Articles Posted in Financial Firms

Texan R. Allen Stanford Convicted on 13 Criminal Counts Over $7.2B Ponzi Fraud

Published on: March 7, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Nearly three years after he was indicted for defrauding investors in a $7.2 billion Ponzi scam involving certificates of deposit that are now worthless, a Houston jury has convicted R. Allen Stanford of 13 of 14 criminal counts, including fraud, conspiracy to commit money laundering, conspiracy to commit wire or mail fraud, wire fraud (from April 24, 2006, December 24, 2008, January 5, 2009, and February 12, 2009), mail fraud, and obstructing investigators. The only count jury members found him not guilty of was wire fraud (from February 2, 2006). Collectively, the Texas financier’s convictions carry prison sentences totaling up to 230 years.

Prosecutors depicted Stanford, 61, as a con man that used investors’ money to get very rich and pay for his businesses. (At one point, his net worth was over $2 billion.) They also say he bribed regulators so he could get away with his scam.

During his criminal trial, financial statements e-mails that were presented as evidence and ex-employees who testified helped paint a picture of the Texan as someone who spent 20 years defrauding investors by selling CDs through his bank in Antigua. James M. Davis, who served as former CFO for Stanford’s different companies, also was a witness for the prosecution. He stated that he and Stanford together falsified annual reports, bank records, and other documents to hide the fraud. Prosecutors contended that Stanford lied to depositors from over 100 nations by claiming that their cash was being invested in bonds, stocks, and other securities.

Texas Financier Allen Stanford’s Ponzi Scam: SIPC Asks District Court to Toss Out SEC Lawsuit Seeking to Reimburse Fraud Victims

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

The Securities Investor Protection Corp. is asking the U.S. District Court for the District of Columbia to reject the SEC’s request for an order that would make it pay back the victim of Texas financier R. Allen Stanford’s $7 Billion Ponzi scam. The brokerage industry-funded nonprofit claims that the Commission has not demonstrated that these investors are eligible to receive this type of coverage from SIPC.

Standing by SIPC is the National Association of Independent Broker/Dealers. The group wrote a letter to SEC Chairman Mary Schapiro contending that forcing the nonprofit to pay back Stanford’s victims is not only a “misfit solution,” but also, it will establish an “unsustainable precedent.”

The SEC’s securities lawsuit against SIPC is an attempt to force a brokerage’s liquidation, which is the first step that SIPC must take under the Securities Investor Protection Act to pay back the clients of its member firms. SIPC, however, has refused to do so on the grounds that Stanford International Bank, which is based in Antigua, is not one if its member firms. Stanford International Bank is the financial firm that issued the more than $7.2 billion CDs that were sold to investors. (It is Stanford Group Co. that belongs to SIPC.) The CDs now have no value.

SEC Wants Proposed Securities Settlements with Bear Stearns Executives to Get Court Approval

Published on: February 28, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission wants the U.S. District Court for the Eastern District of New York to approve the proposed securities settlements that it reached with Matthew Tannin and Ralph Cioffi, two former Bear Stearns & Co. portfolio managers. The SEC says the deals are “fair, adequate, and reasonable.”

The settlements are to resolve SEC allegations that the two men misled bank counterparts and investors about two hedge funds’ financial states. Subprime mortgage-backed securities exposure caused the funds to collapse in 2007 and investors lost about $1.8 billion. (Bear Stearns’ hedge funds were some of the first to fail when the housing bubble popped.)

According to federal prosecutors, Cioffi and Tannen promoted the prospects of the funds even though they knew that their portfolio and the housing market were in dire straights. In the process, they earned millions of dollars.

A jury acquitted both of them criminal charges in these matters in 2009. This was a criminal case filed separate from the SEC’s securities fraud complaint against them. The proposed securities fraud settlement with the Commission allows Tannin and Cioffi to not have to go through a second trial.

As part of the settlement, Tannin and Cioffi have agreed to pay $1 million-Cioffi’s portion would be $700,000 in disgorgement plus a fine of $100,000 and Tannin would pay $200,000 in disgorgement and a $50,000 fine. Also, Cioffi wouldn’t be allowed to associate with any municipal securities dealers, investment advisers, or other financial industry professionals for three years. The ban for Tannin would be two years. Both of them would not have to admit wrongdoing.

Federal Judge Frederic Block, who will decide whether or not to approve the securities fraud settlement, has referred to the money the two men have agreed to pay as “chump change.” He has, however, indicated that he will likely sign off on it.

That said, as our securities fraud lawyers have reported in recent blog posts, the SEC recently came under fire for allowing parties to settle securities fraud cases by paying fines that some don’t believe reflect the true damages sustained by investors and others. Critics have also taken issue with the SEC’s practice of letting financial firms, brokers, and investment advisers settle without having to admit to any wrongdoing.

In response to Block’s concerns, the SEC noted that although courts should just approve Commission settlements, they also shouldn’t replace their own judgments with what the parties involved have agreed upon. The regulatory agency says that as long as the settlements reached don’t ignore any state or federal laws that apply and fail to create a burden on judicial resources, there is no reason why a court shouldn’t approve these agreements. The SEC pointed out that the financial settlement reached with Cioffi and Tannen is in the range of what might have been arrived at had the case gone to court.

Bear Stearns Ex-Managers to Pay $1 Million to Settle Fraud Case, New York TImes, February 13, 2012

SEC Charges Two Former Bear Stearns Hedge Fund Portfolio Managers with Securities Fraud, SEC, June 19, 2008

More Blog Posts:
Motion for Class Certification in Lawsuit Against J.P. Morgan Securities Inc. Over Alleged Market Manipulation Scam Granted in Part by Court, Stockbroker Fraud Blog, July 23, 2010
Bear Stearns Sold to JP Morgan – One Firm’s Trash Is Another Firm’s Treasure!, Stockbroker Fraud Blog, March 17, 2008
Insurer Claims that JP Morgan and Bear Stearns Bilked Clients Of Billions of Dollars with Handling of Mortgage Repurchases, Stockbroker Fraud Blog, February 3, 2011 Continue Reading ›

$698M MBS Lawsuit Seeking Damages from Goldman Sachs Group Can Take on Class Action Status, Says District Judge

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

U.S. district judge says that Public Employees’ Retirement System of Mississippi v. Goldman Sachs Group Inc., a securities fraud lawsuit, may proceed as a class action case. Some 150 investors would fall under this class plaintiff category as they seeking damages related to a $698 million mortgage-backed securities offering.

According to the complaint, loan originator New Century Financial Corp. did not abide by its own underwriting standards and overstated what the value was of the collateral backing the loans. The plaintiffs are accusing Goldman Sachs of failing to conduct the necessary due diligence when it purchased the loans seven years ago. The financial firm then structured, issued, and sold the mortgage pass-through certificates in a single offering.
Goldman attempted to fight certification on the grounds of numerosity, typicality, commonality, statute of limitations, typicality, and alleged conflicts involving buyers of different tranches, what investors knew, and other claims.

Judge Harold Baer Jr. turned down the defendants’ contention that class claims wouldn’t predominate due to individual investors’ knowledge of possibly false statements that may have been made in the offering documents when the acquisition took place. The defendants also had argued that class status should not be granted because investors, who conducted their own research and due diligence, interacted directly with loan originators, as well as had access to data that gave them information about New Century’s practices and the loan pool.

The court also turned down the defendants’ claim revolving around investors’ relying on asset managers and the change in information that was made publicly available over time. The court said that determining whether individual or common issues predominate is reliant upon whether putative class members took part in or knew about the alleged behavior and that likelihood of knowledge is not enough.

Public Employees’ Retirement System of Mississippi had been seeking to certify as a Class any entity or person that bought or otherwise publicly acquired offered certificates of GSAMP Trust 2006-S2 and, as a result, sustained damages. Not included in the Class are defendants, respective officials, directors, affiliates, these parties’ immediate relatives, heirs, legal representatives, successors, assigns, and any entity that defendants had or have controlling interested in.

Goldman Sachs Mortgage-Backed Securities Suit Granted Class-Action Status, Bloomberg, February 3, 2012

$698 Million Class Can Sue Goldman, Courthouse News Service, February 7, 2012

More Blog Posts:
Goldman Sachs CEO Hires Prominent Defense Attorney in the Wake of Justice Department Probe into Mortgage-Backed Securities, Institutional Investor Securities Fraud Blog, August 24, 2011

Mortgage-Backed Securities Lawsuit Against Bank of America’s Merrill Lynch Now a Class Action Case, Stockbroker Fraud Blog, June 25, 2011

Two Ex-Credit Suisse Executives Plead Guilty to Mortgage-Backed Securities Fraud, Institutional Investor Securities Fraud Blog, February 7, 2012

Bank of America Subpoenaed by Massachusetts Over Bryn Mawr CLO II Ltd. and LCM VII Ltd. CLOs that Cost Investors $150 Million

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

Massachusetts securities regulator William Galvin is subpoenaing Bank of America Corp. over two collateralized loan obligations that led to investors to lose $150 million. Galvin is trying to determine whether the financial firm knew it was overvaluing the portfolios’ assets so it could remove the loans from its books.

The state is looking to obtain records and documents from Banc of America Securities LLC related to two CLOs-Bryn Mawr CLO II Ltd. and LCM VII Ltd-that were sold in 2007. (Merrill Lynch and Bank of America Securities joined forces in 2008 when they were merged in an acquisition).

It was in 2006 that Bank of America had about $400 million of commercial loans from small banks. The following year, loans were put together as securities packages that were bought by investors.

Galvin has been taking a hard look at the way banks structured and sold debt products-especially mortgage-backed securities-leading up to the 2008 economic collapse. Galvin says his office is also interested in taking a closer look at other entities.

Massachusetts’ subpoena on Friday comes a day after Bank of America, Citigroup Inc., Wells Fargo & Co., JP Morgan Chase & Co., and Ally Financial Inc. agreed to settle for $25 billion allegations accusing them of engaging in abusive mortgage practices. The agreement was reached with federal agencies and 49 states (not Oklahoma) and is considered the largest federal-state settlement ever. All five banks will also pay the Federal Reserve $766.5 million in penalties.

The deal resolves allegations that the banks robo-signed thousands of foreclosure documents without properly reviewing the paperwork, engaged in deceptive practices when offering loan modifications, did not offer other options prior to closing on borrowers who had mortgages that were federally insured, and submitted improper documents in bankruptcy court.

Also as part of this securities settlement, Bank of America will pay $1 billion to settle a separate probe into allegations that it and its Countrywide Financial unit engaged in wrongful and fraudulent conduct. The $25B settlement is designed to provide mortgage relief and give $2,000 to about 750,000 borrowers whose homes ended up foreclosing after home values dropped 33% from what they were worth in 2006.

Per other terms of the settlement, the bank is to provide $17 billion in loan modification and principal reduction to delinquent borrowers whose homes are at risk of foreclosure. $3 billion is included for borrowers that are up-to-date on mortgage payments but cannot refinance because they owe more than what their home is worth. The banks have also agreed to new servicing standards.

Massachusetts Subpoenas Bank Of America Over CLOs, Fox Business, February 10, 2012
U.S. banks agree to $25 billion in homeowner help, Reuters, February 9, 2012

More Blog Posts:
FDIC Objects to Bank of America’s Proposed $8.5B Settlement Over Mortgage-Backed Securities, Stockbroker Fraud Blog, August 30, 2011
Mortgage-Backed Securities Lawsuit Against Bank of America’s Merrill Lynch Now a Class Action Case, Stockbroker Fraud Blog, June 25, 2011
Bank of America to Pay $335M to Countrywide Financial Corp. Borrowers Over Allegedly Discriminating Lending Practices, Institutional Investor Securities Blog, December 21, 2011 Continue Reading ›

FINRA Says Charles Schwab Corp. is Making Customers Waive Right to Pursue Class Action Lawsuits

Published on: February 8, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has filed a complaint against Charles Schwab Corp. The SRO says the online brokerage is in violation of FINRA rules because it makes clients waive their rights to pursue class actions against it.

Per a new provision added to over 6.8 million customer account agreements, Charles Schwab clients are now not allowed to begin or join class-action complaints against the financial firm. Customers must also agree that arbitrators won’t be given authority to consolidate claims from different parties, as this would set up a class-action situation.

Over 50,000 clients have opened accounts with the financial firm since it implemented this new limitation. Now, FINRA wants an expedited hearing. The SRO is concerned that the class action waiver will cause millions of Schwab clients to mistakenly think they cannot bring or take part in an already existing class action complaint against the brokerage firm. Also, FINRA has specific rules about the conditions that financial firms can place on clients, and the SRO says this provision is a definite violation.

Two Ex-Credit Suisse Executives Plead Guilty to Mortgage-Backed Securities Fraud

Published on: February 7, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Salmaan Siddiqui and David Higgs have pled guilty to conspiracy to commit wire fraud and conspiracy to falsify books in the mortgage-backed securities fraud case against them. Higgs was former a Credit Suisse managing director while Siddiqui had been vice president.

The US Securities and Exchange Commission and the Justice Department have been conducting coordinated enforcement efforts against Higgs, Siddiqui, and Kareen Serageldin. They are charged with fraudulently inflating asset-backed bonds’ prices during late 2007 and early 2008. The bonds consisted of commercial mortgage-backed securities and subprime residential mortgage-backed securities in Credit Suisse’s trading books. Their alleged manipulation of the bond prices resulted in the financial firm getting a $2.65B write-down of its end of the year financial results for 2007. Meantime, seeing as trading book profitability determines bonuses, the three defendants obtained hefty ones.

In addition to the three men, the SEC is also suing Faisal Siddiqui as a fourth defendant. In its securities fraud complaint, the Commission accused the men of being involved in a scam to fraudulently overstate the prices of over $3B of subprime bonds. Recorded phone calls document their fraudulent actions.

Serageldin, who was Credit Suisse’s Structured Credit Trading global head, reportedly initiated the MBS fraud while Higgs, who was with the financial firm’s Hedge Trading, oversaw the operation. The Siddiquis, who are not related to each other, were brokers that allegedly falsely processed the bonds’ prices.

In August 2007, the defendants reportedly started pricing the bonds in a way that would benefit them, rather than recording the fair value. The MBS scam would continue to accelerate as the credit markets faltered. By the end of the year, they were pricing the bonds at falsely high levels. Higgs would later on get the bond prices raised beyond their year-end levels to gain favorable P & L results at the end of January.

In February, Credit Suisse reported having a 2007 net income of $7.12 billion and fourth quarter earnings of $1.16B. Seeing as these figures incorporated the false gains, the information was materially misleading and false. Their scam fell apart when Credit Suisse senior management realized that specific bonds that the defendants’ controlled had been priced abnormally high.

MBS Pricing by Credit Suisse Traders
Credit Suisse traders must price the securities that they hold at fair value, which is determined by current market price or the current price for a similar liability or asset. When there is no liquid market, the traders have to refer to other indicia to determine their assets’ fair value. Credit Suisse brokers know that the ABX indices are the benchmark for specific securities backed by home loans and that they must refer to it when placing a price on RMBS bonds and related products.

Ex-Credit Suisse bond players plead guilty to MBS fraud, Housing Wire, February 2, 2012

Manhattan U.S. Attorney and FBI Assistant Director in Charge Announce Charges Against Two Former Credit Suisse Managing Directors and Vice President for Fraudulently Inflating Subprime Mortgage-Related Bond Prices in Trading Book, FBI, February 2012

SEC Charges Former Credit Suisse Investment Bankers in Subprime Bond Pricing Scheme, SEC, February 1, 2012

More Blog Posts:
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

Credit Suisse Group AG Must Pay ST Microelectronics NV $431 Million Auction-Rate Securities Arbitration Award, Stockbroker Fraud Blog, April 5, 2012

Citigroup to Pay $285M to Settle SEC Lawsuit Alleging Securities Fraud in $1B Derivatives Deal, Institutional Investor Securities Blog, October 20, 2011

SEC and SIPC Go to Court Over Whether SIPA Protects Stanford Ponzi Fraud Investors

Published on: February 6, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission is asking District Judge Robert Wilkins to make the federal Securities Investor Protection Corp. set up a claims process for the Ponzi fraud victims of R. Allen Stanford. These investors had purchased $7.2B in certificates of deposit that allegedly ended up being bogus. The SEC is suing SIPC in an attempt to get it to pay Stanford’s investors for their losses.

SIPC is a nonprofit corporation that gets its funding from the brokerage industry. It is supposed to insure clients against losses resulting from broker theft.

The Commission contends that per the Security Investor Protection Act’s Section 16(b), these investors are protected because the money they deposited at Stanford International Bank Ltd. in Antigua to buy the CD’s was considered to have been deposited with Stanford Group Co., which is a SIPC member. The Commission wants the nonprofit corporation, to begin liquidation proceedings in federal court in Texas.

More than $1B in securities fraud claims from thousands of claimants related to the Stanford Ponzi fraud would likely be filed if the judge were to approve the SEC’s request.

The issue here is whether the clients who were victimized by the Stanford Ponzi scam are eligible to have SIPC cover the losses they sustained. SIPC says no. The group doesn’t believe that the Stanford Investments meets the criteria set up by federal law over who can qualify for payouts from such losses.

Attorneys for SIPC claims that the SEC is trying to set up a liquidation proceeding without there having to be a judicial review regarding whether the law would consider Stanford’s investors “customers.” SIPC wants the judge to order the SEC to refile its complaint, allow for discovery, and then determine this point.

Meantime, Stanford’s criminal trial is underway in Texas. Prosecutors are accusing him of bilking investors by getting them to invest in $7B in fake CDs while he used their funds to support his business and pay for an extravagant lifestyle. Stanford has denied any wrongdoing.

At his trial last week, former Stanford Financial Group Co. CFO James M. Davis testified against Stanford. Davis’s testimony against Stanford is part of the plea deal that he struck. Not only was Stanford Davis’s former boss, but also the two were once roommates at Baylor University.

According to Davis, Stanford told executives to falsify investment returns and that his boss threatened to terminate their employment if they ever reported that he borrowed over $2B from his Antigua bank to pay for his extravagant quality of life. Davis, who pleaded guilty to helping Stanford defraud investors, is facing up to three decades behind bars.

SEC Asks Federal Judge to Order SIPC Payout Plan for Stanford Investors, Bloomberg, January 24, 2012
SEC Suit Pursues Payouts by SIPC, Wall Street Journal, December 13, 2011
Allen Stanford Was ‘Chief Faker,’ Ex-Finance Chief Testifies, Bloomberg, February 6, 2012

More Blog Posts:
Jury Trial Begins in Ponzi Scammer Allen Stanford’s Criminal Case, Stockbroker Fraud Blog, January 23, 2012

SEC Sues SIPC Over R. Allen Stanford Ponzi Payouts, Stockbroker Fraud Blog, December 20, 2011
SEC Issues Emergency Order to Stop $26M “Green” Ponzi Scam, Institutional Investor Securities Blog, October 13, 2011 Continue Reading ›

SEC Charges First Resource Group LLC in Alleged Florida Penny Stock Boiler Room Scam

Published on: January 28, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The SEC is accusing First Resource Group LLC and its founder David H. Stern of violating sections of the Securities Act of 1933 and the Securities Exchange Act of 1934. The Commission contends that they ran a boiler room scam involving penny stock companies while selling the same stocks to make illegal earnings.

First Resource and Stern allegedly hired telemarketers to make fraudulent solicitations to brokers to buy Cytta Corporation and TrinityCare Senior Living Inc. stocks. Meantime, Stern was also selling Cytta stock and TrinityCare shares to investors while buying small quantities to make it look as if actual trading activity was taking place so that investors would buy the shares.

The SEC claims that Stern and First Resources used a telephone sales boiler room to defraud investors and make inflated claims while manipulating the stocks’ price and making a profit. The Commission says they acted as unregistered brokers.

Citigroup Woes Continue With FINRA Order to Pay Financial Adviser Team $24M Over Inadequate Compensation

Published on: January 28, 2012 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority panel wants Citigroup to pay financial advisor siblings Robert Vincent Minchello and James Bryan Minchello, as well as administrator Martha Jane Sullivan, $24 million. The claimants, who were formerly employed by the financial firm, contend that they did not receive fair compensation for transactions involving an institutional investor client.

Prior to working for Citigroup they were with Banc of America Securities. When they landed at Citi, they brought a number of institutional investors with them. Transactions that the brothers conducted with one the clients, a technology incubator that at the time they already had a 10-year working relationship with, is at the center of the dispute with Citigroup.

The Claimants contend that Citi only partially paid them on a few of the initial transactions and then removed them from relationship with the client while refusing to compensate them for subsequent transactions. After leaving the financial firm in 2009 they submitted an arbitration claim with Citigroup. They had wanted $156.1 million in punitive damages and interest, as well as $78 million in compensatory damages ( and attorneys’ fees and other costs).

The FINRA panel awarded the team about $24 million for compensatory damages and 6% yearly interest for the period of December 15, 2004 through January 13, 2012. Citi must also pay the advisors $1M in sanctions. The Claimants’ securities fraud attorney says the award seem to be a “rebuke” of the practice that some investment banks engage in of not paying advisors that connect them with lucrative transactions or clients. The brothers and Sullivan are now with JP Morgan Securities LLC.

As you can read about in some of our recent blog posts, Citigroup has come under fire a lot recently over alleged violations. FINRA just fined Citigroup Global Markets $725,000 for allegedly failing to disclose certain conflicts of interest in its research reports and during research analyst public appearances. In December 2011, a judge turned down Citigroup’s request to have a $54.1M arbitration award against it overturned. That FINRA award was over Citigroup’s alleged failure to disclose to investors the risks involved in putting their money in municipal bonds.

Of course, there is also the $285 million settlement reached between Citigroup and the Securities and Exchange Commission that US District Judge Jed S. Rakoff has refused to approve. Instead, he ordered both parties to court to resolve this matter. The SEC as the housing market was collapsing in 2007, Citigroup sold Class V Funding III and then betting against the $1B mortgage-linked CDO. Clients were not told about this conflict and investors eventually lost almost $700 million. Meantime, the financial firm made approximately $160 million.

Boston financial advisors and assistant win $24 million in arbitration, Boston, January 23, 2012

Citigroup Ordered To Pay Advisor Team $24M in Arbitration Dispute, OnWallStreet, January 24, 2012

More Blog Posts:
Citigroup Request to Overturn $54.1M Municipal Bond Arbitration Ruling Denied by Judge, Institutional Investor Securities Blog, December 27, 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

Unsealed Documents in $54.4M FINRA Arbitration Case Reveal that Citigroup Did Not Disclose Municipal Bond Risks to Investors, Stockbroker Fraud Blog, January 21, 2012