Financial Firms

Deutsche Bank Trust Company, Goldman Sachs Group, and Bank of America Corporation are Among the 21 Lenders Named in Cleveland, Ohio Lawsuit

Published on: January 24, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The city of Cleveland, Ohio is suing 21 financial institutions for hundreds of millions of dollars in damages caused by subprime lending and securitization. The defendants named in the lawsuit are:

• Deutsche Bank Trust Company • Ameriquest Mortgage Company • Bank of America Corporation • The Bear Stearns Companies • Citigroup, Inc.

• Countrywide Financial Corp.

K.W. Brown & Company, K.W. Brown Investments, & 21st Century Advisors Are Held Liable in $4.5 Million Cherry-Picking Scam

Published on: January 21, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of Florida has found K.W. Brown & Company, K.W. Brown Investments, 21st Century Advisors, the companies’ owner Kenneth Brown, his spouse Wendy Brown, and representative Michael Cimilluca liable for their involvement in a cherry-picking scam that earned them $4.5 million and cost investors $9 million. The three of them were also found liable for violating federal securities laws.

According to the Florida Court, from September 2002 up until at least June 2006, Brown and his friends took part in a fraudulent cherry-picking scheme that helped him and his friends earn millions of dollars in illegal gains while clients lost money as a result.

Industry regulators had warned Brown that he needed to put in place procedures and policies that would prevent this type of illegal activity, yet the oversights persisted. A Securities and Exchange examination staff had discovered a number of violations in June 2003, including undisclosed conflicts of interest and breaches of fiduciary duty.

SMH Capital and Two of Its Brokers to Settle FINRA Charges Over Oversight Failures

Published on: January 17, 2008 | by Shepherd Smith Edwards & Kantas, LLP

SMH Capital has agreed to pay $450,000 in fines to settle charges by the Financial Industry Regulatory Authority (FINRA) over the broker dealer’s failure to have supervisory procedures and systems in place to handle its prime brokerage and soft dollar services to hedge funds. The oversight led to a hedge fund manager receiving improper payments in soft dollars worth $325,000.

FINRA says other failures by SMH included producing and giving out hedge fund sales materials that failed to properly “disclose material investment risks to potential hedge fund investors.” SRO is accusing SMH of engaging in an “improper compensation arrangement” with two brokers who supervised hedge funds.

The two SMH brokers, Michael Rosen and Jack Seibal, have agreed to $100,000 fines and a 20-day suspension. SRO says that agreements prohibited the two men from receiving a share of any commission that SMH earned for fund trades. A third unregistered SMH employee agreed to a 10-day suspension and a $15,000 penalty.

Investors Complain about Mutual Funds Sold by Morgan Keegan

Published on: January 12, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Some Investors have complained they were sold mutual funds by the securities firm of Morgan Keegan & Company, Inc. based on representations of safety which were unfounded. At this time such complaints are only allegations and no determination has been made that the firm and/or its representations engaged in any wrongdoing.

The funds in question include RMK High Income Fund (RMH), RMK Advantage Income Fund (RMA), and RMK Multi-Sector High Income Fund (RHY). Reportedly, these funds were heavily invested into collateralized debt obligations (CDO’s) based on sub-prime mortgages and have therefore declined sharply in value.

Morgan Keegan is a Memphis, Tenessee based brokerage firm and is a division of Regions Financial Group. The firm’s offices are located primarily in the South, including in the states of Alabama, Arkansas, Florida, Georgia, Kentucky, Mississippi, North Carolina, South Carolina, Tennessee and Virginia.

Ex-Goldman Sachs Associate Will Serve Nearly Five Years in Prison for Insider Trading

Published on: January 10, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Eugene M. Plotkin, a former Goldman Sachs associate, will serve 57 months in prison for his involvement in insider trading. Plotkin pleaded guilty to conspiracy and eight counts of insider trading for his role in a number of insider trading scams that generated over $6 million in illegal gains.

The former fixed-income research associate to will have to forfeit $6.7 million and pay a $10,000 fine. The forfeiture will come from money that the government has already frozen.

Plotkin, along with ex-Goldman analyst David Pajcin, was one of the key players accused of illegally trading stocks after consulting prepublished copies of BusinessWeek’s “Inside Wall Street” column. The scam also involved the use of information leaked by Jason Smith, a grand juror in the Bristol-Myers Squib Co. case and information provided by Stanislav Shpigelman, a former Merrill Lynch investment-banking analyst.

$600 Million Set Aside by State Street May Be Tip of Mortgage Litigation Iceburg

Published on: January 8, 2008 | by Shepherd Smith Edwards & Kantas, LLP

State Street Corp. announced it established a pre-tax reserve of $618 million billion “to address legal exposure and other costs associated with the under-performance of fixed-income strategies managed by the company’s investment management arm,” blaming exposure to subprime mortgages. The company referenced “customer concerns as to whether the execution of the strategies was consistent with the customers’ investment intent” without identifying any specific litigation.

However, the New York Times published an article stating that State Street created the reserve “after five clients sued it, claiming they had lost tens of millions of dollars in State Street funds they were told would be invested in risk-free debt like Treasuries.” The article added that State Street’s reserve “highlight the legal challenges that lie ahead for financial firms.”

The first of the five lawsuits referenced by the Times article was filed October 1, 2007, by Prudential Retirement Insurance and Annuity Co. The action “seeks, among other relief, restitution of certain losses attributable to certain investment funds” sold by State Street’s investment management arm, and alleges State Street “failed to exercise prudent investment management,” in violation of the Employee Retirement Income Security Act of 1974 (ERISA).

Goldman Sachs Class Securities Fraud Lawsuit is Dismissed

Published on: December 26, 2007 | by Shepherd Smith Edwards & Kantas, LLP

A class securities fraud lawsuit against Goldman Sachs & Co. was dismissed by the U.S. District Court for the Southern District of New York. The lawsuit had charged that a Goldman Sachs & Co. senior analyst issued false research reports with inflated projections of Exodus Communications Inc.’s financial growth on more than one occasion.

Judge Thomas Griesa granted the motion to dismiss after deciding that the second amendment complaint “fails to adequately plead loss causation.” The court dismissed the original lawsuit filed by Exodus investors based on the same grounds.

The Allegations:

Citibank and Columbia University Sued for Charging College Students Extremely High Interest Rates on School Loans

Published on: December 23, 2007 | by Shepherd Smith Edwards & Kantas, LLP

A former Columbia University student is suing Citibank and Columbia University for what he is calling “modern-day slavery,” for allegedly colluding to charge unreasonably high interest rates on student loans.

Brian Baxter, 57, is now a licensed psychotherapist and a social worker. He graduated from Columbia University in the 1990’s with a BA in sociology and a master’s in social work. Baxter says that he is still paying back the interest on his student loan even though it has been 10 years since he graduated.

He says that his $65,000 loan has turned into $172,000. Creditors take 15% of his paycheck regularly. Baxter says he will likely spend the rest of his life paying back his debt.

Ronin Capital, Goldman Sachs Execution & Clearing, Penn Mott Securities, and Pearson Capital Management Receive Censures and Fines from NYSE Regulation

Published on: December 19, 2007 | by Shepherd Smith Edwards & Kantas, LLP

New York Stock Regulation Inc. announced its enforcement actions against four trading companies. The regulator says that Ronin Capital, LLC mismarked over 8,300 short orders because of inadequate supervisory procedures and supervision. The company continued to mismark short orders even after the SEC brought the violation to its attention. Ronin Capital was censured by NYSE Arca and ordered to pay $200,000.

NYSE Arca fined Goldman Sachs Execution & Clearing LP (GSEC) $105,000 for failing to adequately supervise business operators and associated persons in a way that guaranteed compliance with odd lot trading order rules.

Pearson Capital Management LLC was censured and fined $5,000 because it failed to meet market maker requirements. Penn Mott Securities was fined $3,200 for similar violations.

Bear Stearns, Deutsche Bank, and Merrill Lynch Among the Wall Street Firms Subpoenaed by New York Prosecutors

Published on: December 12, 2007 | by Shepherd Smith Edwards & Kantas, LLP

New York Attorney General Andrew Cuomo is subpoenaing several Wall Street firms, including Deutsche Bank AG, Merrill Lynch & Co, and Bear Stearns, for information about packaging and selling debt connect to high-risk mortgages.

Prosecutors want to look at the way investment banks review the quality of mortgages before turning them into packaged products that can be sold to investors. They also want to find out how debt is being turned into securities and learn more about the credit-rating firm-bank relationship.

This past summer, mortgage-backed securities affected by growing default and delinquency rates had high debt ratings despite the backing of loans issued to lenders.