDOs. It, along with other Wall Street firms, had been busy participating in the profitable, growing business of packaging loans into complex securities. When the financial crisis happened, the US government had to bail Citigroup out with $45 billion, which the financial firm has since paid back.

This is not the first case Citigroup has settled related to subprime mortgages and the financial crisis. In 2010, Citi paid $75 million to settle SEC charges that it had issued misleading statements to the public about the extent of its subprime exposure, even acknowledging that it had misrepresented the exposure to be at $13 billion or under between July and the middle of October 2007 when it was actually over $50 billion. Citigroup also consented to pay the SEC $285 million to settle allegations that it misled investors when it didn’t reveal that it was assisting in choosing the mortgage securities underpinning a CDO while betting against it.

This week, Citi agreed to pay a different group of investors a $25 million MBS settlement to a securities lawsuit accusing it of underplaying the risks and telling lies about appraisal and underwriting standards on residential loans of two MBS trusts. The plaintiffs, Greater Kansas City Laborers Pension Fund and the ‪City of Ann Arbor Employees’ Retirement System,‬ had sued Citi’s Institutional Clients Group. ‬

This $590 million settlement of Citigroup’s is the largest one reached over CDOs to date and one of the largest related to the economic crisis. According to The Wall Street Journal, the two that outsize this was the $627 million that Wachovia Corp. (WB) agreed to pay over allegations that investors were misled about its mortgage loan portfolio’s quality and the $624 million by Countrywide Financial (CFC) in 2010 to settle claims that it misled investors about its high risk mortgage practices.

Citigroup in $590 million settlement of subprime lawsuit, The New York Times, August 29, 2012

Citi’s $590 million settlement: Where it ranks, August 29, 2012

Citigroup Said To Pay $75 Million To Settle SEC Subprime Case, Bloomberg, July 29, 2010

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

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

Published on: August 29, 2012 | by Shepherd Smith Edwards & Kantas, LLP

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.

Merrill Lynch Agrees to Pay $40M Proposed Deferred Compensation Class Action Settlement to Ex-Brokers

Published on: August 27, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Merrill Lynch (MER) has arrived at an “agreement in principle” to resolve the class action lawsuit filed by John Burnette and Scott Chambers over deferred compensation that they contend that the brokerage firm refused to pay them after it merged with Bank of America (BAC) in 2008 and they left its employ. About 1,400 brokers are part of this class. However, some 3,300 ex-Merrill brokers have submitted deferred compensation claims against the brokerage firm for the same reason.

Merrill had refused to give these employees their deferred compensation, which is what a broker usually gets paid for staying with a financial firm for a specific number of years, when they resigned after the merger. These brokers, however, cited “good reason” for their departure, which is another cause they can claim to receive this.

The class action settlement was presented to U.S. District Judge Alison Nathan at Manhattan federal court on Friday. She will decide whether to approve it, as well as certify the class according to the parties’ definition. However, it is not known at this time how many brokers will go for this settlement if it is approved.

It is not unusual for many to opt not to be part of a class action settlement and instead seek to obtain more money via an individual arbitration claim. Having an arbitration lawyer personally representing your case generally leads to bigger results. Already, over a thousand ex-Merrill brokers have filed their FINRA claims. Also, for an ex-Merrill broker whose deferred compensation was above six figures, they are likely to get much less by going the class action route. Meantime, ex-Merrill brokers with revenues that exceeded $500,000 during a certain timeframe before they left the financial firm cannot participate in a class action settlement. Neither can those that accepted bonuses and waived certain rights related to deferred compensation claims from Merrill after the deal with Bank of America.

That said, even the ex-Merrill brokers that decide to opt out of the class are likely to benefit from this settlement because it establishes a floor for payouts while serving as Merrill’s public acknowledgement that it had a financial duty to pay the former brokers upon their departure.

Under the class action settlement, the majority of advisers would get 40-60% of the value of their account. According to OnWallStreet.com, for a broker to receive 60%, advisors must have already made a request for reimbursement, whether via lawsuit, arbitration, or some other way and left the financial firm prior to January 30, 2010. To be eligible to receive 50%, these advisers too will have had to have made some type of legal action and resigned by June 30, 2010. If no action was taken, and the former broker still wants to opt in, they would turn in a form and seek 40% of compensation–dependent upon when they exited the firm. Other ex-advisors might also be able to receive 40 to 60% of payment depending on when they left Merrill, whether they had filed a deferred compensation claim, and in what compensation plans they were participants. Ex-dvisers that had an agreement with the Advisor Transition Program, however, would not be able to participate.)

Merrill to Make Good on Former Brokers’ Deferred Comp, On Wall Street, August 24, 2012
Merrill to pay $40 mln in deferred compensation suit, Reuters, August 25, 2012

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Merrill Lynch to Pay Brokers Over $10M for Alleged Fraud Over Deferred Compensation Plans, Institutional Investor Securities Blog, April 5, 2012

Advanced Equities Ordered by FINRA Arbitration Panel to Pay $4.5M to Ex-Broker, Stockbroker Fraud Blog, June 12, 2012

Claims Continue over MasterShare – Prudential Securities’ Deferred Compensation Plan, Stockbroker Fraud Blog, August 13, 2008 Continue Reading ›

2nd Circuit Affirms Dismissal of $18.5M Auction-Rate Securities Lawsuit Against Merrill Lynch Filed by Anschutz Corp.

Published on: August 23, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Second Circuit has affirmed a lower court’s ruling to dismiss the ARS lawsuit filed against Merrill Lynch (MER), Merrill Lynch, Pierce, Fenner, and Smith Inc. ( MLPF&S), Moody’s Investor Services (MCO), and the McGraw-Hill Companies, Inc. (MHP). Pursuant to state and federal law, plaintiff Anschutz Corp., which was left with $18.95 million of illiquid auction-rate securities when the market failed, had brought claims alleging market manipulation, negligent misrepresentation, and control person liability. The case is Anschutz Corp. v. Merrill Lynch & Co. Inc.

According to the court, Merrill Lynch underwrote a number of the Anchorage Finance ARS and Dutch Harbor ARS offerings in which Anschutz Corp. invested. To keep auction failures from happening, Merrill was also involved as a seller and buyer in the ARS auctions and had its own account. Placing these support bids in both ARS auctions allowed Merrill to make sure that they would clear regardless of the orders placed by others. The financial firm is said to have been aware that the ARS demand was not enough to “feed the auctions” unless it too made bids and that its clients did not know of the full extent of these practices.

Per its securities complaint, Anschutz contends that the description of Merrill’s ARS practices, which were published on the financial firm’s website beginning in 2006, were misleading, untrue, and “inadequate.” The plaintiff accused the credit rating agency defendants of giving the ARS offerings ratings that also were misleading and false and should have been lowered (at the latest) in early 2007 when Merrill knew or should have known that the ratings they did receive were unwarranted.