Articles Posted in Financial Firms

Federal Law Preempts Claims that Morgan Stanley Smith Barney LLC’s Insider Trading Detection Policies are Unlawful Under California Statutes, Says District Court

Published on: June 20, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to the U.S. District Court for the Central District of California, federal law preempts would-be class claims accusing Morgan Stanley Smith Barney LLC of having insider trading detection and deterrent policies that are illegal under California labor and unfair competition statutes. The court says that “conflict preemption” precludes the claims and that letting the plaintiffs move forward with them would create an obstacle to Congress’ objectives in enacting federal securities laws.

Per the court, Morgan Stanley set up employee trading policies to prevent and monitor insider trading. Under the ETPs, employees who had certain kinds of brokerage accounts had to either keep them in-house or disclose and get approval for the accounts to be housed at another firm. However, in 2008, because of possible “state law implications” regarding its policy, Morgan Stanley put into practice granting California employees that asked for an exeption approval as long as they gave the financial firm duplicate brokerage account confirmations and statements.

The plaintiffs of this lawsuit, who are all ex-Morgan Stanley employees, contended that under California labor statute, the firm’s policy was unlawful. Morgan Stanley’s lawyer responded by arguing that federal law preempts the plaintiffs’ claims.

The plaintiffs intend to bring their case to the U.S. Court of Appeals for the Ninth Circuit. Their lead lawyer has said that the brokerage firm’s plan forced the securities traders to pay “huge fees for their own advice.”

Related Web Resources:

Marcia Bloemendaal, et al v. Morgan Stanley Smith Barney, Justia, June 14, 2011

More Blog Posts:
MBIA Can Sue Morgan Stanley Over Alleged Misrepresentation of MBS Risks, Says US New York Supreme Court, Institutional Investor Securities Blog, June 14, 2011

Ex-Morgan Stanley Trader to Settle SEC Unauthorized Swaps Trading Claims for $150,000, Stockbroker Fraud Blog, June 13, 2011

JP Morgan Settles for $153.6M SEC Charges Over Its Marketing of Synthetic Collateralized Debt Obligation

Published on: June 18, 2011 | by Shepherd Smith Edwards & Kantas, LLP

J.P. Morgan Securities LLC (JPM) has consented to pay $153.6 million to settle Securities and Exchange Commission charges that it misled investors in 2007 when it marketed a synthetic collateralized debt obligation that was linked to the US housing market. The financial firm also agreed to a permanent bar from future violations of the 1933 Securities Act and to bettering its business practices related to mortgage securities transactions. By agreeing to settle, JP Morgan is not denying or admitting to the allegations. The settlement, however, should allow investors to get a “full return” on their losses.

The SEC says that the brokerage firm mainly used credit default swaps that referenced other CDO securities tied to the housing market to structure the Squared CDO 2007-1. While the CDO’s marketing collateral said that GSCP, GSC Capital Corp.’s investment advisory arm, chose the deal’s investment portfolio, investors were not notified that hedge fund Magnetar Capital LLC played a key part in choosing the portfolio’s CDOs and or that it would benefit if the CDO assets defaulted.

The Commission also claims that when JP Morgan discovered in early 2007 that it could sustain huge losses because the housing market was in peril, it started marketing the deal to investors outside its regular client base. Less than a year later, the securities had lost the majority, if not all, of their value.

The SEC’s complaint accuses the investment bank of selling approximately $150 million of “mezzanine notes” of the Squared deal to over a dozen institutional investors who consequently lost their investments. Also, when the Squared deal was shut in May 2007, Magnetar’s short position was $600 million while its long position was $8.9 million.

J.P. Morgan to Pay $153.6 Million to Settle SEC Charges of Misleading Investors in CDO Tied to U.S. Housing Market, SEC, June 21, 2011

More Blog Posts:
Washington Mutual Bank Bondholders’ Securities Fraud Lawsuit Against J.P. Morgan Chase & Co. is Revived by Appeals Court, Institutional Investor Securities Blog, June 29, 2011

National Credit Union Administration Board Files $800M Mortgage-Backed Securities Fraud Lawsuits Against JP Morgan Securities, RBS Securities, and Other Financial Institutions, Institutional Investor Securities Blog, June 23, 2011

JP Morgan Chase Agrees to Pay $861M to Lehman Brothers Trustee, Stockbroker Fraud Blog, June 28, 2011

Credit Suisse Ordered to Pay STMicroelectronics N.V. $404M Over Improper ARS Investment

Published on: June 15, 2011 | by Shepherd Smith Edwards & Kantas, LLP

In STMicroelectronics N.V. v. Credit Suisse Securities (USA) LLC, 2d Cir., No. 10-3847-cv, 6/2/11, the US U.S. Court of Appeals for the Second Circuit upheld an arbitration panel’s award against Credit Suisse Securities (USA) LLC for $405 million. The financial firm was accused of improperly investing STMicroelectronics N.V. (STM)’s money in high-risk auction-rate securities.

The court says that Credit Suisse offered ST the opportunity to invest in ARS in April 2006 even though the business needed to have cash or its equivalents easily at hand due to the cyclical nature of what it does. Prior to that, ST had invested its funds in safe, liquid securities, including money market deposits.

The court says that the financial firm “explicitly proposed” ARS investments and ST “explicitly accepted” investing only in these securities, which were supported by student loans that were federally guaranteed. Yet within a few days, the court says that Credit Suisse started buying higher yield, higher risk ARS for ST.

By January 2007, none of the ARS were backed by student loans anymore. Yet the financial firm sent an email to ST that concealed the investments “true nature.” All of ST’s ARS failed after the market collapsed and two of the Credit Suisse brokers in charge of the ST account would go on to be convicted of conspiracy and securities fraud charges.

ST later Financial Industry Regulatory Authority arbitration claim against Credit Suisse. The U.S. District Court for Southern District of New York later confirmed the panel’s $406 million.

In its appeal, Credit Suisse attacked the award, claiming that arbitrator John J. Duval Sr. gave inaccurate and incomplete disclosures and was misleading because he suggested that he “worked for ‘both sides,’” when he actually was an expert witness for the claimants. The court rejected that contention. Credit Suisse also accused the arbitrators of “manifestly disregarding” the law when it reached its finding. The court rejected this contention too. The appeals court did, however, find that the district court should have credited the amount of the award funds that ST got from the sale of certain Deutsche Bank securities and, as a result, lowered the amount of interest due.

More Blog Posts:
Credit Suisse Broker Previously Convicted for Selling High Risk ARS is Barred from Future Securities Law Violations, Institutional Investors Securities Blog, February 12, 2011

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

Judge Gives Lower Sentence to Former Credit Suisse Broker Convicted of Auction-Rate Securities Fraud, Stockbroker Fraud Blog, January 30, 2010

MBIA Can Sue Morgan Stanley Over Alleged Misrepresentation of MBS Risks, Says US New York Supreme Court

Published on: June 14, 2011 | by Shepherd Smith Edwards & Kantas, LLP

In MBIA Insurance Corp. v. Morgan Stanley, N.Y. Sup.Ct., No. 29951-10, the New York Supreme Court says that insurance company MBIA can sue Morgan Stanley and affiliates Saxon Mortgage Services Inc. and Morgan Stanley Mortgage Capital Holdings LLC for alleged misrepresentations about the risks involved in insuring residential mortgages that were sold to investors as mortgage-backed securities. While Judge Gerald Loehr allowed MBIA to bring a cause of auction for fraud against the broker-dealer and its affiliates, he did dismiss an unjust enrichment claim against Saxon.

MBIA claims that the defendants made their representations in their talks leading up to the agreement that had the insurer saying it would insure over $223 million in residential MBS that investors bought in the transaction. The alleged misstatements were over the characteristics of the mortgage loans (both pooled and individual), the quality of the collateral for the loans, and borrowers’ credit ratings. The action dealt with the securitization of a transaction involving about 5,000 subordinate-lien residential mortgages that were bought, structured, and sold by the defendants. Morgan Stanley is also accused of representing to MBIA that the mortgage loans weren’t subprime loans but were instead alternative documentation loans.

MSMCH had acquired the mortgage loans and then transferred and pooled them to Morgan Stanley Capital Inc., which then transferred them to a trust that had LaSalle Bank National Association serve as a trustee. The trust put out certificates secured by groups of those mortgages, which were sold, and paid a yield to certificate holders connecting the cash flow to the loans.

More Blog Posts:

Goldman Sachs Group Made Money From Financial Crisis When it Bet Against the Subprime Mortgage Market, Says US Senate Panel, Institutional Investor Securities Blog, April 15, 2011

Ex-Morgan Stanley Trader to Settle SEC Unauthorized Swaps Trading Claims for $150,000

Published on: June 13, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Larry Feinblum, an ex-Morgan Stanley & Co. Inc. (MS) trader, has consented to settle for $150,000 SEC allegations that he hid from risk managers the true extent of risk involved in certain proprietary trading. This move caused the financial firm to suffer about $24.47 million in losses when it unwound the unauthorized positions.

The SEC claims that over a 3-month period in 2009, Feinblum, who was a supervisor on Morgan Stanley’s Equity Financing Products Swaps Desk, and trader Jennifer Kim executed a number of transactions that set up net risk positions that were significantly over limits that “could be exceeded only with supervisory approval.” The two are also accused of submitting swap orders into the firm’s risk management system that they never planned on executing and which they then promptly canceled.

The SEC says that not only did Feinblum and Kim set up their arbitrage trading strategy at positions that exceeded Morgan Stanley’s risk limits, but they also submitted the orders for the purpose of artificially and temporarily lowering the net risk positions in the securities as recorded in the firm’s risk management systems. They also went after a trading strategy that was supposed to create a profit from price discrepancies between foreign markets and US markets.

On December 17, 2009, Feinblum, who had just lost $7 million the day before, admitted that he and Kim had gone beyond the risk limits on repeated occasions and that they hid their misconduct. Morgan Stanley then proceeded to unwind the positions but by then they had already taken the financial hit.

Related Web Resources:
Former Morgan Stanley Trader Barred for Bogus Swaps, Securities Technology Monitor, June 2, 2011
SEC: Morgan Stanley trader’s trick caused millions in losses, The Washington Post, June 2, 2011
SEC Administrative Proceeding

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China-Based Hackers Broke into Morgan Stanley Network, Reports Bloomberg, Stockbroker Fraud Blog, February 28, 2011
Morgan Stanley Failed to Disclose Financial Adviser’s Felony Charge to FINRA, Claims Car Accident Victim’s Attorney, Stockbroker Fraud Blog, January 10, 2011
Morgan Stanley & Co. and TD Ameritrade Inc. to Repurchase Over $338M in Auction Rate Securities from New Jersey Investors, Institutional Investor Securities Blog, May 4, 2011 Continue Reading ›

SEC Examining Whether Goldman Sachs Violated Bribery Laws When Dealing with Libya’s Sovereign-Wealth Fund

Published on: June 10, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to the Wall Street Journal, the SEC is trying to figure out whether Goldman Sachs Group Inc. and a number of other financial firms were in violation of bribery laws because of the way they handled Libya’s sovereign-wealth fund. SEC enforcement lawyers are now looking at documents detailing these relationships. Several other companies have had significant interactions with the Libyan Investment Authority, including Och-Ziff Capital Management Group, JP Morgan Chase, and Carlyle Group.

The Journal says that Goldman invested over $1.33 billion from Libya’s fund in a number of trades in 2008. The investment lost over 98% of its value.

US regulators want to know about a $50M and transaction fees that Goldman Sachs said it would pay the fund in exchange for a release of liability and winding down the trades. Although the money reportedly was never handed over before violence flared up last year in Libya, this doesn’t mean that the financial firm is exempt from the federal Foreign Corrupt Practices Act, which does not let US companies offer (or pay) bribes to state-owned company employees or foreign government officials. The money would have gone to an outside advisory firm that was at the time run by the son-in-law of the Libyan national company.

Goldman spokesman Lucas van Praag has said that the financial firm is “confident” that it didn’t do anything that violated any regulation or rule. He noted that the company worked with outside counsel to make sure that it was in compliance with all rules.

Related Web Resources:
SEC Examining If Goldman-Libya Connection Violated Bribery Laws, Huffington Post, June 9, 2010

SEC Looks At Goldman, Others’ Dealing With Libyan Sovereign Fund, The Wall Street Journal, June 9, 2011

More Blog Posts:

Goldman Sachs Ordered by FINRA to Pay $650K Fine For Not Disclosing that Broker Responsible for CDO ABACUS 2007-ACI Was Target of SEC Investigation, Stockbroker Fraud Blog, November 12, 2010

David Lerner & Associates Ignored Suitability of REITs When Recommending to Investors, Claims FINRA

Published on: June 8, 2011 | by Shepherd Smith Edwards & Kantas, LLP

FINRA has filed securities charges against David Lerner & Associates, Inc. accusing the broker-dealer of not taking into account suitability when soliciting vulnerable investors-in particular, elderly clients, to buy shares in the non-traded, $2B Apple REIT Ten offering. The SRO is also accusing the broker-dealer of posting misleading information online about distributions.

DLA has been Apple REITs only underwriters for nearly two decades. The broker-dealer has sold almost $6.8B of the securities into about 122,600 customer accounts. The series has made $600M in fees and other earnings for the broker-dealer, making up 60 to 70% of the firm’s yearly business. Since January, DLA also has been sole underwriter for Apple REIT Ten, which has sold over $300M of a $2B offering of shares. DLA associates earn numerous fees, including 10% of all offerings.

The SRO says that for at least seven years, the closed Apple REITs have “unreasonably valued” their shares at $11 (notwithstanding performance declines, market fluctuations, and increased leverage). The REITs, which were launched from 2004 and 2008 and were used mainly used to buy extended hotel stays, have managed to keep up “outsized” distributions of 7-8% through leveraged borrowing and returning of capital to investors. The SRO contends, however, that DLA did not disclose on its website that the income from real estate was not enough to support these. FINRA also claims that DLA provides “misleading” distribution rates on its website for all past Apple REITs.

DLA is denying the allegations.

Finra Sues David Lerner Firm, Wall Street Journal, June 1, 2011
FINRA Charges Firm With Ignoring Suitability, Providing Bad Data on REITs, BNA, June 1, 2011
REITs

More Blog Posts:
Ameriprise Must Pay $17 Million for REIT Fraud, Stockbroker Fraud Blog, July 12, 2009
W.P. Carey & Co Settles SEC Charges Over Payments of Undisclosed REIT Compensation, Stockbroker Fraud Blog, March 25, 2008
UBS Financial Services Fined $2.5M and Ordered to Pay $8.25M Over Lehman Brothers-Issued 100% Principal-Protection Notes, Institutional Investors Securities Blog, April 12, 2011 Continue Reading ›

Northern Trust Securities Agrees to $600,000 FINRA Fine Over Charges It Failed to Properly Monitor High-Volume Securities Trades and CMO Sales

Published on: June 8, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Northern Trust Securities has consented to pay a $600,000 Financial Industry Regulatory Authority fine over securities charges accusing it of failing to supervise collateralized mortgage obligation sales and lacking the systems set up to properly monitor certain high-volume securities trades. FINRA contends that the alleged actions by the broker-dealer exposed investors to the risk of losing if not all then a significant part of their principal through potential over concentration in CMOs. By agreeing to settle, however, Northern Trust is not admitting to or denying the charges.

According to FINRA, from 10/06 and 10/09, Northern Trust failed to to watch out for unsuitable levels of concentration” in CMOs in customer accounts and this occurred in significant part because Northern Trust employed an exception reporting system that did not analyze or capture significant parts of its business, such as:

• Certain trades of 10,000 equity shares or more
• Certain trades of 250 or more of fixed-income bonds
• All CMO transactions

The SRO contends that from 1/07 to 6/08, 43.5% of the Northern Trust’s business was not included in the review. The SRO claims that not having the proper systems to properly monitor the fixed income trades of over 250 bonds and equity trades of more than 10,000 shares led to a failure on the financial firm’s part to look at the trades for concentration, excessive mark-ups, excessive suitability, trading, or commissions, or for trading in restricted stocks.

Northern Trust reportedly wasn’t aware of this problem until an elderly investor filed an arbitration claim related to the concentration in her Countrywide Financial Corp. CMO account.

Related Web Resources:

FINRA Fines Northern Trust Securities, Inc. $600,000 for Inadequate Supervision of Sales of Collateralized Mortgage Obligations and Certain High-Volume Securities Trades, FINRA, June 2, 2011

More Blog Posts:
Charles Schwab & Co. Defendant in Class-Action Securities Fraud Lawsuit Filed on Behalf of Schwab Total Bond Market Fund Investors Over CMOs and Mortgage-Backed Securities, Stockbroker Fraud Blog, September 7, 2010

HSBC Securities to Pay $375K to Settle FINRA Allegations that It Recommended Unsuitable Collateralized Mortgage Obligations to Retail Clients, Stockbroker Fraud Blog, August 25, 2010

SEC & FINRA Examine CMO Sales and Marketing Practices, Stockbroker Fraud Blog, January 23, 2008

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

Published on: June 2, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of Texas has ruled that Credit Suisse Securities shouldn’t have to pay Luby’s Restaurants another $186,000 as part of its arbitration to the investor. The case is Luby’s Restaurants LP v. Credit Suisse Securities (USA) LLC. Shepherd Smith Edwards and Kantas Founder and Texas Securities Fraud Attorney William Shepherd had this to say about the ruling: “Attorneys for each side have the opportunity to submit language to the arbitrators that it desires to be reflected in an award. In cases where the award sought is anything more than payment of a specific amount it is wise to submit such language.”

Luby’s Restaurants LP bought over $30 million in auction-rate securities from Credit Suisse. The investor bought the ARS based on the financial firm’s representation that the instruments were very liquid, safe, and a suitable investment.

Luby’s later filed its arbitration claim with FINRA for ARS losses. By then it had gotten back everything but $8.9 million in securities. Then, after initiating the proceedings-but prior to the arbitration hearing-Luby’s redeemed another one of its securities for less than par and lost $186,000.

The arbitration panel would go on to rule in favor of Luby’s. Credit Suisse was directed to buy back the ARS from Luby’s at par and with interest. While both parties sought to confirm the award, they were in dispute over whether the $186,000 that Luby’s lost after it filed its arbitration case should be included.

The court says that Credit Suisse does not have to pay that amount to Luby’s. The court noted that the Award doesn’t mention the additional damages that Luby’s sustained when it sold some of the securities under par during pendency of the arbitration but prior to the hearing.

Related Web Resources:
$186K Under Arbitration Award, BNA Securities Law Daily, May 31, 2011
Luby’s Restaurants LP v. Credit Suisse Securities (USA) LLC, Justia

More Blog Posts:
Credit Suisse Group AG Must Pay ST Microelectronics NV $431 Million Auction-Rate Securities Arbitration Award, Stockbroker Fraud Blog, April 5, 2010
Texas Securities Commissioner’s Emergency Cease and Decease Order Accuses Insignia Energy Group Inc. of Misleading Teachers, Stockbroker Fraud Blog, May 23, 2011
Goldman Sachs and Wells Fargo Investments Repurchase $26.9M in Auction-Rate Securities from New Jersey Investors, Institutional Investors Securities Blog, May 25, 2011 Continue Reading ›

District Court Wants to Know Why FINRA Arbitration Panel Denied Freecharm Ltd.’s Securities Fraud Claim Against One Atlas Financial Group LLC

Published on: May 31, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Judge Marcia G. Cooke of the U.S. District Court for the Southern District of Florida is asking why a Financial Industry Regulatory Authority arbitration panel denied Freecharm Ltd.’s breach of fiduciary duty and fraud claims against Atlas One Financial Group LLC. Cooke wants to know about the panel’s reasoning so it can make a ruling regarding the parties’ conflicting motions to modify, confirm, or vacate the award.

The court says that, Freecharm Ltd. began arbitration proceedings against associated entity Atlas One Financial Group LLC and three individuals in 2009. Freecharm accused Atlas of committing Florida statutory violations, breach of fiduciary, fraud, negligence, and other wrongdoings linked to the alleged excessive and/or unauthorized trading in a number of securities accounts.

After the FINRA panel entered an award denying Freecharm’s claims “in their entirety,” Freecharm then submitted a motion to modify or vacate, while Atlas put forward its own motion to have the award confirmed.

Freecharm is claiming that the panel went beyond its powers, exhibited partiality, ignored the law and the facts, and was prejudiced in refusing to see that Atlas allegedly concealed discovery documents. Freecharm is also challenging the credibility of certain witness testimony and discovery documents.

Although the district court has acknowledged that the FINRA panel’s decision deserves “considerable deference,” it also has found that in this instance the award does not “expressly state” the reason Freecharm’s claims were entirely denied. The court says that it needs more information so it can identify the possible evidence for the panel’s logic, as well as determine what principal of law the arbitrators allegedly disregarded. District courts are authorized to remand a case to an arbitration panel for the purpose of getting clarification about the panel’s intent when “in making an award evidences a manifest disregard of the law.”

Related Web Resources:
In Weighing Motion to Confirm, Court Asks Arbitrators to Clarify Basis of Award, Alacra Store, May 25, 2011 Atlas One Financial Group, LLC et al v. Freecharm Limited, Justia Dockets

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
SEC Approves FINRA’s Proposal to Give Investors an All-Public Arbitration Panel Option, Stockbroker Fraud Blog, February 12, 2011
Raymond James Must Pay $925,000 Over Auction-Rate Securities Dispute, Stockbroker Fraud Blog, September 1, 2010 Continue Reading ›