Financial Firms

Citigroup, AK Capital, National Financial Services, and Tradestation Fined and Censured by NYSER Over Trade Violations

Published on: October 29, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The New York Stock Exchange Regulation Inc. has censured and fined four firms for trade violations. The four investment firms, Citigroup, AK Capital, National Financial Services, and Tradestation, agreed to the censures and fines but did not admit to or deny wrongdoing.

According to NYSER:

• Citigroup Global Markets Inc. allegedly cancelled 365 market-on-close (MOC) orders after the cutoff time at 3:40 ET on four 2007 trade dates and submitted, between December 9 2008 and January 5, 2009, 12,480 limited-on-close (LOC) orders after the cutoff time on 18 trade dates. Citigroup was ordered to pay a $150,000 fine.

• National Financial Services, LLC employees allegedly engaged in wrongdoing related to LOC and MOC orders it made on eight trade dates between 2006 and 2008. NFS also allegedly neglected to properly supervise these employees. The firm agreed to a $75,000 fine.

• Tradestation allegedly failed to oversee and put into place adequate internal compliance controls, took part in conduct not in line with the fair and equitable trade principals involving odd-lot orders, and neglected to find out necessary facts about certain orders and clients. Tradestation agreed to a $100,000 fine.

• AK Capital allegedly failed to use background checks on employees, failed to set up written policies designed to prevent the misuse of material nonpublic data, and failed to review trade confirmations and certain clients’ monthly account statements. The NYSE Arca options-trader registrant also allegedly neglected to keep records and books that accurately showed all liabilities, assets, capital accounts, and income expenses. The firm agreed to a $20,000 fine.

Related Web Resource:
Monthly Disciplinary Actions – October 2009, NYSE Regulation Continue Reading ›

Morgan Keegan Again Ordered by Arbitrators to Pay Bond Fund Losses to Investors

Published on: October 27, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Keegan & Co. has been ordered to pay $51,000 to Larry and Diane Papasan. Larry Papasan is Memphis Light, Gas and Water Division’s former president.

The Papasans filed their arbitration claim against Morgan Keegan last year after they lost about $80,000 in the account they had with the investment firm. The Papasans’ claim is one of many arbitration cases and securities fraud lawsuits filed by Morgan Keegan investors who sustained RMK fund losses. The general accusation is that the broker-dealer misrepresented the volatility of the bond funds, which they allegedly were not managing conservatively.

Larry Papasan, who is retired, opened his account because he knew John Wilfong, a former Morgan Keegan financial adviser. Wilfong felt so confident about the bond funds that he even sold them to his mother, Joyce Wilfong, who also went on to suffer financial losses from her investment. Her friend Maxine Street also suffered bond fund losses.

The two women filed a joint arbitration claim against Morgan Keegan. Joyce was awarded $68,000, while Street settled for an undisclosed sum.

According to the Papasans, John Wilfong spoke with Jim Kelsoe, the RMK funds’ manager, prior to leaving Morgan Keegan for UBS. Kelsoe allegedly told Wilfong not to liquidate because the funds were safe. The Morgan Keegan fund manager is named in other cases for allegedly failing to disclose the risks associated with the mutual fund investments.

Related Web Resources:
Latest RMK Award Goes to Ex- MLGW Head, Memphis Daily News, October 27, 2009
Two Morgan Keegan Funds Crash and Burn, Kiplinger, December 2007 Continue Reading ›

JP Morgan to Repurchase $480 Million in ARS from Michigan Investors

Published on: October 24, 2009 | by Shepherd Smith Edwards & Kantas, LLP

JPMorgan Chase & Co. is offering to repurchase $480 million in auction-rate securities from investors in Michigan. The full buybacks are for investors who bought ARS between 2006 and early 2008. JPMorgan’s offer is part of a settlement that it reached with the Michigan Office of Financial and Insurance Regulation.

The broker-dealer is also paying the state of Michigan $664,000 to settle allegations that it misled clients into thinking that the ARS they were buying were liquid like cash. 90% of the settlement went to the state’s general fund, while 10% was deposited in the OFIR’s Michigan Investor Protection Trust.

OFIR also reached similar agreements with Citigroup, Banc of America Securities, Merrill Lynch, Comerica, and Wachovia. The state of Michigan has negotiated over $3.5 billion in payments for investors and received over $6.5 million.

Many investors were caught off guard when their ARS accounts froze after the market collapsed. Many broker-dealers were accused of misleading clients and making it seem as if auction-rate securities were as liquid as cash.

Michigan is not the first state that JPMorgan Chase & Co. has settled with over allegations that it misled clients about ARS. In August 2008, JP Morgan Chase, along with Morgan Stanley, agreed to give back more than $7 billion to ARS investors as part of the settlement they reached with New York State Attorney General Andrew M. Cuomo.

Related Web Resources:
OFIR Announces $480 Million Auction Rate Securities Settlement with JPMorgan Chase, MichNews.org, October 8, 2009
Cuomo Settles JP Morgan, Morgan Stanley ARS Claims, CFO, August 14, 2008
Michigan Office of Financial and Insurance Regulation
Continue Reading ›

Two Dresdner Kleinwort Traders Censured for Market Abuse by UK’s FSA

Published on: October 21, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Two Dresdner Kleinwort traders were censured for market abuse by the United Kingdom’s Financial Services Authority. According to the FSA, Darren Morton had access to inside information about a possible new issue of Barclays floating-rate bonds in March 2007 that would offer more favorable terms than the last issue.

The FSA says that Morton shared what he knew with trader Christopher Perry and the two men sold the whole holding of the previous issue held by K2, a Dresdner investment vehicle with a portfolio containing $65 million of Barclay’s FRNs. That same day, a new issue was announced, and counterparties that bought the bonds from K2 lost some $66,000.

Rather than accept the FSA’s offer to settle and receive a fine and/or penalty at a lower amount, the two men took their case to the FSA’s tribunal authority. The regulatory committee found that the two men did not realize that they were engaging in market abuse.

While the two men were censured, they were not fined and their right to work was not challenged. The FSA cited a number of factors to explain the sanction chosen:

• The two did not make money personally from the trade.
• They have undergone market abuse training.
• No one gave them proper guidance.
• Their compliance and disciplinary records are clean.

FSA enforcement director Margaret Cole, however, noted that insider dealing is cheating regardless of the market. She promised that future offenders will be slapped with harsher sanctions.

Related Web Resources:
The FSA and the intriguing case of Dresdner Kleinwort bond managers, Guardian.co.UK, October 7, 2009
SA censures Dresdner traders over market abuse, MarketWatch, October 7, 2009
Financial Services Authority
Continue Reading ›

Market Timing Violations Against AG Edwards & Sons Inc. Supervisors and Broker Upheld by the SEC

Published on: October 17, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission is upholding the market timing violations against two AG Edwards and Sons Inc. supervisors and one of its stockbrokers. Billions of dollars were involved in the mutual fund market timing transactions.

While market timing, which involves the buying and selling of mutual fund shares in a manner that takes advantage of price inefficiencies, is not illegal, a violation of 1934 Securities Exchange Act Section 10(b) and Rule 10b-5. can arise when there is intent to deceive.

Last year, the ALJ found that AG Edwards and Sons brokers Charles Sacco and Thomas Bridge intentionally violated antifraud provisions when they engaged in market timing activities even though they had been restricted from doing so. The ALJ also found that supervisors Jeffrey Robles and James Edge failed to properly supervise the stockbrokers.

The antifraud charges filed against Bridge by the SEC Enforcement Division involved 1,352 trades (representing $1.126 billion) he executed over a two-year period for companies belonging to client Martin Oliner. The Enforcement Division accused Sacco of entering 25,533 market timing trades (representing $4.036 billion) for two hedge fund clients between 5/02 – 9/03.

The SEC determined that Edge, who was Bridge’s supervisor, knew and was complicit in the latter’s actions. Although Robles was not considered to have been complicit in Sacco’s alleged broker fraud, the commission said he should have noticed there were problems.

The SEC ordered Bridge to cease and desist from future violations. He is also barred from associating with any dealers or brokers for five years. Sacco has already settled his broker-fraud case.

Edge is barred from acting in a supervisory role over any dealer or broker for five years. Robles received a similar bar lasting three years. All three men were ordered to pay penalties, while Bridge was ordered to disgorge almost $39,000 plus $16,665.57 in prejudgment interest.

Related Web Resources:
Read the SEC’s Opinion regarding this matter

Commission Sanctions Thomas C. Bridge for Violations of the Antifraud Provisions of the Securities Laws and James D. Edge and Jeffrey K. Robles for Failing to Supervise Reasonably, Trading Markets, September 29, 2009 Continue Reading ›

SEC Warns Charles Schwab Corp. of Possible Civil Charges Over Two Bond Funds

Published on: October 15, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Charles Schwab Corp. has received a Wells notice from the Securities and Exchange Commission about possible civil charges related to the discount brokerage’s Schwab Total Bond Market Fund and Schwab YieldPlus Fund. Schwab has been the target of regulatory investigations over the two funds and is a defendant in a number of civil lawsuits.

SEC staff members plan on recommending civil charges against a number of Schwab affiliates over possible securities violations. The Wells notice is not a finding of wrongdoing or a formal allegation. It does, however, give Schwab an opportunity to respond before the SEC makes a decision on whether to move forward with an enforcement action. The discount brokerage says the possible charges are unwarranted.

In San Francisco, Schwab is defending itself against a class-action fraud lawsuit in federal district court. YieldPlus fund investors are accusing the brokerage firm of failing to fully disclose the risks connected with some securities in the Schwab funds.

Notice: Schwab YieldPlus Investors Must Act Quickly To File Independent Claims For Losses

Published on: October 13, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Investors who invested into YieldPlus Funds issued by the Charles Schwab Corp. must take immediate action to avoid being limited in recovery to the amount obtained through a class action suit. Many with significant losses have been advised by attorneys to seek individual recovery in Securities Arbitration through the Financial Industry Regulatory Authority (FINRA). Those with smaller losses are being advised to remain in the class action.

Most investors who seek recovery of investment losses through private claims receive a greater portion of their losses than those who remain in class actions, even after paying expenses including legal fees. In some cases investors can recover many times the amount paid through class action settlements.

To file a private claim a YieldPlus investor must “opt out” of the class on or before December 28, 2009. This requires the investor to provide a written statement requesting exclusion from the Schwab YieldPlus class-action lawsuit, sign and date the request, include their mailing address and mail this information by the due date. It is highly recommended that this be done earlier than that date and on a form provided by the Administrator. Any flaw in the process can result in a failure to be eligible to proceed.

Citigroup ordered to pay $600,000 FINRA fine for inadequate supervision that may have allowed foreign clients to avoid paying taxes on dividends

Published on: October 12, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup, Inc. has agreed to pay a $600,000 Financial Industry Regulatory Authority fine to settle claims that its alleged inadequate supervision of certain derivative transactions between 2002 and 2005 allowed a number of foreign clients to avoid paying taxes on dividends.

The way this allegedly worked is that during a period of dividend payments, the customer would sell stock to Citigroup. The bank would pay the client an income equal to the dividend. It would also pay any share price increase.

FINRA is accusing Citigroup of failing to control trades and failing to prevent improper trades, both internally and with trading partners. The dividend equivalent that certain foreign Citigroup clients obtained was not considered subject to withholding taxes. Citigroup’s strategy was allegedly intended to lower its tax bill.

Former Merrill Lynch Employee, Guilty of $1.4 Million Texas Securities Fraud Scheme, Receives Prison Term

Published on: October 5, 2009 | by Shepherd Smith Edwards & Kantas, LLP

A judge has ordered a former Merrill Lynch employee, San Antonio stockbroker Bruce E. Hammonds, to serve almost five years in prison and three years supervised release for Texas securities fraud. Bruce E. Hammonds also must pay $1.1 million in restitution to the Merrill Lynch investors he defrauded and almost $60,000 to two clients that he continued to defraud after the broker-dealer fired him in June 2008.

Hammonds reportedly did not deny the alleged fraud when Merrill Lynch confronted him about his activities. The broker-dealer has paid the investment fraud victims back in full.

According to the criminal complaint affidavit, Hammonds opened a working capital account under the name B & J Partnership.He was supposed to register the account in an internal monitoring system, which he never did. Instead of placing investors’ funds in a Merrill Lynch fund, he deposited $1.4 million of their money in his working capital account. He provided clients with charts demonstrating the performance of the B&J Partnership investment fund even though no such fund existed.

Hammonds pleaded guilty to federal securities fraud charges earlier this year after an investigation found that between August 2006 and October 2008, Hammonds didn’t invest clients’ funds in stocks and hedge funds. Instead, he used the money for personal purposes, including an alleged house-flipping business. He gave back $486,000 to clients so it would appear as if they had made money off their investments.

Related Web Resources:
Judge sends ex-stockbroker to jail for bilking investors, Business Journal, October 2, 2009
Stockbroker sent to prison for $1.4 million scheme, My San Antonio, October 3, 2009 Continue Reading ›

Colorado Sues Stifel, Nicolaus for Misrepresenting Auction-Rate Securities to Investors

Published on: October 3, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The Colorado Securities Division is suing Stifel, Nicolaus & Co. for securities fraud. State regulators are accusing the broker-dealer of making false assurances to investors about auction-rate securities.

In its Colorado securities fraud complaint, the securities division accused Stifel Nifel, Nicolaus of violating the Colorado Securities Act by allowing investors to think that their ARS-investments would always be liquid, failing to properly supervise sales team members, and making unsuitable investment recommendations to clients.

The Division claims that Stifel, in the role of underwriter, knew that there were liquidity risks linked to ARS but never let its sales force know about them. Stifel brokers allegedly compared ARS to money market funds on a regular basis and sold them as if they were appropriate for cash management purposes. Investors were told they would always be able to access their funds as if it were cash. However, when the ARS market collapsed in February 2008, the Colorado investors that purchased auction-rate securities were unable to get their funds or sell their bonds.