Articles Posted in Financial Firms

Merrill Settles SEC Charges Over ‘Squawk Box’ Misuse for $7 Million

Published on: March 22, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Merrill Lynch will pay $7 million to settle Securities and Exchange Commission administrative charges that the investment bank neglected to protect customers whose orders were transmitted over “squawk boxes.” The penalty is the second highest fine that the SEC has imposed for cases involving Section 15(f) of the 1934 Securities Exchange Act and Section 204A of the 1940 Investment Advisers Act violations. These statutes mandate that investment advisers and broker dealers implement procedures and policies that would keep employees from misusing nonpublic, material data.

The SEC says that from 2002 to 2004, a number of Merrill Lynch brokers at three branch offices let day traders, who did not work for the company, hear customers’ unexecuted orders as they were being broadcast over the internal intercom systems. The traders used the information to trade before Merrill’s institutional clients’ orders were placed.

The SEC says Merrill did not have the procedures or polices to prevent employees from accessing the squawk boxes or to supervise them to make sure that they did not misuse customer order data. In addition to paying the penalty, Merrill Lynch says it will implement a number of measures to ensure that customer order data is protected any time it is sent over squawk boxes or other technologies used for their transmission.

U.S. Attorney for the Eastern District of New York had filed criminal charges related to the squawk box front-running activities against a number of Merrill employees, A.B. Watley Group Inc., and several individuals. While seven defendants were acquitted of nearly all the charges, they must go back to trial for a single count of conspiracy to commit securities fraud. Former Merrill stockbroker Timothy O’Connell was found guilty of witness tampering and issuing false statements.

Wachovia Securities Must Pay Texas $4 Million for Auction-Rate Securities

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

The Texas State Securities Board has fined Wachovia Securities $4 million for misleading investors about auction-rate securities. The Wells Fargo & Co unit must also have completed buying back ARS from investor clients in Texas by June 30.

This is the final step in the auction-rate securities case against Wachovia in which a tentative settlement agreement was reached last year when Wachovia Securities agreed to pay back over $8.5 billion in ARS from investors throughout the US.

It is also part of Texas’s efforts to deal with problems related to securities. The nearly $4 million is Texas’s share of the $50 million penalty Wachovia said it would pay. Last December, the Texas State Securities Board issued a final order mandating that Citigroup pay the state $3.6 million for making misrepresentations to investors about the auction-rate securities.

According to the Texas order, Wachovia Securities created misconception when it told investors that ARS were like cash and could be retrieved at nearly any time. The order accused Wachovia and its registered securities agents of knowing that the ARS market was in trouble yet neglecting to provide investors with this information. Wachovia Securities is one of the registered securities dealers in Texas.

UBS Financial Services, Merrill Lynch, and Citigroup are among the large investment firms that reached similar billion-dollar settlements with state regulators and the Securities and Exchange Commission. The collapse of the auction-rate securities market in February 2008 left many investors with frozen ARS that they thought were going to remain liquid and safe.

Wachovia Securities Ordered To Pay Texas $4 Million In ARS Probe, CNNMoney.com, March 17, 2009
Texas State Securities Board
Continue Reading ›

Despite Financial Market Volatility, Most Investment Advisors Are Telling Clients To Stick With Their Investment Plans

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

According to a TD Ameritrade Institutional survey, most investment advisers continue to tell their clients that now is a great time to invest in the financial market rather than encouraging them to cash out their investments in the wake of the financial crisis:

• 93% of investment advisers are not telling clients to cash out investments.

• Over 50% of these registered advisers believe now is the time to invest in equities.

• 43% of them are telling clients to increase their fixed income allocations.

• 53% are having clients increase cash allocations.

• 41% have dramatically increased their communications with clients so they can offer them reassurance.s

506 registered investment advisers participated in the survey. TD Ameritrade Institutional managing director of advisor advocacy and industry affairs Brian Stimpfl says that the results demonstrate how most advisors are staying committed to sticking with their clients’ investment strategies despite volatility in the financial market.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker Fraud Lawyer William Shepherd, however, had this to say: “When markets fell 20% or so by early September, brokers and financial advisors should have been listening to their clients carefully to learn the true nature of their risk-tolerances. When any investor expresses strong feelings about losses in an account the investment advisor must act to revise the client’s objectives. Several of our clients told their advisors they were losing sleep over their investments. Yet, instead of revising the clients’ investment objectives – and their investments – as required, the advisors adamantly told their clients not to sell. Now that these investors’ nightmares have come true, the advisors want to hide behind objectives marked on the old forms without taking responsibility for their reckless inaction.”

Related Web Resource:
FA Magazine
TD Ameritrade Institutional
Continue Reading ›

Morgan Keegan Settlement with Children’s Wish Fund Shows the Impact Recouping Investment Losses Can Have On The Little People

Published on: March 14, 2009 | by Shepherd Smith Edwards & Kantas, LLP

In 2007, Morgan Keegan settled an arbitration claim with the Indiana Children’s Wish Fund for an undisclosed amount. The charity had reported losing $48,000 in a mutual fund it had invested in with the brokerage firm.

The Wish Fund became involved in mortgage securities after a local banker persuaded the charity’s executive director, Terry Ceaser-Hudson, to invest money in a bond fund through Morgan Keegan. Ceaser-Hudson was put in touch with broker Christopher Herrmann. When she asked him about the risks of investing in the fund, she says he assured her that investing it would be as safe as investing in a CD or a money market account.

In June 2007, the Wish Fund invested nearly $223,000 in the fund. That week, two Bear Stearns funds collapsed.

Less than three weeks after investing the charity’s money in the Morgan Keegan fund, Ceaser-Hudson says she was surprised to see a $5,000 loss. As the bond fund’s net asset value fell in September, she ordered the sale of the stakes to be sold. She got back about $174,000 of the $223,000 she had invested on behalf of the Wish Fund-that’s a 22% loss in just three months. Ceaser-Hudson filed an arbitration claim against Morgan Keegan and accused Herrmann of breach of duty when he making an unsuitable recommendation to the Wish Fund.

It appears as if the Regions Morgan Keegan mutual fund board members, like many investment professionals, did not properly assess the risks that came with investing in mortgage securities. Most of the brokerage firm’s directors do not own shares in the bond funds that were devastated, which means that the majority of them were not impacted by their decline.

For a charity like the Children’s Wish Fund, however, the losses it incurred had been preventing nine sick children from having their wishes granted.

Related Web Resources:
The Debt Crisis, Where It’s Least Expected, New York Times, December 30, 2007
The Indiana Children’s Wish Fund
Continue Reading ›

UBS Sanctioned For Madoff-Related Losses by Luxembourg Financial Services Regulator

Published on: March 9, 2009 | by Shepherd Smith Edwards & Kantas, LLP

In Europe, the Luxembourg Commission de Surveillance du Secteur Financier (CSSF) has censured UBS’s Luxembourg-based branch for failing to execute due diligence and, as a result, allegedly allowing for the massive losses investors have incurred from the Bernard Madoff’s $50 billion Ponzi scam.

The Luxembourg financial service regulator is accusing Switzerland’s biggest bank of a “serious failure” in the way it managed a feeder fund that funnelled assets to Madoff-related investments. Luxembourg’s CSSF is giving UBS three months to remedy the problems.

UBS, however, is disputing the CSSF’s claim that it violated its contractual obligation to clients. The investment bank says the Luxalpha fund was set up at the request of wealthy clients that wanted a tailor-made fund that would let them invest their assets with Bernard Madoff. UBS says these clients knew that it was not responsible for their assets’ security.

Following news of the Madoff scheme and revelations that some French investors had allegedly lost billions of dollars because their investments were channelled to Madoff through Luxembourg-based mutual funds, the European Commission announced it would start investigating the way EU member states use the EU mutual fund regulatory regime (UCITS, which refers to Undertakings for Collective Investment in Transferable Securities).

The EU also said that approval of a new regulatory regime will more than likely be delayed so more changes can be considered to ensure that investors are protected in the future from losses such as the ones that occurred with Madoff.

The French government accused UBS of lax supervision of mutual funds. French officials have also accused Luxembourg of being lax when it comes to EU mutual fund regulations. They’ve called on the EU to come up with stricter rules. Luxembourg, which has one of the EU’s mutual fund financial service sectors, disagrees with France’s accusations.

Madoff’s scheme has resulted in massive losses for individual investors, institutions, world financial markets, politicians, charities, and many others.

Luxembourg regulator censures UBS over Bernard Madoff, Times Online, February 26, 2009
French investors to take legal action against banks over Madoff feeder funds, Times Online, January 14, 2009

Related Web Resources:
Feds say Bernard Madoff’s $50 billion Ponzi scheme was worst ever, Daily News, December 13, 2008
Luxembourg’s Commission de Surveillance du Secteur Financier
Continue Reading ›

Wells Fargo, Goldman Sachs, JP Morgan Chase, Citigroup, UBS Securities, Bank of America, Moody’s Investment Services, and Fitch Ratings are Among Defendants Sued On Behalf of Wells Fargo Certificate Investors for Alleged Securities Fraud Violations

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

The Boilermaker-Blacksmith National Pension Trust is suing a number of investment banks, credit rating agencies, and underwriters, including Wells Fargo, WFASC, Morgan Stanley & Co., Credit Suisse Securities (USA) LLC, Barclays Capital Inc., Bear Stearns & Co., Countrywide Securities Corp., Deutsche Bank Securities Inc., JPMorgan Chase Inc., Bank of America Corp., Citigroup Global Markets Inc., McGraw-Hill Cos., Moody’s Investor Services Inc., and Fitch Ratings Inc., over allegations that they made false statements in the prospectus and registration statement for certificates that were collateralized by Wells Fargo Bank, NA. The lawsuit, filed on behalf of thousands of investors that bought the certificates from Wells Fargo Asset Securities Corp., accuses the defendants of violating the 1933 Securities Act by engaging in these alleged actions.

According to the securities fraud lawsuit, the defendants concealed from investors that Wells Fargo revised its underwriting practices in 2005 and became involved in high risk subprime mortgage lending. The complaint contends that WFASC and a number of defendants submitted to the Securities and Exchange Commision prospectus and registration statements representing that the mortgages were backed by certificates that were subject to specific underwriting guidelines for evaluating a borrower’s creditworthiness. The plaintiffs contend that these prospectuses and registration statements were false because they neglected to reveal that the Wells Fargo-originated certificates were not in accordance with the credit, underwriting, and appraisal standards that Wells Fargo, per the companies, had supposedly used to approve mortgages.

The lawsuit also claims that because Wells Fargo decided to enter the subprime mortgage mortgage market in 2005, the investment bank had to take significant write-downs in 2008 because of its massive exposure to the subprime market and the WFASC certificates that these mortgages backed dropped significantly in value. The Boiler-Blaksmith fund reports that it lost about $5 million, which is more than half of what it invested.

Related Web Resources:
Read the Complaint

The Boilermakers National Funds
Continue Reading ›

SEC Freezes Assets of Westridge Capital Management, WG Investors, LP, WG Trading Company, LP, and Money Managers Stephen Walsh and Paul Greenwood Over Alleged Misappropriation of Up to $554 Million in Investor Funds

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

The Securities and Exchange Commission is accusing money managers Stephen Walsh and Paul Greenwood, along with their affiliated entities Westridge Capital Management, WG TRADING Company, LP, and WG Investors, LP, of orchestrating an investment fraud scam that has resulted in the misappropriation of some $554 million in investor assets.

According to the SEC, Greenwood and Walsh told investors that their money was going to be placed in a stock index arbitrage strategy, but instead, they used the funds to buy luxury cars, multi-million dollar residences, a horse farm and horses, rare collectibles, as well as pay for other personal expenses. The SEC has obtained an asset freeze against the two money managers and their affiliated entities.

The SEC’s complaint accuses Walsh and Greenwood, through their three affiliated entities, of violating the Securities Exchange Act of 1934, the Securities Act of 1933, and the Investment Advisers Act of 1940. The SEC is seeking a permanent enjoinment of the defendants from committing future violations of the federal securities laws and wants them to pay penalties, disgorgement of ill-gotten gains, and prejudgment interest.

Meantime, the US Commodity Futures Trading Commission filed charges against Walsh, Greenwood, and their affiliated entities, while the US Attorney’s Office for the Southern District of New York filed criminal charges against the two money managers, who have both been arrested.

Because a number of prominent consulting firms recommended the money managers and their affiliated entities to pension and endowment groups, these investors now stand to loose millions. Wilshire Associates, Mercer, and Cambridge Associates are three of the consulting firms that made such recommendations.

For example, the Sacramento County Employees’ Retirement System made its multi-million dollar investment after Mercer highly recommended WG Trading and Westridge. Kern County Employees’ Retirement Association in California and the Iowa Public Employees’ Retirement System invested their money after Wilshire recommended Westridge.

Consulting firms play a huge role in the investment business. One reason is that they give advice to hundreds of institutional investors on where to place their money. The money managers they recommend can end up making millions of dollars, while the clients pay consulting firms either a small percentage of the assets invested or a flat fee for a contract lasting a number of years.

Related Web Resources:
Consultants Touted Firm Accused in Fraud, The Wall Street Journal, February 27, 2009
SEC Charges Two New York Residents For Misappropriating More Than $500 Million in Investment Scheme, SEC, February 25, 2009
Read the SEC Complaint (PDF)
Continue Reading ›

Morgan Stanley Court Case Demonstrates Why Securities Arbitration is Often a Better Forum

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

Many lawyers and investors complain about securities arbitration. According to Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker Fraud Attorney William Shephard, however, the following Morgan Stanley case is “one of many cases filed in court which would have likely not been dismissed in securities arbitration.”

Earlier this month, the U.S. District Court for the Southern District of New York tossed out a securities class action lawsuit filed against Morgan Stanley, Morgan Stanley DW Inc. (MSDWI), Morgan Stanley & Co. Inc. (MS&Co.), the Technology Fund, the Information Fund, Morgan Stanley Investment Management Inc., Morgan Stanley Investment Advisors Inc. (MSIA), and Morgan Stanley Distributors Inc. The class action case is on behalf of investors in the Morgan Stanley Information Fund and Morgan Stanley Technology Fund over alleged improprieties in initial public offering shares allocations, as well as alleged conflicts of interest between Morgan Stanley’s research and investment banking departments.

According to the court, the investors claim they lost millions of dollars in the purchase of the funds as a result of violations of the 1933 Securities Act. The plaintiffs are also claiming that Morgan Stanley, MSDWI, and MS&Co. publicly said that they kept a “Chinese Wall” between their research and investment banking departments so there wouldn’t be any conflicts of interest when, in fact, this wall had fallen and MS & Co. was acting to benefit its investment banking departments. They also claim they were told that analyst recommendations and research were not influenced by the interests of Morgan Stanley or its affiliates.

Among the conflicts of interest, the investors are alleging that the defendants engaged in at least one of the a number of roles involving companies that with shares included among the funds’ portfolio securities for the class periods, including:

• As underwriters for certain securities.
• As investment bankers for certain companies with securities in the funds’ portfolios.
• Preparing and sending out research reports and recommendations about companies that had shares in the funds’ portfolios.
• Trying to get first-time or more underwriting and additional business from the companies that had shares in the portfolios.

The plaintiffs contend that MS & Co. factored in how much investment bank business research analysts were able to secure when determining their total compensation. This resulted in MS & Co.’s promotion of Morgan Stanley shares or those of potential clients, which then would lead to the price inflation of the companies’ shares. They also claimed that the portfolio funds had a substantial amount of Morgan-Stanley sponsored-stocks and that Morgan Stanley took part in “laddering,” which involved rewarding customers with “hot” IPO shares when they went after research tie-ins that artificially inflated an IPO stock’s aftermarket share price.

The court, however, dismissed the lawsuit saying that the plaintiffs failed to plead material omissions that Morgan Stanley should have disclosed. Continue Reading ›

Bank of America, Citigroup, Goldman Sachs, and Wells Fargo Chief Executives Among Those Defending Bailout Fund Use

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

Earlier this month, the chief executives of the eight biggest banks in the United States, including Citigroup, Bank of America, Wells Fargo, and Goldman Sachs addressed the House Financial Services Committee in an attempt to persuade US lawmakers that billions of dollars in bailout funds were used as intended-to increase consumer and business lending and improve balance sheets. The banking heads also admitted to certain mistakes and promised that compensation in the future would be commensurate with performance.

Under the Capital Purchase Program, the federal government gave the banks $125 billion in cash infusions in November. Bank of America and Citigroup also received $20 billion each in Treasury investments.

At the session, some of the bank executives gave testimony regarding activities performed since they received the government’s financial assistance. For example, Kenneth Lewis, Bank of America’s chief executive, says that during 2008’s fourth quarter, the bank committed to $115 billion in new loans.

Vikram Pandit, Citigroup’s chief executive, said his bank had provided $75 billion in new loans for the fourth quarter. He also said that Citigroup had used $36.5 billion to expand personal loans, mortgages, and credit lines for businesses, families, and individuals, as well as to create secondary market liquidity. He said Citigroup had cancelled an order for a $50 million jet.

While the executives were contrite, Committee Chairman Barney Frank criticized them for giving executives bonuses, in addition to salaries. Lawmakers also asked the banks’ executives to stop home foreclosures until the Obama Administration can executive a $50 billion plan on mortgage modifications and other assistance for borrowers that are experiencing problems.

John Stumpf, Wells Fargo’s chief executive, said that his bank could hold off on foreclosing on loans in which it is the investor or owner. Pandit said Citigroup could support a moratorium for borrowers that live on properties facing foreclosure. Lewis said Bank of America could place a moratorium on home foreclosure for two or three weeks.

Related Web Resources:
Fed Urges Banks to Put Bailout Funds Into Loans, Not Dividends, Bloomberg.com, February 24, 2009 Continue Reading ›

Credit Suisse Securities Ordered by FINRA Panel to Pay $406 Million for Improper ARS Sale to Semiconductor Manufacturer STMicroelectronics NV

Published on: February 25, 2009 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority Panel says Credit Suisse Securities must pay STMicroelectronics $406 million. The award, issued in favor of the semiconductor manufacturer, is over Credit Suisse Securities’s sale of unauthorized auction rate securities. Consequential damages and legal fees are also part of the FINRA award. STMicroelectronics also gets to keep some $25 million in interest award.

STMicroelectronics N.V. had filed for arbitration because Credit Suisse had made unauthorized purchases of credit link notes and collateralized debt obligations when it should have bought student loan securities that were Federally guaranteed, which was what the semiconductor company had mandated and authorized. STMicroelectronics N.V. says Credit Suisse Group engaged in fraud because of its actions.

Also, in STMicroelectronics’s securities fraud lawsuit against Credit Suisse Group, which was filed last year, the semiconductor company alleged that Credit Suisse purposely set out to defraud the company. It also claims that transferring clients’ accounts into auction-rate securities was part of a plan to receive higher fees for the service it was providing.

FINRA Arbitration
FINRA provides a dispute resolution forum for business disputes between investors, individual registered representatives, and securities firms. Recent FINRA dispute resolution statistics through January 2009:

• 525 cases filed through January 2009 • 267 cases were closed
FINRA Dispute Resolution has the biggest securities dispute resolution forum in the world. FINRA oversees nearly all such mediations and arbitrations in the United States.

STMicroelectronics Sues Credit Suisse Over Securities, The New York Times, August 7, 2008

Related Web Resources:

Credit Suisse
Continue Reading ›