Financial Firms

Dow Corning Corp.’s $165M Securities Fraud Lawsuit Against Merrill Lynch & Co. Can Proceed, Says District Court Judge

Published on: April 7, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York’s Chief Judge Loretta A. Preska says that Dow Corning Corp. can sue Merrill Lynch & Co. for securities fraud. Dow Corning is claiming $165 million in auction-rate securities losses. Dow Corning says that it still has not been able to sell its ARS. The company and two affiliates, its Devonshire Underwriters unit and Hemlock Semiconductor Corp., had filed their complaint against the Bank of America-owned Merrill for falsely misrepresenting the ARS, for which Merrill acted as managing broker and underwriter.

Preska denied Merrill’s motion to dismiss the complaint, noting that this securities fraud lawsuit is different from other ARS lawsuits, in which motions to the defendants’ motions to dismiss were granted. Unlike other ARS cases, Dow Corning is challenging certain omissions and statements that Merrill allegedly made to reassure the company that the investments were safe even while knowing the ARS market was failing. The court says that for purposes of its ruling, it is taking the allegations to be true.

Dow Corning says Merrill’s actions violated the Michigan Uniform Securities Act, the 1934 Securities Exchange Act’s Section 10(b), and breached a number of common law duties. The contends that Merrill knew as far back as early 2007 that trouble was brewing with the ARS market yet the broker allegedly stepped up efforts to sell ARS to investors. Even though Dow Corning asked questions about possible issues with the market, the broker is accused of not revealing the information it had and, instead, making reassuring statements that were actually misleading misstatements. The court says Merrill was obligated to “speak truthfully.”

Related Web Resources:
Merrill Loses Bid to Throw Out Dow Corning Auction-Rate Lawsuit, Bloomberg, March 30, 2011
Dow Corning Suit Against Merrill Lynch Over ARS Losses Survives Motion to Dismiss, BNA Securities, April 4, 2011

More Blog Posts:
Akamai Technologies Inc’s ARS Lawsuit Against Deutsche Bank Can Proceed, Institutional Investor Securities Blog, March 4, 2011
Citigroup Global Markets to Pay Back $95.5M Over ARS Sold to LandAmerica Exchange Fund, Institutional Investor Securities Blog, November 11, 2010
Class Auction-Rate Securities Lawsuit Against Raymond James Financial Survives Dismissal, Stockbroker Fraud Blog, September 27, 2010 Continue Reading ›

Wells Fargo Settles SEC Securities Fraud Allegations Over Sale of Complex Mortgage-Backed Securities by Wachovia for $11.2M

Published on: April 7, 2011 | by Shepherd Smith Edwards & Kantas, LLP

For a payment of $11.2 million, Wells Fargo & Co. will settle US Securities and Exchange Commission allegations that Wachovia Capital Markets LLC misled investors and improperly sold two collateralized debt obligations in 2007 and 2006. Wachovia was bought by Wells Fargo in 2008.

Wells Fargo Securities now manages Wachovia. By agreeing to settle, the investment bank is not admitting to or denying the findings.

According to the SEC, Wachovia Capital Markets LLC, now called Wells Fargo Securities, violated securities law anti-fraud provisions when it sold the complex mortgage-backed securities to investors despite the red flags indicating that there was trouble brewing with the US housing market.

The SEC says that Wachovia charged excessive markups in the sale of part of a $1.5 billion CDO called Grand Avenue II. Unable to sell the CDOs $5.5 million equity portion in October 2006, it kept the shares on the trading desk while dropping their value to 52.7 cents on the dollar. Wachovia later sold the shares for 90 and 95 cents on the dollar to an individual investor and the Zuni Indian tribe. Both did not know that they had purchased the shares at a price that was 70% above their accounting value. The transaction went into default in 2008.

The SEC claims that in 2007, Wachovia Capital Markets misrepresented to investors in Longshore 3, a $1.3 billion CDO, that assets had been acquired from Wachovia affiliates on an “arms’-length basis” when actually, 40 residential mortgage-backed securities were transferred at $4.6 million over market prices. The SEC contends that Wachovia was trying to avoid sustaining losses by transferring the assets at “stale” prices.

Related Web Resources:

Wells Fargo-Wachovia settles CDO claim with SEC for $11 million, Housing Wire, April 5, 2011

CDO News, New York Times

Mortgage-Backed Securities, SEC.gov

More Blog Posts:

Houston Man Indicted in Alleged $17M Texas Securities Fraud, Stockbroker Fraud Blog, December 23, 2010

Goldman Sachs COO Says Investment Firm Shorted 1% of CDOs Mortgage Bonds But Didn’t Bet Against Clients, Stockbroker Fraud Blog, July 14, 2010

AIG Reorganizes Property and Casualty Insurer Chartis

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

American International Group Inc. is reorganizing Chartis, its property and casual insurer, into two global groups—one consumer and one commercial. AIG executive vice president, finance, risk and investments Peter D. Hancock has been named Chartis’s chief executive officer, while current Chartis CEO Kristian P. Moor is to become vice chairman.

John Q. Doyle, who was formerly Chartis US’s CEO will head the global commercial business, while current chief administrative officer Jeffrey L. Hayman will be in charge of the global consumer business group. Both men will report to Hancock. The reorganization will section Chartis into four regions: U.S./Canada, Europe, Growth Economies, and Far East.

It was just this February that Chartis had to put aside $4.2 billion for loss reserve increases. According to AIG CEO Robert Benmosche, strengthening claims management, underwriting, risk management, and reserving so that the right risk-adjusted returns are earned remain top priorities. Benmosche promised to rebuild businesses needed to pay back the firm’s $182.3 billion government rescue. Benmosche, who is undergoing treatment for cancer, intends to step down in 2012.

Chartis has over 45 million clients internationally located in over 160 nations. Last year, the insurer wrote $31.6 billion in net premiums. Meantime, AIG’s stock performance has been less than stellar with a 26% drop since the start of the year.

Related Web Resources:
AIG Revamps Chartis, Makes Hancock Head After Reserve Boost, Bloomberg, March 31, 2011

FINRA Panel Orders Wedbush Securities to Pay $233,000 in Securities Fraud Damages

Published on: March 28, 2011 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority (FINRA) arbitration panel says Wedbush Securities Incorporated must pay Karen E. Ray $233,000 in damages. Ray had accused the brokerage firm of numerous causes of action, including negligence, purposely negligent misrepresentations, and violating FINRA Rules of Fair Practices.

Rays case isn’t the first one against the broker-dealer. FINRA’s broker report on the financial firm noted that Wedbush has been at the center of a number of customer complaints and over 40 regulatory inquiries brought by the Securities and Exchange Commission, FINRA (previously NASD), the NYSE Division of Enforcement, as well as regulatory bodies in Colorado, Washington, New Jersey, Georgia, Idaho, and Oregon.

Among the allegations are those involving supervisory failures and market timing. The broker report also noted that Wedbush had received over 40 securities arbitration claims by customers alleging unsuitability, negligence, excessive margin, churning, misrepresentation, and/or breach of fiduciary duty. Their cases involved different kinds of securities, such as mutual funds, bonds, stocks, municipal securities, annuities, and options.

FINRA Wants Amerivet Securities Inc.’s Lawsuit Seeking to Inspect the SRO’s Records Dismissed

Published on: March 26, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority wants the District of Columbia Court of Appeals to reverse the D.C. Superior Court’s decision to not dismiss Amerivet Securities Inc.’s lawsuit against the SRO. The broker-dealer wants to inspect FINRA’s records and books.

Amerivet Securities filed its complaint in August 2009 under the Delaware General Corporation Law’s Section 220, which lets a shareholder examine a company’s records and books for “any proper purpose.” The broker-dealer says it needs to inspect FINRA’s books and documents in order to expose the corporate wrongdoing related to the SRO’s 2008 investment losses and and allegedly inflated executive pay practices.

When our securities fraud attorneys covered this case more than a year ago, we noted that Amerivet had accused FINRA of failing to supervise and regulate a number of its larger member firms, including Lehman Brothers, Merrill Lynch, Bernard L. Madoff Investment Securities Inc., Bear Stearns and Co, and Stanford Financial Group. The broker-dealer also claimed that FINRA recklessly pursued high-risk investment strategies that were not appropriate for preserving capital. (Read our previous Stockbroker Fraud Blog post to find out more.) Last month, Judge John Mott ruled in favor of Amerivet and noted that pursuant to Section 220, the broker-dealer had asserted a proper purpose for wanting to make its inspection.

Juno Mother Earth Asset Management LLC and Its Founders Face SEC Securities Fraud Lawsuit Over Alleged $1.8M Looting of Hedge Fund Assets

Published on: March 23, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission has filed a securities fraud complaint accusing Juno Mother Earth Asset Management LLC and its founders Arturo Rodriguez and Eugenio Verzilli of looting over $1.8 million in assets from a hedge fund.

The two hedge fund managers allegedly used the assets to cover Juno’s operating expenses, including rent, payroll, entertainment, and travel. They also are accused of submitting false SEC filings, including telling the SEC that it managed $40 million more than what it in fact did.

The SEC says that Juno’s partners falsely claimed that they had placed $3 million of their own capital in a client fund, when in fact, they never used their own money. In addition to selling securities in client brokerage and commodity accounts, Juno allegedly directed 41 separate transfers of cash to Juno’s bank account and made false claims that they were expense reimbursements for costs incurred on the client fund’s behalf. Rodriguez and Verzilli then issued false promissory notes to cover up the fraud and make it seem as if the fund had invested money in Juno.

The SEC further contends that the three defendants marketed investments in the Juno fund but did not reveal that the hedge fund advisor was having financial problems. When offering and selling the securities, Juno would misrepresent and inflate its assets, even claiming at one point that it was managing up to $200 million.

The government is trying to crack down on hedge fund managers who make it appear as if they’ve invested more personal money than what they’ve actually put in. The agency is seeking disgorgement plus prejudgment interests, permanent injunctions, and civil monetary penalties.

Related Web Resources:
SEC Charges Two Hedge-Fund Managers, The Wall Street Journal, March 16, 2011

Read the SEC Complaint (PDF)

More Blog Posts:

3 Hedge Funds Raided by FBI in Insider Trading Case, Stockbroker Fraud Blog, November 3, 2010

Dallas-Based Southwest Securities Settles for $500,000 FINRA Charges It Improperly Used Paid Consultants

Published on: March 17, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Southwest Securities Inc., a Dallas-based financial firm, has consented to a $500,000 fine imposed by Financial Industry Regulatory Authority. The SRO claims that the broker-dealer paid consultants to solicit municipal securities business-a violation Municipal Securities Rulemaking Board Rule G-38-and did not comply with a number of the board’s other requirements. FINRA says that the Texas broker-dealer’s alleged misconduct threatened the municipal securities market’s integrity.

Under Rule G-38, municipal securities dealers are not allowed to pay persons not affiliated with the company for the purposes of soliciting business for it. Southwest Securities, however, allegedly worked with these consultants to obtain 24 municipal securities underwritings and roles as financial adviser to Texas municipalities. The consultants were paid over $200,000 and promised a percent of earnings from any municipal securities business solicited. The broker-dealer also allegedly issued $26,000 in one-time payments to three individuals for their involvement in obtaining this type of business for the firm.

Other violations, allegedly included:

• Failing to properly submit MSRB forms.
• Inaccurate reporting to over 300 municipal securities transactions.
• Inadequate supervisory systems and procedure, which should have been revised to meet an MSRB Rule G-38 amendment that doesn’t allow unaffiliated individuals to receive payment soliciting municipal securities business.
• Engaging in prohibited municipal securities business-a violation of MSRB Rule G-37
By settling, the Southwest Securities is not denying or admitting the Texas securities charges.

Related Web Resources:
Dallas broker pays $500,000 to settle bond query, Dallas News, March 7, 2011
FFINRA Fines Southwest Securities $500,000 for Paying Former Texas Municipal Issuer Officials and Others to Solicit Municipal Securities Business on its Behalf, FINRA, March 7, 2011 Continue Reading ›

Michael Kenwood Capital Management, LLC Principal Pleads Guilty to Securities Fraud Involving Ponzi Scam

Published on: March 17, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Last month, our stockbroker fraud lawyers reported on a Securities and Exchange Commission order to freeze the assets of Michael Kenwood Capital Management, LLC and its principal Francisco Illarramendi for their alleged misappropriation of $53 million in investor funds. This month, Illarramendi pleaded guilty to securities fraud, wire fraud, conspiracy to obstruct justice, and investment adviser fraud.

Per the US Department of Justice’s release, a hedge fund that Illarramendi was advising sustained losses in the millions. He had been tasked with investing the money. However, instead of telling clients about their failed investments, the DOJ says that Illarramendi decided to cover up this information by taking part in a securities fraud scam. The hedge funds and other entities that he advised ended up with “outstanding liabilities” far beyond their assets’ values. U.S. Attorney David B. Fein says this securities case this is the largest white-collar prosecution that the office has ever pursued.

Two other men have been detained and criminally charged over their alleged involvement in the hedge fund scam and of aiding Illaramendi. Juan Carlos Horna Napolitano and Juan Carlos Guillen Zerpa are charged with investment adviser fraud and conspiracy to obstruct justice.

Meantime, the SEC says it has amended its civil complaint against Illaramendi and MK Capital Management, LLC. The agency is now alleging that the “breadth” of the securities fraud may be in the “hundreds of millions.”

Our institutional investment fraud law firm represents clients in arbitration and litigation with claims against investment advisers, broker-dealers, brokers, and others in the financial industry. We are dedicated to recovering investor losses.

Related Web Resources:

Order to Freeze Assets in $53M Fund Fraud Allegedly Involving Michael Kenwood Asset Management LLC Obtained by SEC, Stockbroker Fraud Blog, February 21, 2011

SEC adds new charges Connecticut-based hedge fund manager in Ponzi scheme, SEC, March 7, 2011

Morgan Keegan & Co. Inc. Must Pay $250K to Couple that Lost Investments in Hedge Fund with Ties to Bernard L. Madoff Investment Securities

Published on: March 16, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Financial Industry Regulatory Authority says that Morgan Keegan & Co, Inc. must pay over $250,000 in punitive and compensatory damages to Jeffrey and Marisel Lieberman. The couple suffered financial losses after investing in Greenwich Sentry LLP, a hedge fund whose assets were funneled to Bernard L. Madoff Investment Securities. FINRA contends that the brokerage firm failed to due enough due diligence on the Madoff feeder fund, and was “grossly negligent.”

The Lieberman, who are accusing the Regions Financial unit of fraudulent misrepresentation, negligence breach of fiduciary duty, and violations of Florida and Tennessee statutes, claim that Morgan Keegan and Julio Almeyda, one of its registered representatives, invested $200,000 of their money with Greenwich Sentry. The fund ended up filing for bankruptcy last November.

Per Morgan Keegan’s internal compliance rules, investors should only be allowed to place money in hedge funds if “speculation” is one among their main objectives when opening an account. “Speculation” was the last objective on the couple’s list. FINRA says that not only must the broker-dealer repay the couple’s entire loss of $200,000, but also they must also give them 6% annual interest from when the investment was made, $50,000 in punitive damages, and $14,000 in expert witness fees.

Meantime, the FINRA panel cleared Almeyda of wrongdoing, finding that he did not know that Morgan Keegan had not provided sufficient due diligence nor was he aware that he had given the Lieberman’s false and misleading information about their investments’ risks.

Over the last year, Morgan Keegan has found itself dealing with hundreds of arbitration cases nvolving mutual fund investors alleging securities fraud related to the significant losses they sustained during the subprime mortgage crisis.

Related Web Resources:
Morgan Keegan Fined $250,000 Over Madoff Fund, Reuters, March 7, 2011

More Blog Posts:
Morgan Keegan to Pay $9.2M to Investors in Texas Securities Fraud Case Involving Risky Bond Funds, Stockbroker Fraud Blog, October 6, 2010
Morgan Keegan & Co., Inc., Morgan Asset Management, and Two Employees Face Subprime Mortgage Securities Fraud Charges by SEC, Stockbroker Fraud Blog, April 8, 2010
Morgan Keegan Ordered by FINRA Panel to Pay Investor $2.5 Million for Bond Fund Losses, Stockbroker Fraud Blog, February 23, 2010 Continue Reading ›

FINRA Orders Charles Schwab to Pay $18M to Fair Fund for YieldPlus Investors

Published on: March 12, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulation Authority wants Charles Schwab & Company, Inc. to pay $18 million to a Fair Fund set up by the SEC to payback investors of the Schwab YieldPlus Funds. FINRA found that even after changes to the fund’s portfolio resulted in it being affected by the mortgage-backed securities market crisis, Schwab did not change its marketing of the fund and instead provided inaccurate material.

The FINRA order was announced just as the Securities and Exchange Commission revealed that $119 million settlement was reached with Charles Schwab & Co., Inc. and Charles Schwab Investment Management for their alleged misleading of Schwab YieldPlus Fund investors and failure prevent nonpublic information from being misused. According to the SEC, investors were not adequately told about the risks associated with the Schwab fund. Instead, they were provide with allegedly misleading statements, such as those claiming that investing in the ultra-short bond funds was only slightly riskier than investing in a money market fund. Read our earlier stockbroker fraud blog post for more information.

Schwab has said that it is still facing about 20 individual securities arbitration claims asking for $3 million in damages related to the YieldPlus Fund. Last year, it resolved federal and California state law claims-for $200 million and $35 million, respectively, over the fund.

In other recent Charles Schwab Corp. news, FINRA has announced that it isn’t going to recommend disciplinary action over the firm’s auction-rate securities sales to clients. Charles Schwab had received two Wells notices in 2009 indicating that regulators were recommending enforcement actions.

Related Web Resources:
UPDATE: Finra Won’t Discipline Schwab For Auction-Rate Securities-Filing, The Wall Street Journal, February 25, 2011
SEC Reaches $119 Million Settlement with Charles Schwab, The Blog of Legal Times, January 11, 2011
FINRA Orders Schwab to Pay $18 Million to Investors for Improper Marketing of YieldPlus Bond Fund, FINRA, January 11, 2011

More Blog Posts:
Schwab Settles for $119M SEC Charges It Allegedly Misled YieldPlus Fund Investors, Stockbroker Fraud Blog, January 17, 2011
Class Members of Charles Schwab Corporation Securities Litigation Can Still Opt Out to File Individual Securities Claim, Stockbroker Fraud Blog, December 6, 2010
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 Continue Reading ›