Articles Posted in Financial Firms

Another Securities Fraud Lawsuit Filed Against UBS International

Published on: April 23, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Another securities fraud lawsuit has been filed against UBS International, which is a division of UBS. This latest claim brings forth allegations similar to those filed earlier in the year against UBSI. Both claims revolve around the use of loans to buy securities, such as stocks, and UBS created products. Shepherd Smith Edwards & Kantas LTD LLP is the stockbroker fraud law firm to file this latest case.

According to the securities fraud claim, a UBSI broker working out of the Coral Cables office recommended specific loans along with a portfolio that mostly was comprised of equities to a certain Latin American client. Because of this, “margin calls” were made on the UBSI accounts.

When the client couldn’t come up with additional funds, the assets already in the account were sold off, resulting in losses worth hundreds of thousands of dollars. The complaint contends that the transactions made within the UBSI accounts were unsuitable and inappropriate and placed most (if not all) of the investor’s funds at risk.

It is unclear whether the satellite office in Florida had supervisors or compliance officers charged with overseeing the broker. There is evidence, however, that UBSI sent client statements to the broker’s other office in Guatemala rather than directly to the clients. This could have resulted in the client not being able to avail of certain safeguards. The broker also used Americorp Trust, an offshore entity located in the Netherlands Antilles, to deal with this specific client’s assets.

Shepherd Smith Edwards & Kantas LTD LLP specializes in securities fraud cases requiring litigation or arbitration, as well as cases involving broker misconduct.

Related Web Resource:
SEC Center for Complaints and Enforcement Tips, SEC.gov Continue Reading ›

Oregon’s Attorney General Files $36 Million Lawsuit Against OppenheimerFunds

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

Last week, Oregon’s Attorney General sued OppenheimerFunds Inc. for allegedly mismanaging the state’s 529 College Savings Plan when it recommended a bond that took risks that were not in alignment with the Plan’s conservative investment objectives. The 529 College Savings Plan allows investors to avail of tax benefits while they save for their children’s college education.

According to the $36 million securities fraud lawsuit, the defendants had signed a contract agreeing to recommend only funds that were consistent with the Oregon 529 College Savings Board’s investment policy and would let the board know about any fund changes. Also, as an investment adviser, OppenheimerFunds had fiduciary duties it owed the board.

The complaint contends that the defendants breached their fiduciary and contractual duties by continuing to recommend the Oppenheimer Core Bond Fund even after it took part in risky leverage and speculative bets with derivatives.

According to the lawsuit, the Oregon College Savings Plan Trust retained the services of OppenheimerFunds to put together, manage, and make recommendations for its portfolios. All recommendations had to be compatible with each portfolio’s objectives.

When OppenheimerFunds initially recommended the Core Bond Fund, the bond was a “straightforward” bond fund that was primarily invested in high-quality corporate bonds. That is, until sometime between 2007 and 2008 when fund managers allegedly began taking part in credit default swaps and total return swaps. This, says the lawsuit, dramatically changed the risk profile of the fund.

Yet OppenheimerFunds failed to let the board know about this change until January 22. The fund lost more than 35% of its value in 2008 and another 10% during the first three months of 2009. The complaint says that rather than moderate the degree of risk, OppenheimerFunds increased the risks.

OppenheimerFunds maintains that significant losses occurred as a result of market volatility and not due to dramatic changes in investment strategies and that the Board was notified of all changes. The investment adviser says it is extremely disappointed with the lawsuit and expressed concern that an outside lawyer, and not the state, conducted the probe into the case.

However, Keith S. Dubanevich, the special counsel in the Oregon attorney general’s office, says it is their common practice to retain outside help when dealing with certain areas of law, including securities fraud, and that Oregon’s Justice Department did lead the investigation.

Related Web Resources:
Oregon Sues Over Risks Taken In Its ‘529’ Fund, The Wall Street Journal, April 14, 2009
Oregon 529 College Savings Network

Oregon Attorney Continue Reading ›

Merrill Lynch Cannot Prevent Former Brokers From Using Customer Information and Soliciting Clients, Says District Court

Published on: April 20, 2009 | by Shepherd Smith Edwards & Kantas, LLP

A motion by Merrill Lynch, Pierce, Fenner & Smith Inc. to stop two former financial advisers from using customer information they received while working at the investment firm has been denied. In the U.S. District Court for the District of Utah, Judge Dale Kimball says Merrill neglected to show that it would suffer irreparable harm if that relief wasn’t granted or that public interest/ the balance of that harm is in its favor.

Per the court, Paul Aiman started working for Merrill as a financial adviser in 1989 and Rex Baxter was hired to do the same in 1997. Both men resigned from the firm on April 3 to work for Ameriprise Financial Services. Merrill countered by trying to obtain a temporary restraining order preventing the former employees from using customer data the two now ex-advisers allegedly misappropriated.

Merrill asked the U.S. District Court for the District of Utah to enjoin the two men from soliciting its clients and making them give back or “purge” all documents and data that they had allegedly illegally misappropriated, such as client contact information, financial statements, account figures, assets, investment goals, net worth, investment histories, and other financial data.

The court, however, said that to receive preliminary injunctive relief or a TRO, the moving party must show that:

• There was a good chance of succeeding on the merits.
• The possibility of injury surpasses the harm that the opposing party might experience.
• Relief is in the public interest.
• Irreparable harm will occur unless relief is granted.

In regards to irreparable harm, the court said that Merrill’s argument that because the two men worked with 180 clients with millions of dollars in assets it was not possible to determine damages if relief is not granted is “outdated” since all transactions are electronically monitored. The court also said that there is no clear evidence that the defendants even possess any of the clients’ financial information and that any customer information they might have could easily be accessed through regular sources, such as telephone directories. The court noted that it is not unusual for brokers to move to a different brokerage firm, bringing their client lists with them, and that preventing the two men from using these lists could hamper their careers-causing them great harm.

Also, the “diminished public interest” in Merrill’s enforcement of non-solicitation agreements-considering that many brokerage firms opt not to enforce such agreements-and the public interest in a client being able to keep working with their chosen financial adviser do not indicate that the “public interest” factor weighs in Merrill’s favor.

The parties will now take their case before an arbitration panel.
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Magistrate Judge Tells Texas Court that Citigroup Global Markets Holding Inc. Should Not Be Denied Arbitration Award for Unpaid Promissory Note

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

The US District Court for the Western District of Texas should confirm an arbitration award for brokerage firm Citigroup Global Markets Holding Inc. against a former employee who failed to pay his promissory note-so says magistrate judge Nancy Stein Nowak.

Nowak argued before the Texas court that even if “equitable reasons” exist for why stockbroker Ernest Elam shouldn’t pay the brokerage firm the money he owes for the note, the arbitrator’s decision must still be upheld because the former Citigroup broker failed to provide a reason for why he shouldn’t pay that falls under the Federal Arbitration Act.

Last July, the arbitration panel found in favor of Smith Barney and Elam was told to pay the investment firm $193,484.28, $15,768.70 in legal fees, and 5% interest per annum for any balance that is not paid. In turn, Elam asked for the award to be vacated because he claims that:

• The promissory note was a forgivable lone.
• He was misled about repayment requirements.
• Smith Barney sought repayment because the broker’s departure caused the branch manager’s end of the year bonus to go down.
• Smith Barney benefits financially from commissions through Elam’s previous clients.

According to Nowak, Citigroup Global Markets Holdings Inc. and Citigroup Global Markets Inc. (as Smith Barney) had asked for confirmation of the award against Elam for the 2004 note he defaulted on in the original principal amount of $270,878. The magistrate judge says that according to the FAA, an arbitration award can only be vacated if:

• The award was obtained through fraud, corruption, or undue measures.
• The arbitrators were at least partially corrupt or engaged in misconduct or went beyond the scope of their powers.

Therefore, Novak contends that the district court cannot vacate the award and should grant Smith Barney’s motion.
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US Lawmakers Want SEC and Treasury Department to Answer Questions About Merrill Lynch Executive Bonuses and TARP Funds

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

US lawmakers are asking government regulators some tough questions about executive compensation at investment banks. Last week, Rep Dennis Kucinich, who heads the House Oversight Committee’s Domestic Policy Subcommittee, asked the Securities and Exchange Commission to determine whether Bank of America Corp. violated federal securities laws when it did not tell shareholders that Merrill Lynch was going to pay executives $3.62 billion in bonuses. Kucinich noted that these bonuses were 22 times larger than what AIG executives were offered-equivalent to 36.2% of the Troubled Asset Relief Program (TARP) funds that Merrill received.

A March filing by New York Attorney General Andrew Cuomo (whose office is also pursuing this matter) claims that even though the firm had already made the decision to accelerate bonus payments, Merrill told Cuomo and the House Oversight Committee that it planned to make incentive compensation decisions at the end of the year. Cuomo claims that Bank of America neglected to tell shareholders that Merrill was going to offer executives big bonuses before the BofA merger was final.

When BofA was questioned about Cuomo’s claims, the bank said it revealed everything it was required to before the shareholders voted on the merger. Kucinich says that this makes him wonder about the SEC’s interpretation of fiduciary duty when it comes to revealing all “material” data to shareholders when asking for shareholder action and what is considers “material” information for proxy rules meant to protect investors under the Securities Exchange Act of 1934.

He asked the SEC whether it thinks that B of A’s omission is a material one and, if so, what it would do to redress it. The House Oversight Committee is trying to determine whether officials from Bank of America and Merrill misled Congress about the executive bonuses and their timing.

Meantime, Rep. Edolphus Towns, who oversees the House Committee and Oversight Reform, told Treasury Secretary Tim Geithner that he was worried about media reports that the Treasury Department was trying to “circumvent” statutory restrictions regarding executive pay for companies availing of TARP funds. Towns wants Geithner to respond to news reports that the Treasury Department established special entities to receive federal bailout funds that could then be channeled toward corporate recipients so as to avoid executive pay restrictions and requirements that the US get an ownership interest in the bailout firms. Towns cautioned that it would not be wise for the Treasury Department to allow excessive pay practices to continue at firms that taxpayers had bailed out.

Kucinich Asks If Merrill Bonuses Broke Laws, NY Times, April 7, 2009
Read Representative Towns’ Letter to Treasury Secretary Geithner (PDF)
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Did Morgan Keegan Tutor Towns to Invest into Their Own Risky Deals?

Published on: April 11, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The Tennessee city of Lewisburg got an unpleasant surprise this January when they discovered that their annual interest rates on a bond was now $1 million. Officials had gotten themselves involved in risky municipal bonds after speaking with investment firm Morgan Keegan & Co. at a state-sponsored seminar five years ago. Not only did Morgan Keegan offer them advice about these complex financial transactions, but their representatives made the deal.

Unfortunately, Lewisburg is just one of the hundreds of US cities and counties feeling the financial fallout because high-risk municipal bond derivates have gone sour. For example, officials in Tennessee’s Claiborne County were told by Morgan Keegan bankers that they would have to pay $3 million (an amount they can’t afford) to remove themselves from municipal bond derivatives. And in Mount Juliet, city leaders discovered that payment of their bonds had gone up 500% to $478,000.

Morgan Keegan has been able to dominate the lightly regulated municipal bond marketplace. Based in Tennessee, the investment company has sold $2 billion in municipal bond derivates to 38 cities and counties since 2001. Morgan Keegan reps say they’ve managed to save counties and cities money by providing lower interest rates. They also maintained that it is not their fault that the economic crisis has created turmoil in the bond market.

Now, however, federal regulators are trying to figure out how to restrict municipal bond derivative use. They also want to determine whether it makes sense for big investment banks to convince small counties and cities to take part in transactions that decrease interest rates but come with higher risks.

Morgan Keegan’s managing director Joseph K Ayres says that the investment firm is being unfairly blamed for the economic slump and that there was no conflict of interest when it advised municipalities and underwrote bonds. He says that the state of Tennessee had requested and approved the seminar and that the firm did not offer unbiased descriptions of municipal bond options or market any products during the session. Lewisville officials, however, say that Morgan Keegan failed to provide them with proper advice and did not fully explain the risks of their investment to them.

Investment banks make more in yearly income and fees from derivatives than from fixed-income bonds. In Tennessee alone, Morgan Keegan has made millions of dollars in fees. Unfortunately, it’s the municipalities and other investors who stand to lose a great deal.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker Fraud Attorney Bill Shepherd has this to say: “As a former advisor to municipalities I can tell you that those who manage public funds depend heavily on their financial advisors to be not only truthful but candid about investment risks. It is disgraceful when unscrupulous “experts” abuse the trust placed in them to mine public funds for their own greed. Our firm currently represents a number of municipalities, credit unions, etc., which have lost hundreds of millions of dollars.” Continue Reading ›

Former Fidelity Brokerage Reps Says They Were Pressured to Make Sales That Conflicted With CFP Ethic Codes

Published on: April 8, 2009 | by Shepherd Smith Edwards & Kantas, LLP

A number of Fidelity Brokerage Services LLC representatives who left the company last year say that they were obligated to acquire certified financial planner certification but were also barred from revealing that part of their bonuses were affected by whether they sold certain proprietary products. About half of Fidelity brokers’ compensation is salary and the remainder is in bonuses. The ex-brokers say they were pressured into selling Fidelity’s life insurance products and Portfolio Advisory Services.

One ex-broker said that he had to meet 80% of his sales target in PAS in order to qualify for the investment portion of the manager bonus and not receive an employment warning. Other brokers say that they were monitored weekly and comparisons were made between them and other representatives to spur productivity. Still another ex-broker said they were warned that representatives who didn’t get the CFP by mid-2009 would be let go.

The Fidelity Investments brokerage unit removed the CFP mandate this January, the same month that that the Certified Financial Planner Board of Standards Inc. instituted a new code of ethics and professional responsibility that obligates certified planners to notify clients about any conflicts of interest. A number of ex-Fidelity brokers says that Fidelity Brokerage withdrew the requirement because approximately 18% of the more than 275 account executives with its Private Client Group resigned last year.

Fidelity disputes the former brokers’ accounts and says that attrition isn’t unusual, broker compensation doesn’t conflict with clients’ best interests, and bonuses are not affected by proprietary products’ sales. A company spokesperson also says that the CFP requirement was withdrawn so that qualified candidates wouldn’t be discouraged from joining the private-client unit and the decision had no connection to service offering. Fidelity says it still encourages representatives to get the CFP.

Related Web Resources:
Ex-Fidelity reps claim sales pressure, Investment News, April 5, 2009
Certified Financial Planner Board of Standards Inc.
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Morgan Keegan Ordered by FINRA to Pay Investors $267,711 Plus Interest for Losses in RMK Bond Funds

Published on: April 7, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Separate Financial Industry Regulatory Authority arbitration panels have issued awards to investors who suffered financial losses in Regions Morgan Keegan mutual funds. Last week, a FINRA panel awarded two California residents $267,711 plus interest for their losses-the largest bund fund arbitration award that Morgan Keegan has been ordered to pay to date.

In two arbitration cases last month, investors were also awarded six-figure sums, with one award amount larger than the damages claimed by investors. To date, FINRA panels have awarded over $871,000 to investors for their Morgan Keegan-related claims.

All of the arbitration claims accuse Morgan Keegan of concealing the actual risks associated with their bond funds. The investors have accused Morgan Keegan of selling certain funds as relatively conservative investments when they were actually exposed to a number of high risk debt instruments, including collateral debt obligations and subprime mortgage securities. They say Morgan Keegan engaged in a scheme to defraud investors of certain bond funds and misrepresented the extent of their holdings in riskier investments.

Merrill Lynch & Co Ordered to Pay FINRA Arbitration Panel $39.8 Million

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

Merrill Lynch & Co. must pay an investor $39.8 million in compensatory damages because of negligence on the part of one a subsidiary broker-dealer. A Financial Industry Regulatory Authority arbitration panel issued the award to Trustees of the Masonic Hall & Asylum Fund, which is an endowment for an Utica health-care facility. This is one of the largest awards against a Wall Street firm.

The fund’s arbitration claim had accused Merrill Lynch and subsidiary Advest Inc. of misrepresentation, negligence, breach of fiduciary duty, and breach of contract. The claim had also accused Advest Inc. of encouraging it to buy into Sphinx Managed Futures Index Fund LP, which was owned by Refco Inc. However, Refco Inc. collapsed in 2005 after giving notice that its chief executive had concealed bad debts valued at about $430 million from firm auditors. The fund says it lost money because of Advest Inc.’s poor recommendation.

The FINRA panel awarded the fund $30.6 million plus $9.2 in interest from as far back as November 2005. Merrill Lynch announced that it was not pleased with the ruling and says that the case stemmed from investments that occurred before the Wall Street firm acquired Advest.

The FINRA panel said Merrill Lynch can seek damages in bankruptcy proceedings for the Refco unit in charge of the Sphinx fund, and the broker-dealer says it will do so.

One way for investors who have lost money because of securities fraud to recover their investments is to go through the arbitration process.

Related Web Resources
Merrill to Pay $40 Million in Refco Case, Wall Street Journal, March 30, 2009
Merrill socked with historic arbitration ruling, Crain’s New York Business, March 31, 2009 Continue Reading ›

First New York Securities LLC and Four Ex-Traders to Pay $435,000 in FINRA Sanctions Over Short Selling

Published on: March 26, 2009 | by Shepherd Smith Edwards & Kantas, LLP

First New York Securities LLC and four of its ex-traders have reached a settlement with the Financial Industry Regulatory Authority over allegations that they improperly covered short positions involving secondary offering shares, as well as engaged in associated oversight failures.

Per the FINRA settlement, First New York Securities LLC will pay $170,000 and disgorge $171,000. The former First Securities New York traders are to pay: $7,500 from Kevin Williams, $50,000 from Joseph Edelman, $30,000 from Michael Cho, and $30,000 from Larry Chachkes. By agreeing to settle with FINRA, the firm and its former brokers are not admitting to or denying the allegations.

FINRA says the trading addressed by the short selling case took place during a specific restricted period (usually five business days) when the Securities and Exchange Commission doesn’t allow for short sales to be covered with securities from secondary offerings and before the secondary offering is priced. This matter is addressed in Rule 105 of Regulation M.

The self-regulatory organization says that a 2005 probe found that the investment bank violated the rule related to five public offerings. The SRO says First New York Securities and its traders engaged in short selling during the period when they weren’t allowed to and covered short positions using shares from the offering. FINRA says that as a result, the firm and its four traders earned $171,504 and effectively got rid of their market risk.

FINRA also accuses the investment firm of neglecting to properly supervise its traders, as well as neglecting to establish proper supervisory procedures or to enforce such a system. The SRO also accuses First New York Securities of failing to maintain the proper books and records connected to the transactions that are being addressed.
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