Financial Firms

Securities Fraud News: Barclays to Pay $13.5M For Unsuitable Fraud Transactions, Appeals Court Upholds Asset Freeze of Wyly Brothers’ Relatives, Ex-NBA Player to Get Sentence for Ponzi Scam Conviction

Published on: December 29, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Barclays Capital Gets FINRA Fine for Unsuitable Mutual Fund Transactions

The Financial Industry Regulatory Authority said that Barclays Capital, Inc. (BARC) must pay over $10M in restitution plus interest to customers that were impacted by violations related to unsuitable mutual fund transactions. The self-regulatory organization said that the firm did not give certain customers the breakpoint discounts that applied. Aside from the restitution, Barclays must pay a $3.75M fine.

According to the SRO, from 1/10 through 6/15, the firm’s supervisory systems were not adequate enough to make sure that unsuitable transactions didn’t happen or that the firm’s duties related to mutual fund sales to retail brokerage clients were met. FINRA said that Barclays supervisory procedures wrongly defined a mutual fund switch as warranting three transactions within a specific period of frame. Because of this erroneous definition, the firm did not act on thousands of automated alerts warning of transactions that might be unsuitable, failed to include certain transactions for suitability review, and neglected to make sure that customesr got disclosure letters about transaction costs. Over 6,100 unsuitable mutual fund switches occurred, causing r about $8.63M in customer harm.

FINRA said that the Barclays did not give its supervisors enough guidance so that they could make sure that brokerage customers were engaging in mutual fund transactions that were suitable for their investment goals, holdings, and ability to tolerate risks. The SRO, which evaluated activities over a six-month period of time, said that 39% of mutual fund transactions were found unsuitable and customers suffered financial harm, including realized losses, of over $800K.

Also, during these five years, the firm’s supervisory system did not succeed in making sure that purchases were properly aggregated so eligible customers could get breakpoint discounts, including those involved in 100 Class A share mutual fund transactions.

By settling, Barclays is not denying or admitting to FINRA’s charges. It is, however, consenting to the entry of findings.
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Wells Fargo Sued by Commerz Bank in Mortgage-Backed Securities Case

Published on: December 29, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Commerzbank is suing Wells Fargo (WFC) for losses sustained on failed mortgage-backed securities (MBS). The German finance firm claims the California lending giant did not properly supervise MBS during the housing bubble, which Commerzbank argues, led to hundreds of millions of dollars in losses.

Commerzbank alleges that Wells Fargo caused it over $100 million in losses because of Wells Fargo’s purported lack of action. The German firm invested over $290 million in MBSs and Wells Fargo was the trustee of 19 of the MBSs. A lot of the securities were backed by mortgages from subprime lender Option One.

The German bank believes that Wells Fargo and other trustees should have ensured that the loans backing the securities satisfied certain standards, notified investors when loans defaulted, and forced mortgage lenders to compensate investors for the poor quality loans. Instead, Wells Fargo did not do any of these actions.

Court Refuses to Overturn Criminal Conviction of Ex-UBS/Citigroup Trader

Published on: December 28, 2015 | by Shepherd Smith Edwards & Kantas, LLP

In the U.K., a panel for the Court of Appeal refused to overturn the criminal conviction of ex-UBS (UBS) and Citigroup (C) trader. Tom Hayes is behind bars for conspiring to rig Libor. However, while his conviction will stand, the panel did lower his criminal sentence from 14 years to 11 years, citing his non-managerial role at the two banks and his diagnosis of mild Asperger’s.

Hayes is considered the main leader, spurring dozens of traders to manipulate the London interbank offered rate. However, his lawyers claim that Hayes did not hide his conduct from others at the bank and never considered his actions dishonest. Hayes said that his behavior was common in his industry.

When he voluntarily testified before prosecutors, Hayes admitted to manipulating rates. He also testified against a number of ex-friends and colleagues. Hayes also is facing criminal charges in the U.S.

Libor helps shape the borrowing costs for trillions of dollars in loans. Banks set rates, including Libor, by turning in rates at which they would be willing to lend each other money in different currencies and at different maturities.

US Continues Its Probe As Deutsche Bank Alleges $10B in Suspect Russia Trades

Published on: December 23, 2015 | by Shepherd Smith Edwards & Kantas, LLP

To date, Deutsche Bank AG (DB) says it has identified $10 billion in suspect trades that may not have been checked for money laundering. In the review, uncovered $6 billion of mirror trades involving its operations in Russia. According to a Russian central bank report, there are clients using rubles to purchase Russian shares and then selling them in London at the same time, usually for dollars. While mirror trades are legal in certain situations, they can be used to circumvent U.S. rules related to reporting money as it moves internationally. The German lender notified international authorities of its investigation a few months back.

According to Bloomberg, prosecutors in the United States have been investigating whether the bank’s dealings with the mirror trades violated U.S. rules regarding money laundering. Already, Russia’s central bank has fined Deutsche Bank after examining the latter’s trading in that country. Also, a source reportedly told Bloomberg that Russia’s regulator said that Deutsche Bank was the victim of an illegal scam and has since dealt with its related shortcomings.

The transactions under investigation include those involving trading in an account that was consistently involved in buy orders. In addition to the “mirror trades,” the investigation uncovered $4 billion of suspect trades that may have been conducted with another bank.

Fidelity Must Pay $1M Penalty For Failing to Detect Elder Financial Fraud

Published on: December 22, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority (FINRA) has imposed an over $1 million penalty on Fidelity Investment’s Fidelity Brokerage Services (Fidelity) for failing to protect clients from a financial fraud committed by a woman pretending to be a broker for the firm. Lisa A. Lewis (Lewis) stole over $1 million from customers, most of whom were elderly investors. FINRA says that the firm’s retail brokerage arm should have been able to detect the scam, but Lewis was able to perpetrate her fraud because Fidelity’s supervisory controls were lax.

According to the self-regulatory organization (SRO), from August 2006 to May 2013, Lewis told customers from a firm she was fired from for purported check-kiting and improperly borrowing customer funds that she was with Fidelity, when she had no such connection to the firm. Lewis set up Fidelity accounts by using the personal data of nine people and placed the accounts in their name, as well as established joint accounts with them in which she named herself co-owner. Lewis then had all communication regarding the accounts sent to her. Lewis was able to set up over 50 individual and joint accounts at the firm. She proceeded to convert assets from these accounts for her own benefit.

Last year, Lewis pleaded guilty to wire fraud related to the elder financial fraud scam, and she is now behind bars where she is serving a 15-year prison term. She also has to pay over $2 million in restitution to the customers she harmed.
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JPMorgan Chase Resolves “London Whale” Class Action Securities Lawsuit for $150M

Published on: December 22, 2015 | by Shepherd Smith Edwards & Kantas, LLP

JPMorgan Chase & Co. (JPM) will pay $150 million to resolve investor claims accusing the firm of concealing up to $6.2 billion in losses caused by the trader Bruno Iksil, who was given the nickname “London Whale.” Pension funds filed a class action securities case accusing the firm of using its investment office in London as a secret hedge fund. According to the plaintiffs, the bank told them that the office was managing risk when what it was actually doing was making trades for profit. Investors were harmed when huge losses resulting from transactions made through the London office caused the bank’s share price to drop.

The pension funds said that they suffered tens of millions of dollars of losses because fund managers were provided with information that was “false and misleading.” They also believe that the bank knowingly concealed the growing risks that were occurring at the London office.

Plaintiffs of this lawsuit include the Ohio Public Employees Retirement System, which says it lost $2.5 million, the Arkansas Teacher Retirement System, the state of Ohio, funds in Arkansas, Swedish pension fund AP7, and other JP Morgan shareholders that purchased stock between 2/24/10—this is when the company submitted to regulators its 2009 earnings report—and 5/21/12. The latter date is when the firm announced that it was stopping a $15 billion share buyback program until it could get a better handle of the losses sustained.

Former RBS Bond Trader Pleads Guilty to Fraud

Published on: December 21, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Adam Siegel, an ex-Royal Bank of Scotland Group Plc (RBS) bond trader, has plead guilty to fraud over his involvement in a multi-million dollar scheme in which he lied to customers so that they would pay higher prices for bonds. Siegel, 37, served as the co-head of RBS’s U.S. Asset-Backed Securities, Mortgage-Backed Securities and Commercial Mortgage-Backed Securities Trading groups. He supervised and traded fixed income investment securities, including collateralized loan obligations (CLOs) and residential mortgage-backed securities (RMBS).

According to prosecutors, Siegel and others lied about the asking price of sellers to buyers, as well as the price that buyers were willing to pay to sellers, while pocketing the difference. He made misrepresentations so that customers would pay higher prices while those selling bonds would end up getting deflated prices, both of which benefitted RBS.

Sometimes, he and co-conspirators would make misrepresentations to buyers by telling them that a fake third-party was selling the bonds. This allowed the firm to charge an unwarranted commission.

Morgan Stanley to Pay $8.8M in Parking Scam

Published on: December 19, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley Investment Management (MISM) will pay $8.8 million to resolve SEC charges accusing a firm portfolio manager of engaging in a parking scheme that gave preferential treatment to certain client accounts. Also, as part of the settlement, SG Americas, who is accused of helping in the fraud, will pay over $1 million to resolve the charges.

The portfolio manager, Sheila Huang, has consented to an industry bar. According to an SEC probe, while overseeing accounts that had to liquidate certain positions in 2011 and 2012, Huang arranged for the sale of mortgage-backed securities to Yimin Ge, an SG Americas subsidiary, at prices that were predetermined so she could buy back the positions at small markups in other accounts that Morgan Stanley advised.

Huang sold more bonds at prices that were above market so she would not suffer losses for certain accounts. She then bought the positions back at prices that were unfavorable in a fund she oversaw without disclosing this to the client whose fund had been disadvantaged.

Huang is accused of engaging in prearranged transactions for five bond trade sets. As a result of her parking scam, some Morgan Stanley clients benefited more than others. Purchasing clients were generally the ones that profited from the market saving, while buying and selling clients did not.

J.P. Morgan Chase Settles SEC and CFTC Charges Alleging Client Steering for $307M

Published on: December 18, 2015 | by Shepherd Smith Edwards & Kantas, LLP

J.P. Morgan Chase & Co. (JPM) will pay $307M to resolve Securities and Exchange Commission and Commodity Futures Trading Commission charges accusing two of its units of not telling wealthy clients about certain conflicts of interest. The JPM businesses are J.P. Morgan Securities LLC, its wealth management investment advisory business that offers investment products to clients that have a net worth of $250K – $5M, and JPMorgan Chase Bank N.A., its U.S. private bank that deals with clients that have a $5M net worth or greater.

According to the agreement, the investment advisory service did not tell wealth management customers that its Chase Strategic Portfolio, which is a program for wealth management customers, favored mutual funds managed by the firm. For several years, the program put about $10 billion of $32.6 billion in proprietary funds, and until the earlier part of 2012, at least 47% of the assets were in such funds.

The private bank also showed a similar preference toward the bank’s products. It was not until 2011 that it told clients that language in its disclosures noting that it preferred managers affiliated with JPM had been “mistakenly” removed. The language was not put back until last year.

LPL Financial to Pay $750K in Nontraded REIT Case Involving Elderly Investor in New Hampshire

Published on: December 15, 2015 | by Shepherd Smith Edwards & Kantas, LLP

New Hampshire’s Bureau of Securities Regulation says that LPL Financial has consented to pay $750,000 to resolve charges involving the sale of nontraded real estate investment trusts to an elderly investor. The state says that transactions were not only unlawful but also they were suitable for the 81-year-old customer.

The state says that the sale of the nontraded REITs were unsupervised, causing the investor to sustain substantial losses in 2008. Aside from the $750K, which includes $250K to the bureau, $250K in administrative fees, and $250K to the investor education fund, LPL will offer remediation to any client in New Hampshire that bought a nontraded REIT through the firm since 2007 if the sale did not meet the firm’s product-specific limitations or guidelines.

Nontraded REITS
Nontraded REITs can be high-risk investments. They are liquid and may come with substantial front-end fees of up to 15%. Distributions are not guaranteed and are determined by the alternative investments’ board of directors. REITs are not traded on exchanges and there is a limited secondary market for them, which can make them difficult for investors to sell.
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