Articles Posted in Financial Firms

Order to Freeze Assets in $53M Fund Fraud Allegedly Involving Michael Kenwood Asset Management LLC Obtained by SEC

Published on: February 21, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has obtained an order to freeze the assets of investment adviser Michael Kenwood Capital Management LLC and firm principal Francisco Illarramendi, who is accused of taking at least $53M from a hedge fund and fraudulently transferring investor money from several funds to bank accounts he controlled. Illarramendi then allegedly took that money and placed it in private-equity investments.

The SEC’s securities fraud complaint charges the investment adviser and Illarramendi with violating the 1940 Investment Advisers Act. Rather than using the money to benefit investors, Illarramendi allegedly used the money to his benefit and for the benefit of the entities under his control. The SEC says that it sought emergency relief because it was afraid that Illarramendi was going to make additional, unauthorized investments.

The largest private equity investment Illarramendi made was in an unnamed West Coast nuclear energy company. The SEC says he used $23 million in investor funds. A foreign company pension fund that was his biggest investor contributed 90% of the money in his funds.

In December 2009, Illarramendi allegedly authorized for $3.5 million to be transferred from an account to a Spanish company that makes rolled steel. In May 2010, he approved the transfer of $20 million from the financial firm’s $540 million Short Term Liquidity Fund to pay for shares in a clean-tech manufacturing company. He transferred another $4 million from the short-term fund to purchase shares in a development stage energy company. Another $3.1 million was transferred from different funds to the Spanish steel company.

The SEC is accusing Illarramendi of using clients’ money as if they were his and diverting millions of the investors’ funds. The commission says he breached his responsibilities as an investment adviser and abused clients’ trust. The SEC is seeking disgorgement of ill-gotten gains, permanent injunction, plus prejudgment interest.

Named as relief defendants that received investor money that they weren’t entitled are Michael Kenwood Asset Management LLC, MKEI Solar LP., and Kenwood Energy and Infrastructure LLC. Illarramendi, who is the majority owner of Michael Kenwood Group LLC, managed several hedge funds. One of the hedge funds has held up to $540 million in assets.

Related Web Resources:
SEC Charges Connecticut-Based Hedge Fund Manager for Fraudulent Misuse of Investor Assets, SEC, January 28, 2011
Read the SEC Complaint (PDF)

1940 Investment Advisers Act

Related Blog Posts:
Fontana Capital LLC Founder Violated Short-Selling Rule, Says SEC, Stockbroker Fraud Blog, February 2, 2011
3 Hedge Funds Raided by FBI in Insider Trading Case, Stockbroker Fraud Blog, November 23, 2010
$2.6M Texas Securities Fraud Settlement: Hedge Fund Adviser Settles SEC Allegations Involving Violations Related to Improper Public Stock Offering Participation After Short Selling, Stockbroker Fraud Blog, October 5, 2010 Continue Reading ›

$18M Credit Default Swap Case Against Merrill Lynch International Reinstated

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

The securities case accusing Merrill Lynch International alleging breach of contract related to the $18 million credit default swap purchased by DKR Soundshore Oasis Holding Fund Ltd has been reinstated. The Appellate Division (First Department) of the New York Supreme Court rejected the financial firm’s efforts to get the case tossed on the grounds that DKR did not give enough notice of a credit event. The judges were in unanimous agreement that notifying Merrill the event happened was enough and it didn’t matter that the date hadn’t been specified.

DKR bought for ¥1.5 billion (that’s $18 million) the swap from Merrill for insurance against a certain debt obligation of Urban Corp. Per the contract, a credit event would constitute a restructuring of at least ¥1 billion of Urban’s subordinate debt.

In June 2008, DKR told Merrill that Urban had restructured its debt, but the credit default seller said the notice was not valid and refused to issue payment. DKR filed a lawsuit against Merrill claiming breach of contract and other claims. The defendant filed a motion to dismiss on the grounds that DKR did not give the exact date of when the restructuring happened. The lower court agreed.

Now the appellate court, in reversing the ruling, has determined that CDS buys are entitled to “the benefit of every possible favorable inference” and that the contract under dispute did not ask that the notice have the same precision as to how a credit event was defined.

CDS buyers are required to make periodic payments to sellers in return for credit protection against a third party. If that party defaults on its obligation, the buyer tells the seller there has been a credit event and this is supposed to result in payment of the credit protection.

More Blog Posts:
France and Germany Press EU to Ban Naked Short Selling of Stocks and Limit Credit Default Swaps, Stockbroker Fraud Blog, July 8, 2010

The Financial Regulation Reform Act of 2008 Seeks to Regulate Investment-Bank Holding Companies and Credit Default Swaps, Stockbroker Fraud Blog, November 24, 2008

Wisconsin School Districts Sue Royal Bank of Canada and Stifel Nicolaus and Co. in Lawsuit Over Credit Default Swaps, Stockbroker Fraud Blog, October 7, 2008

Ex-Triton Financial CEO Accused of Using NFL Contacts to Commit $50M Texas Securities Fraud

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

Kurt Branham Barton, the former CEO of Triton Financial, a financial firm based in Austin, Texas, has been indicted on 33 counts, including Texas securities fraud, money laundering, and wire fraud. Barton allegedly used ex-NFL stars and church contacts in a $50 million Ponzi scam.

The American-Statesman reports that beginning in 2002, Barton accumulated a number of partnerships and companies based around Triton Financial. He even hired ex-NFL stars Chris Weinke and Ty Detmer to persuade clients to invest. Many investors belonged to the Church of Jesus Christ of Latter-day Saints (Barton is also a member).

Court documents contend that Barton got investors to give him over $50 million and that he used the funds to live a lavish lifestyle that included expensive vehicles, flying in private planes, and a luxury box for watching University of Texas football games. He also made money in political campaign contributions.

By 2009, however, several securities fraud complaints had been filed. Investors accused Barton of misleading them about where their money would go. The Securities and Exchange Commission would go on to file a securities fraud lawsuit against Triton Financial and Barton, and the Texas State Securities Board has stripped him of his investment adviser license.

The indictment accuses Barton of lying about his investments to investors regulators and of creating “false, fictitious, and fraudulent limited partnerships. He also allegedly used an E-Trade statement that showed his holdings had a balance of over $3 million even though the actual balance was $3,161.17. Barton is accused of giving regulators “altered and fabricated documents” about his business dealings.

A judge has placed Triton Financial in receivership. Per the receiver’ statement on January 31, 2011, over 600 investors have made $63.3 million in securities fraud claims against the financial firm and its ex-CEO.

Related Web Resources:
Former Triton chief indicted on charges of money laundering and fraud, Statesman, February 15, 2011
Broker indicted in fraud with NFL stars, KXAN, February 16, 2011
Read the Indictment (PDF)

More Stockbroker Fraud Blog Posts:
Texas Securities Act Control Person Claims against Merrill Lynch Pierce Fenner & Smith Inc. is Revived by Appeals Court, Stockbroker Fraud Blog Posts, January 20, 2011
R. Allen Stanford’s Criminal Trial Over $7 Billion Ponzi Scam Delayed So He Can Detoxify from Medication Addiction, Stockbroker Fraud Blog Posts, January 11, 2011
ALJ to Determine Whether to Revoke Registration of STS-Advisors Ltd. and Investment Adviser Representative Richard Lewis Bruce Over Alleged Texas Securities Fraud, Stockbroker Fraud Blog Posts, January 7, 2011 Continue Reading ›

Ex-Goldman Sachs Broker’s Request for SEC Help in Obtaining Documents from Germany Denied by District Court

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

The U.S. District Court for the Southern District of New York says it will not direct the Securities and Exchange Commission to contact German authorities on behalf ex-Goldman Sachs & Co. (GS) executive Fabrice Tourre, who is seeking to obtain certain documents related to the securities fraud case against him. Per Magistrate Judge Michael Dolinger’s ruling, a discovery request based on Federal Rule of Civil Procedure 34(a) doesn’t “extend” to having a
“government agency make requests to a foreign government under the terms of” a memorandum of understanding between both parties. Dolinger notes that while MOU between the SEC and its German equivalent allows both regulators to help each other in the enforcement of their respective securities laws, “there is no indication” that the MOU is supposed to offer a right or a benefit to a private party, such as allowing a securities fraud litigant to obtain discovery in Germany.

The SEC charged Goldman Sachs and Tourre over alleged misstatements and omissions related to collateralized debt obligations called Abacus 2007-AC1, a derivative product linked to subprime mortgages. The broker-dealer settled its securities case for $550 million. Meantime, Tourre, who is accused of giving Goldman Sachs “substantial assistance” in its alleged efforts to mislead investors, is seeking to have the SEC case against him dismissed. He is pointing to Morrison v. National Australia Bank Ltd., a US Supreme Court decision that was issued two months after the SEC filed charges against him.

This week, his lawyers argued that the SEC was attempting to circumvent the Supreme Court ruling, which limits the reach of civil claims over acts that occurred outside the country. The transactions involving Tourre that are under dispute took place abroad.

Goldman’s Tourre Shouldn’t Face SEC Lawsuit, His Lawyers Say, Bloomberg Businessweek, February 15, 2011

The SEC Complaint (PDF)

Ex-UBS Employee Can Proceed with Her Whistleblower Claim, Says District Court

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

The U.S. District Court for the District of Connecticut says that ex-UBS (UBS) employee Mary Barker’s whistleblower claim alleging that she was retaliated against for she reporting a purported accounting mistake can move forward. Her Age Discrimination in Employment Act claim, however, was dismissed.

Barker, who used to work UBS’s Stamford, Conn. Office, was given the responsibility of reconciling UBS’s existing exchange seat shares with old company records in December 2006. The valuation had to take place because UBS’s holdings of exchange seat assets were redistributed after the Commodity Exchange Inc. and the New York Mercantile Exchange merged.

Barker allegedly found that some of UBS’s historical exchange seat holdings had either not been accounted for or had been improperly accounted on the financial firm’s balance sheet. UBS went on to realize that about $80 million from the sale of exchange seats had been overlooked.

Barker told her manager about the brokerage firm’s alleged failure to disclose the seat holdings in February 2007. She says that not only did her manager fail to report her findings, which violated federal securities laws, to upper management, but also, her worries were never addressed. She says that her interactions with other UBS officials over the matter were similarly unsatisfying.

Despite getting a “Thank You Award” for her efforts, Barker says that UBS began to take retaliatory action against her. Not only did she get a poor review rating that year and fail to get a salary bump the following year, but also she was passed over for a promotion and her complaints were disregarded. In May 2008, Barker was told that the financial firm was letting her go due to a general reduction in UBS’ workforce.

Related Web Resource:
Barker v. UBS AG

More Blogs on Whistleblower Cases:

Why Whistleblowers Should Act Quickly and Consult Competent Legal Counsel, Stockbroker Fraud Blog, December 18, 2010

Whistleblower Sues Moody’s Investors Service for Defamation, Stockbroker Fraud Blog, September 15, 2010

TD Ameritrade Inc. Settles SEC Securities Fraud Charges Over Reserve Yield Plus Fund Shares for $10M

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

TD Ameritrade Inc. (AMTD) has settled Securities and Exchange Commission charges that it failed to reasonably supervise its representatives, some who sold shares of the Reserve Yield Plus Fund to clients. As part of the settlement, TD Ameritrade will pay $10 million to eligible customers who are still fund shareholders.

According to the SEC, TD Ameritrade representatives offered and sold Reserve Yield Plus Fund shares to customers before September 16, 2008. The SEC contends that the representatives “mischaracterized” the fund as a money market fund, making it seem as if the fund had guaranteed liquidity while allegedly failing to discloses the risks involved with this type of investment. In September 2008, the fund “broke the buck” when its assets’ value fell lower than the level required to cover each dollar that had been invested in the fund.

The SEC also claims that TD Ameritrade lacked an adequate supervisory system or policies to stop its representatives’ misconduct that led to investors’ losses. Clients eligible to receive money from the settlement should get receive 1.2 cents per share.

The SEC says that it is essential that customers are given adequate information about investment instruments and that broker-dealers must properly train and supervise their representatives to give clients this important information. The SEC said that thousands of TD Ameritrade customers still hold most of the Yield Plus Funds shares. They got approximately 95% of its original investments after the fund liquidated its assets.

By agreeing to settle, the TD Ameritrade Inc. is not denying or admitting to the misconduct.

Related Web Resources:
SEC announces $10M settlement with TD Ameritrade, AP/Yahoo, February 3, 2011
SEC Charges TD Ameritrade for Failing to Supervise Its Representatives Who Sold Shares of the Reserve Yield Plus Fund, SEC, February 3, 2011
Securities Fraud Attorneys

Related Blog Posts on SEC Settlements:
AXA Rosenberg Entities Settle Securities Fraud Charges Over Computer Error Concealment for Over $240M, Stockbroker Fraud Blog, February 10, 2011
Ex-Portfolio Managers to Pay $700K to Settle SEC Charges that They Defrauded the Tax Free Fund for Utah, Stockbroker Fraud Blog, January 22, 2011
Schwab Settles for $119M SEC Charges It Allegedly Misled YieldPlus Fund Investors, Stockbroker Fraud Blog, January 17, 2011 Continue Reading ›

Credit Suisse Broker Previously Convicted for Selling High Risk ARS is Barred from Future Securities Law Violations

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

Credit Suisse Securities (USA) LLC (CS) broker Eric Butler is permanently barred from future violations of securities laws. The U.S. District Court for the Southern District of New York granted the Securities and Exchange Commission’s motion for the permanent injunction late last month.

Butler was convicted of criminal charges related to the unauthorized sale of more than $1 billion in subprime-related auction-rate securities to clients. A jury found him guilty of three counts of securities fraud and he was sentenced to five years in prison. Butler is appealing is sentence and conviction.

The SEC’s securities fraud‘s complaint in 2008 against Butler and co-defendant Credit Suisse broker Julian Tzolov accused the two men of engaging in a bait-and-switch approach that left unsuspecting foreign corporate customers with high-risk ARS, rather than the more conservative financial products they had given the defendants permission to buy. The collapse of the ARS market left clients with $800 million in illiquid products.

According to the court, the SEC made a motion for summary judgment against Butler on the grounds of collateral estoppel related to the criminal case against him. The commission also sought to permanently bar him from future violations. Meantime, Butler opposed the injunctive relief and summary judgment on the grounds that the criminal case did not “necessarily” decide the issues in this case, he was not given the fair and complete opportunity to litigate the criminal charges against him, and the SEC was not entitled to injunctive relief. The district court, however, determined that the criminal case did “actually” decide the issues the SEC wanted to establish by collateral estoppel and that given the circumstances “totality,” it was appropriate to permanently bar Butler from future SEC violations.

Related Web Resources:

Ex-Credit Suisse Broker Butler Gets Five-Year Prison Sentence, Bloomberg, January 23, 2011

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

Will Two Former Credit Suisse Group AG Brokers Convicted of Securities Fraud Get More Lenient Sentences Because of Industry’s “Culture of Corruption?”, Stockbroker Fraud Blog, August 21, 2009

Ex-Credit Suisse Broker Who Pleaded Guilty to Securities Fraud for Role in Auction-Rate Securities Scam Knew in Late 2007 that Clients’ Funds Were in Trouble, Stockbroker Fraud Blog, July 29, 2009

AXA Rosenberg Entities Settle Securities Fraud Charges Over Computer Error Concealment for Over $240M

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

AXA Rosenberg Investment Management LLC (ARIM), AXA Rosenberg Group LLC (ARG), and Barr Rosenberg Research Center LLC (BRRC) have agreed to pay over $240 million to settle administrative securities fraud charges that they hid an important error in the computer code of the quantitative investment model used for managing client assets. The Securities and Exchange Commission says the error resulted in investor losses worth $217 million. As part of the settlement, the three Axa Rosenberg entities will repay the investors who sustained financial losses, as well as a $25 million penalty.

The SEC says that the institutional money manager’s concealment of “material error in its computer code” from investors was a violation of federal securities laws. The commission also claims that the three entities made material misrepresentations, such as failing to disclose the error or its effect and did not properly represent “the model’s ability to control risks.”

Per the charges, the error, which was discovered by ARG and BRRC senior managers in June 2009, disabled a key risk-management component. Instead of fixing the problem right away, senior management told others not to reveal the error, which they did not remedy at the time.

The SEC says that quantitative investment managers have been known to “isolate their complex computer models from the firm’s compliance and risk management function” in an attempt to protect trade secrets.” The SEC also claims that BRRC failed to implement and adopt compliance procedures and policies to make sure the model would work as intended. Although the error was eventually remedied, ARG’s Global CEO was not notified of it until five months after its discovery.

As of last December, Axa Rosenberg Group LLC said that as “the specialist active global equity investment management firm” managed over $31 billion in assets. ARG is the holding company of investment advisers ARIM, which used the investment model to manage client portfolios, and BRRC, which developed the quantitative investment model’s code.

Related Web Resources:
SEC Charges AXA Rosenberg Entities for Concealing Error in Quantitative Investment Model, SEC, February 3, 2011
Read the corrected SEC order (PDF)

More Blogs on SEC Enforcement:
Ex-Portfolio Managers to Pay $700K to Settle SEC Charges that They Defrauded the Tax Free Fund for Utah, Stockbroker Fraud Blog, January 22, 2011
Schwab Settles for $119M SEC Charges It Allegedly Misled YieldPlus Fund Investors, Stockbroker Fraud Blog, January 17, 2011
Broker Settles SEC Charges He Defrauded Elderly Nuns, Stockbroker Fraud Blog, January 13, 2011 Continue Reading ›

CalPERS Files Securities Fraud Lawsuit Against Lehman Brothers

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

The California Public Employees’ Retirement System is suing Lehman Brothers Holdings Inc., its ex-executives, and a number of bond underwriters for fraud and of making materially false statements about mortgage-backed securities losses. CalPERS, a $229 billion public pension fund, owned about $700 million Lehman bonds and 3.9 million shares of Lehman bonds when Lehman filed for bankruptcy in September 2008. Because of the economic crisis, CalPERS funds lost $100 billion in value from September 2008 and March 2009.

In its securities fraud complaint, CalPERS accused Lehman of “dramatically” borrowing to fund its real estate investments from 2004 to 2007—high-risk activity that investors were not told about. Other defendants include ex-Lehman Chief Executive Richard S. Fuld Jr., ex-Lehman Chief Financial Officers Erin Callan and Christopher O’Meara, 9 Lehman directors, and 33 others firms, including Wells Fargo Securities, Citigroup Global Markets Inc., and Mellon Financial Markets. The defendants allegedly failed to disclose not just Lehman’s exposure to Alt-A lending and subprime, but also its mortgage-related assets’ true value.

This securities complaint is CalPERS second action against members of Wall Street that sold mortgage-backed securities. In July 2009, CAlPERS sued Standard & Poor’s, Moody’s Investors Services Inc., and Fitch Inc. The complaint accused the financial rating companies of giving top grades to bonds that ended up sustaining huge financial losses when the subprime mortgage securities market collapsed.

Also, CalPERS has a shareholder lawsuit against Bank of America Corp. (BAC) over its Merrill Lynch acquisition. The pension fund also has a case against BofA’s Countrywide Financial.

Related Web Resources:

CalPERS suit accuses Lehman Bros. of fraud, Los Angeles Times, February 9, 2011

CalPERS

QA3 Financial Corp. Notifies Its Brokers It is Closing Its Doors

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

QA3 Financial Corp. has announced that it will be closing down its business. In an email sent to its 400 brokers after the market closed on Friday, QA3 owner and CEO Steve Wild says the decision was made following the securities arbitration award that was issued against the independent brokerage firm last month and the fact that its errors and omissions carrier has yet to provide coverage.

Catlin Specialty Insurance Co. is QA3’s insurer. The broker-dealer sued the insurer last year alleging failure to uphold the insurance contract, which QA3 claims is supposed to provide $7.5 million in coverage for legal claims, expenses, and damages related to private placement. Catlin then sued QA3, contending that there was a $1 million cap on QA3 private-placement claims.

Once a leading seller of high-risk private placements, QA3 has been dealing with dozens of arbitration cases and securities lawsuits from clients that purchased private placements, such as Medical Capital Holdings Inc, DBSI Inc., and Provident Royalties LLC.

Recently, a Financial Industry Regulatory Authority Inc. panel ordered QA3 to pay $1.6 million after losing an arbitration claim filed by an elderly couple. The panel found that the brokerage firm failed to adequately supervise broker James R. Files or provide sufficient training regarding the sale of tenant-in-common exchanges (TIC’s). The plaintiffs, Mary-Ann and Arthur Cargill, are in their 70’s, possess limited financial resources, and don’t have a great deal of investment experience. The FINRA panel also says that the brokerage firm appears to have routinely disregarded sales and marketing approval practices.

Related Web Resources:
B-D down: QA3 to close up shop next week, Investment News, February 7, 2011
Arbitrator awards Wilton couple nearly $1.6 million for investment, American Chronicle, January 19, 2011
Catlin Specialty Insurance Company v. QA3 Financial Corp., Justia Dockets and Filings, November 23, 2010
Private Placements, Stockbroker Fraud Lawyers Continue Reading ›