Articles Posted in Financial Firms

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Another state has filed an individual enforcement against brokerage and investment banking firm Stifel, Nicolaus, & Co. Inc. On May 7, Virginia’s State Corporation Commission’s ‘s Division of Securities and Retail Franchising filed its civil lawsuit accusing the broker-dealer of making misrepresentations and false statements related to the sale of auction-rate securities, as well as failing to properly supervise its sales representatives that sold ARS to Virginia residents.

Just this March, Missouri Secretary of State Robin Carnahan had sued Stifel, Nicolaus, accusing the investment firm of making misrepresentations to over 100 ARS clients that were told that the securities were liquid, conservative investments. In May, Carnahan reached an agreement with two Bank of America Corp subsidiaries. Under the agreement, the bank would pay a $1.37 million fine and provide relief to numerous Missouri entities that bought $400 million in ARS.

Meantime, state officials are looking into whether TD Ameritrade Holding Corp., Charles Schwab Corp., and E*Trade Financial Corp also engaged in ARS-related violations. Broker-dealers that have reached preliminary settlements with federal and state regulators over their misrepresentation of ARS to clients include Citigroup Inc., Deutsche Bank AG, Credit Suisse Group, JP Morgan Chase & Co, Goldman Sachs Group Inc., Merrill Lynch & Co. Inc., Royal Bank of Canada, Morgan Stanley, Wachovia Corp, and UBS AG.

Per the agreements, settlement parties would repurchase up to $56 billion in illiquid ARS at par from charities, retail investors, and mid-sized and small businesses, as well as pay $522 million in penalties. The agreements with Bank of America, Wachovia, and Citigroup have been finalized.

Last month, the Financial Industry Regulatory Authority announced final settlements reached with NatCity Investments Inc. of Cleveland (a $300,000 fine), M & T Securities Inc. of Buffalo (a $200,000 fine), M & I Financial Advisors Inc. of Milwaukee (a $150,000 fine), and Janney Montgomery Scott LLC of Philadelphia (a $200,00 fine). FINRA also announced that SunTrust Investment Services Inc. and SunTrust Robinson Humphrey Inc. decided not to finalize their preliminary settlements. FINRA is still investigating both firms’ activities pertaining to ARS.

Related Web Resources:
Virginia sues Stifel, Nicolaus & Co. over auction rate securities, St Louis Business Journal, May 15, 2009
FINRA Announces Agreements with Four Additional Firms to Settle Auction Rate Securities Violations, FINRA, May 7, 2009
Carnahan Finalizes $400 Million Bank of America Auction Rate Securities Settlement, Missouri Secretary of State, May 14, 2009
Carnahan sues Stifel Nicolaus over auction rate securities, St Louis Business Journal, March 12, 2009 Continue Reading ›

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Merrill Lynch Life Agency Inc. will pay $18 million to the Illinois Division of Insurance to settle the state’s investigation into the investment firm’s involvement with a trust fund overseen by the Illinois Funeral Directors Association. The trust was supposed to cover funeral costs for about 49,000 consumers that had prepaid for funeral contracts. The $18 million will be placed in a special fund and will be used to offset losses by association members when delivering on their funeral contract commitments to consumers.

Merrill Lynch & Co. Inc, between 1986 and 1999, had marketed and sold tax-exempt variable universal life insurance policies as investments within the pre-need trust. Unfortunately, in 2007, the trust imploded, and its value dropped from over $300 million to approximately $250 million.

The Illinois Department of Financial and Professional Regulation then conducted a probe into the trust and discovered that the funds’ trustees had used the policies as investments within the trust. Also state comptroller Dan Hynes is asking the association to account for $10 million that trustees allegedly obtained from the trust as excess management fees.

According to state regulators, Merrill Lynch Life registered representative Edward L. Schainker, who served as the association’s investment advisor, recommended and sold over 300 policies to its members. The policies were to offer tax-exempt investment returns. Merrill Lynch’s life insurance division put forth 120 policies and received over $32 million in premiums that were invested in bonds and stocks that over the years have dropped in value and placed the trust’s solvency at risk.

Schainker is accused of violating Illinois insurable-interest laws and of failing to determine whether his investment plan could provide the needed revenue to cover trust liabilities. The Illinois secretary of state’s office has suspended his broker’s license and the state’s insurance division is seeking to revoke Schainker’s insurance license. He also has been ordered to pay civil penalties of $100,000.

By settling, Merrill Lynch Life is not admitting to the allegations made by the state of Illinois.

Related Web Resources:
Merrill Lynch to pay $18 million to halt state probe into funeral trust fund, Chicago Tribune, May 20, 2009
Illinois slams Merrill Lynch Life to the tune of $18M for funeral trust scam, Investment News, May 21, 2009
Illinois Funeral Directors Association

Illinois Department of Financial and Professional Regulation
Continue Reading ›

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VSR Financial Services, an investment firm, has agreed to pay $10.3 million to settle a FINRA claim that it failed to properly supervise two ex-brokers accused of improperly selling risky investments to 249 customers. The agreement ends the litigation brought by the investors, many of them retirees, against VSR and its two ex-brokers, Rebecca Engle and Brian Schuster.

Although a number of securities fraud lawsuits have been filed against Schuster, Engle, and VSR, most of the investment fraud victims opted to pursue their cases through arbitration because the terms of their investment agreements prevented them from filing lawsuits. The claimants have accused the former VSR brokers of selling them investments that were inappropriate and high-risk.

The majority of investors who were defrauded say that because they were already either retired or about to retire, they had wanted to place their money in investments that were conservative and low risk. Instead, they claim that Schuster and Engle made high-risk investments for them, selling them securities in Royal Palm Capital Group and American Capital Corp while failing to explain the risks involved. Schuster and Engle allegedly promoted these investments as “mini Berkshire Hathaways” and “can’t miss” opportunities when the companies were actually startups that had limited operating histories. According to criminal complaints and court documents, the investment fraud victims lost at least $20 million.

Engle and Schuster have been charged with eight felony counts of securities fraud. They worked together a number of times between 2000 and 2007 and have also been affiliated with Wachovia Securities LLC and Capital Growth Financial LLC. More arbitration claims against the other companies they’ve been associated with are pending.

Employer to pay $10M, CayCompass.com, May 24, 2009
VSR Financial Services settles securities claims, Kansas City, May 20, 2009 Continue Reading ›

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California Attorney General Edmund G Brown, Jr. is suing Wells Fargo Investments LLC, Wells Fargo Institutional Securities, and Wells Fargo Brokerage Services for $1.5 billion. Brown is accusing the Wells Fargo affiliates of violating state securities laws and misleading California investors with false statements about auction-rate securities.

According to the California Attorney General’s securities fraud lawsuit, the Wells units engaged in fraud and deception to sell the securities, neglected to properly train and supervise the agents that sold the ARS, marketed the securities to investors that shouldn’t have been investing in them, and regularly misrepresented the securities when marketing them.

Brown says that nearly 40% of the ARS that the Wells defendants sold are owned by Californians. ARS investors included individuals, non-profits, small businesses, and others that were never fully informed about the risks of investing in theses securities.

ARS sales pitches by Wells Fargo representatives reportedly continued even though there were warnings as early as 2005 from the Financial Accounting Standards Board and others that auction-rate securities should not be considered cash-like equivalents. In November 2007, a Wells Fargo Bank’s Trust Department reportedly sent a memo warning against buying ARS.

Following the collapse of the $330 billion ARS market in February 2008, some 2,400 Californians, who were told that their ARS were liquid like cash, were unable to access their investments that ranged in worth from $25,000 to millions.

Brown says he is suing the Wells units because unlike Citigroup, UBS, Wachovia, and Merrill Lynch, the affiliates have not been able restore the securities’ cash value. The California Attorney General wants Wells Fargo to restore the securities’ value, disgorge any associated profits, and pay civil penalties at $25,000/violation.

Wells Fargo Chief Executive Officer Charles W. Daggs says the investment bank is disputing the claims made in the California Attorney General’s lawsuit. He also noted that Wells was among the first in the investment bank industry to voluntarily give clients with frozen securities significant liquidity. Daggs says that since April 2008, these clients have been able to access 90% of their ARP holdings’ par value via non-recourse loans with favorable rates.

Related Web Resources:
Calif. AG sues Wells Fargo for $1.5 billion, News Daily, April 23, 2009
Read the Attorney General’s Complaint Against Wells Fargo (PDF)
Continue Reading ›

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Massachusetts Attorney General Martha Coakley has announced a $60 million settlement with Goldman Sachs over the alleged role the investment bank played in the subprime mortgage crisis. While Goldman did not originate the loans, it played a role in their securitization. Coakley has been conducting a nationwide probe targeting investment banks that knew certain loans were high risk but still opted to write them, as well as underwrite securities from these loans. Coakley says that state courts are in agreement that a number of these loans were destined to fail from the start.

Massachusetts will use $50 million of the settlement to help 714 Massachusetts homeowners with mortgages that are either delinquent or still performing. The money, however, won’t go toward helping homeowners whose homes have already foreclosed. The other $10 million will go to the state.

Among the terms of the settlement:

• Goldman has consented to principal write-downs of 25% to 30% for first mortgages and upward of 50% for second mortgages if owners want to sell or refinance their homes.

• A homeowner who is significantly delinquent will have to make manageable payments toward mortgages until they are able to sell or refinance.

• If a homeowner cannot sell his or her home, Goldman will help qualified borrowers to refinance and provide other solutions so that they don’t have to foreclose.

• Homeowners that have loans with Goldman entities and those that Litton Loan Servicing LP has serviced will receive immediate help.

By agreeing to the settlement, Goldman is not admitting to or denying wrongdoing. This is the first settlement, however, where an investment bank has been held to task for its role in the subprime lending crisis. Up until this point, prosecutors were only targeting the sources of the subprime loans and not the parties that put together the loans and presented them to investors.

Related Web Resources:
Massachusetts settles with Goldman Sachs, UPI, May 11, 2009
Goldman Sachs, Massachusetts reach settlement on mortgage securities, LA Times, May 12, 2009
Attorney General Martha Coakley
Continue Reading ›

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Regions Financial Corp, a Morgan Keegan & Co brokerage unit, says the US Securities and Exchange Commission may file a civil proceeding against it over charges that the firm allegedly engaged in the improper sale of auction-rate securities. The regulator filed a “Wells Notice” against Morgan Keegan in March. The notice means that a civil proceeding could be next. It also gives Morgan Keegan the opportunity to prepare a defense.

The SEC is examining the degree to which Morgan Keegan revealed to its clients the risks associated with investing in the auction-rate market and whether the firm sold a huge amount of that debt even when its ability to support the auction had declined.

Morgan Keegan is purchasing back the ARS it sold to clients. According to Morgan Keegan spokesperson Kathy Ridley, the investment firm has already gotten back $28 million in ARS.

Our securities fraud lawyers at Shepherd Smith Edwards & Kantas LTD LLP are working with numerous clients on claims against Morgan Keegan and Regions Financial over failed auction-rate securities investments, as well as investor claims involving these Morgan Keegan Bond Funds:

• RMK Strategic Income Fund (RSF)

• RMK Advantage Income Fund (RMA)

• RMK Multi-Sector-High Income Fund (RHY)

• RMK High Income Fund (RHM)

• RMK Select High Income Funds: C (RHICX), I (RHIIX), and A (MKHIX)

• RMK Select Intermediate Bond Funds: A (MKIBX), C (RIBCX), I (RIBIX)

The collapse of the $330 billion auction-rate securities market left many investors unable to sell auction-rate debt that they were told were safe to invest in and that were the liquid equivalent of cash. Since then, many investors have come forward complaining that they were misled about the risks tied to investing in the market.

Regions Financial unit may face SEC charges, Reuters, May 11, 2009
Regions Financial says Morgan Keegan unit received ‘Wells notice’, The Birmingham News, May 12, 2009 Continue Reading ›

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The Financial Industry Regulatory Authority says it is fining Centaurus Financial Inc. because the firm failed to protect customers’ confidential information. The California-based company must notify brokers and affected customers of the breach and give clients a year of free credit monitoring. Also as part of its settlement with FINRA, Centaurus has agreed to entry of the SRO’s findings. It will also certify with the SRO that its systems and procedures comply with privacy requirements. Centaurus, however, is not denying or admitting to the FINRA charges.

FINRA says that from April 2006 to July 2007, Centaurus neglected to make sure that the computer firewall, password system, and username for its computer fax server were providing the necessary protections. As a result, FINRA contends that persons that lacked the proper authorization were able to gain access to images stored on the faxes that included account numbers, social security data, personal information, and other sensitive, confidential client information.

An unauthorized party was even able to use Centaurus’s fax server to run a “phishing” scheme in July 2007. The scam was intended to fool computer users into giving out their personal information, including credit card information, banking data, passwords, and usernames. Over a 3-day period, 894 unauthorized logins by 459 unique IP addresses occurred after a file simulating a known Internet auction site was loaded to CFI’s fax server.

Phishing Scams
These schemes are designed to persuade recipients to reveal personal account data. For example, a target might be sent a Web site link or an attachment via email that asks for confidential personal and financial data. The sender or the Web site involved may appear to be legitimate but is actually illegal.

FINRA says that following the “phishing” incidents, Centaurus sent to some 1,400 clients and their brokers letters about the incident but that what they told them was misleading. The SRO contends that rather than admit that the breach of confidentiality occurred because the firm’s protections were inadequate and, as a result, unauthorized logins occurred, Centaurus reported that only one person had unauthorized access to the client information found on the server and that that data was not openly accessible.

Related Web Resources:
FINRA Fines Centaurus Financial $175,000 for Failure to Protect Confidential Customer Information, FINRA, April 28, 2009
Recognize phishing scams and fraudulent e-mail, Microsoft, September 14, 2006 Continue Reading ›

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Last week, the Securities and Exchange Commission charged six people, including ex-Citigroup Global Markets’ investment banker Maher Kara and his brother Michael Kara, with taking part in a multimillion-dollar insider trading investment scam that involved tipping others about upcoming merger deals. The Karas were indicted in a California district court. Other defendants include Zahi Haddad, Emile Jilwan, Karim Bayyouk, and Bassam Salman. Except for Salman, all of them allegedly made between $82,000 to $2.3 million, with Maher Kara making over $1.5 million. The SEC wants to the defendants to pay fines, disgorgement, and other relief.

The SEC says that from at least April 2004 to April 2007, Maher Kara told his brother on numerous occasions about deals that were pending involving Citigroup clients in the health care industry. Michael Cara would then buy options and stock in at least 20 companies involved in the Citigroup deals and would give the information to relatives and friends in Illinois and California who would also trade before the deals occurred.

Scam participants reportedly made the most money from trading in Biosite right before an announcement was made in March 2007 that the medical testing company was being acquired. Following the public disclosure, stock price in Biosite increased by more than 50% and Michael Kara and six tippees allegedly made over $5 million in illegal profits.

Two other tippees have agreed to disgorge their illegal profits to settle the SEC allegations. Nasser Mardini disgorged $291,000, while Joseph Azar disgorged $118,000 and will pay a fine. Both are not denying or admitting wrongdoing by settling.

Related Web Resources:
SEC charges former Citi banker with insider trading, Reuters, April 30, 2009
SEC Charges Wall Street Investment Banker and Seven Others in Widespread Insider Trading Scheme, SEC.gov, April 30, 2009 Continue Reading ›

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The Securities and Exchange Commission is suing Morgan Peabody Inc. owner and chief executive officer Davis Williams for allegedly misappropriating investor funds that were raised in three public offerings. Also named in the complaint were Williams Financial Group, Sherwood, and WFG Holdings. The defendants are accused of violating federal securities laws, including Section 10(b) of the Securities Exchange Act of 1934, Section 17(a) of the Securities Act of 1933, and Rule 10b-5 thereunder.

The SEC says that from January 2007 – September 2008, Williams notified Morgan Peabody registered representatives that they should sell and offer LLC promissory notes and debentures from WFG Holdings Inc. and Sherwood Secured Income Fund. He then allegedly used millions of dollars (he’d raised $9 million from investors) for personal purposes, including rent at his residence that cost almost $50,000 a month, at least $175,000 in personal travel, and over $200,000 in entertainment and food.

The SEC claims that WFG Holdings investors thought that their money was being invested in Morgan Peabody. Meantime, Sherwood investors were notified that most of their money would go into real estate. Instead, the SEC contends that Williams moved the investors’ money into bank accounts that he oversaw and used the money for personal purposes.

More than 100 investors in nine states purchased the securities. The SEC is seeking disgorgement, injunctive relief, and civil penalties.

Obtaining Financial Recovery from Securities Fraud
Investors that are the victims of securities fraud may be entitled to financial recovery. An experienced stockbroker fraud law firmcan help you successfully get through arbitration or court proceedings so that you recover your lost funds.

Related Web Resources:
SEC sues L.A. broker for fraud, Dailybreeze.com, April 21, 2009
SEC Charges Owner of California Broker-Dealer with Misappropriating Millions in Investor Funds, TradingMarkets.com, April 21, 2009 Continue Reading ›

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Wachovia Capital Markets LLC and Citigroup Global Markets Inc. will settle allegations by the Michigan Office of Financial and Insurance Regulation that the firms misled investors who bought auction rate securities by paying a combined $880.3 million-$717 million for Citigroup and $159 million for Wachovia-to reimburse clients. The OFIR says the firms misled clients into thinking ARS were liquid like cash and were surprised when the market collapsed, freezing their assets. OFIR claims the securities were sold and marketed as if they were conservative investment and that the firms did not give investors information about the risks involved.

Both firms will also pay $2.3 million to Michigan to resolve the ARS charges. Citigroup will pay $1.72 million per an administrative consent order and Wachovia will pay $654,000. According to OFIR, 90% of the funds will be placed in a general fund for the state, while the rest will go to the Michigan Investor Protection Trust for consumer education about a number of issues, including investment fraud.

Just this March, Wachovia and Citigroup said they would pay back California investors over $4.7 billion after the investment firms were accused of misleading investors about investing in ARS. Also last month, the North American Securities Administrators Association set up a Web site so investors could find out how to file arbitration claims for damages stemming from ARS losses.

Citigroup, Wachovia in $876M Mich. ARS Buyback, The Bond Buyer, April 17, 2009
Michigan regulators detail settlement with Citigroup, Wachovia over auction rate securities, Associated Press, April 16, 2009

Related Web Resources:
North American Securities Administrators Association

Michigan Office of Financial and Insurance Regulation
Continue Reading ›

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