Financial Firms

Securities Cases: Class Action Lawsuit Charges Fidelity with Duty Breach, Billionaire Ira Rennert in Court Over Alleged $70M Pension Fund Fraud, and Dole Sued Over Merger Fraud

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

Fidelity Investments Unit Faces ERISA Fiduciary Breach Claims
Fidelity Management Trust Co. has been named a defendant in a class action securities case under ERISA law. The plaintiffs claim that the Fidelity Investments unit is in fiduciary breach under ERISA because it included a stable value fund as an investment alternative for 401(k) plan accounts. They believe that low investment returns and high fees made the fund an unwise investment for participants in a 401(k) plan.

William Perry and James Ellis are the lead plaintiffs. At different times through the Barnes & Noble Inc. 401(k) plan, they were invested in the Fidelity Group Employee Benefit Plan Managed Income Portfolio Commingled Pool (MIP) fund. Plaintiffs believe that the high fees and poor results were because of the deliberate omissions and actions of Fidelity Management Trust as MIP’s fiduciary and trustee.

According to the complaint, before 2009 Fidelity executed an investment strategy that proved unsuccessful when it placed mortgage-backed securities, asset-backed securities, and collateralized loan obligations, and others securitize debt in the portfolio. MIP lost value when the financial crisis struck. After that, Fidelity changed up its asset allocation to lower risk to the fund’s wrap providers, including AIG Financial Products, Monumental Life Insurance Company, JP Morgan Chase Bank, State Street Bank and Trust, and Rabobank Netherland. Plaintiffs believe it is this conservative strategy that led to lower returns. They said that excessive fees, which were paid to wrap providers, hurt them.

Plaintiffs represented by the class include everyone involved in ERISA-governed plans that use the fund.

Billionaire In Court Again for Pension Fund Fraud
Ira Rennert, the billionaire industrialist, is once again accused of pension fraud. This time, the allegations involve $70 million and the fund of another family-controlled company. According to the allegations, Rennert was able to avoid responsibility for pension expenses of his RG Steel company when he lied to the Pension Benefit Guaranty Corporation. The independent US government entity, which is the plaintiff in this pension fraud case, said it would have terminated RG Steel’s pension plan if it had known that the company was about to be sold. If that had occurred, Rennert’s Renco Group would have had to take care of pension costs.

The government entity claims that Renco president, Ari Rennert, omitted key information and lied when he told PBCG that he would keep them updated of changes. A week later, about 25% of Renco was bought by Cerberus Capital and the former no longer had a pension liability. Renco denies the allegations.

Securities Fraud News: Texas REIT’s Share Price Drops Following Ponzi Allegations, Morgan Stanley, Ex-Broker Are Found Jointly Liable in $1M Elder Fraud Case, and Brokerage Firm Resolves Variable Annuities Claims for $475K

Published on: December 12, 2015 | by Shepherd Smith Edwards & Kantas, LLP

United Development Funding IV Shares Fall After Allegations of Texas Ponzi Scheme
United Development Funding IV (“UDF IV”), a Texas-based real estate investment trust (“REIT”), saw its share price drop after Harvest Exchange published a post that said the REIT had been run like a Ponzi scheme for years. United Development was a nontraded REIT that became traded when it listed on Nasdaq last year under the symbol “UDF”.

In the report on the Harvest site, the anonymous author said that the UDF umbrella had traits indicative of a Ponzi scam, such as, it uses new capital to pay distributions to current investors and UDF companies and gives substantial liquidity to earlier UDF companies to pay earlier investors. The article said that once the funding of retail capital to the most current UDF stops, the earlier UDF companies do not seem able to stand on their own. This purportedly indicates that the structure will likely fail and investors will be the ones sustaining losses.

After the report by the online professional network of investors, UDF IV saw its share price plunge from $17.53 to $10.10. It later dropped further to $8.55/share.

Over $1M Awarded in Senior Financial Fraud Case Against Morgan Stanley and a Former Financial Adviser
A Financial Industry Regulatory Authority Inc. arbitration panel has awarded 92-year-old Genevieve Lenehan (“Mrs. Lenehan”) over $1M in her claim against Morgan Stanley (MS) and former Morgan Stanley advisor Justin Amaral (“Amaral”). Mrs. Lenehan accused Amaral of churning and reverse churning her account. Amaral also advised Mrs. Lenehan’s husband until his death five years ago.
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Hedge Fund News: Millennium Global Wants Citigroup to Pay $53M Over Shut Out Trades, Stone Lion Capital Suspends Redemptions Following Withdrawal Requests

Published on: December 12, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Millennium Global Emerging Credit Fund Ltd. is suing Citigroup (C). The hedge fund’s liquidators claim that the bank undervalued assets when it closed out certain trades during the financial crisis in 2008. They believe that Citigroup did this at rates that failed to reflect the true market value. Millennium sustained nearly $1 billion in losses. Now its liquidators want $53 million in damages.

The positions at issue were linked to the debt of Uganda, Sri Lanka, a brewer from the Dominican Republic. and a sugar company in Zambia. Citibank says the positions were illiquid and difficult to value even when the market was good. While the bank has admitted that it improperly valued certain trades, it maintains that the adjustments are not as great as what the hedge fund is claiming.

Millennium Global Emerging Credit Fund maintains that Citigroup did not use procedures that were “commercially reasonable” when it shut down the positions. The bank offered to pay Millennium about $6.8 million after more than fifty open transactions were closed out, but the fund believes that amount is way too low.

Morgan Stanley to Settle Mortgage Backed-Securities Claims Involving Credit Unions for $225M

Published on: December 11, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley (MS) will pay $225 million to resolve claims brought by the National Credit Union Administration (NCUA) for Western Corporate Federal Credit Union, U.S. Central Federal Credit Union, Southwest Corporate Federal Credit Union and Members United Corporate Federal Credit Union. The credit unions contend that the firm left out material facts and made false statements when selling mortgage backed securities (MBS). The credit unions argued that their purchase of the faulty MBS led to their demise.

Structured products, such as MBS, that are tied to residential mortgage-backed securities (RMBS) played a major part in credit unions failing after the 2008 financial crisis. U.S. Central, which was the largest credit union to fail in 2009, sustained billions of dollars of losses after purchasing faulty MBSs.

As of 9/25/15, the unpaid balance of the securities was approximately $194 million, with losses incurred by the certificates at $31 million. As part of the MBS settlement, pending lawsuits against the firm will be dropped in New York and Kansas. Proceeds from the settlement will go toward claims made against the corporate credit unions.

Ex-J.P. Morgan Bankers to Settle SEC’s $8.2M Bribery Case Related to Jefferson County, Alabama Bonds

Published on: December 2, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Douglas MacFaddin and Charles LeCroy will pay $326,373 to settle SEC civil charges accusing them of paying friends of Jefferson County, Alabama officials $8.2M in return for $5B in county bond business. Together, the ex-J.P. Morgan Securities (JPM) executives will pay $326,373 once a district court judge approves the proposed settlements—that’s 4% of the $8.2M that was allegedly paid so that their firm could get the business.

Jefferson Count experienced financial woes when it borrowed funds so it could comply with a 1996 court order to stop sewer leaks from getting into area streams. Additional construction costs and bond swaps cost the project to exceed over $3B.

The Commission’s lawsuit had alleged violations of its law and rules. The regulator’s charges against the two men were resolved in mediation.

Citigroup Could Pay $872M in Securities Lawsuit by Allied Irish Banks

Published on: November 30, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Twelve years after Allied Irish Banks Plc (AIB) filed a securities lawsuit against Citigroup (C) accusing the bank of helping a rogue trader conceal about $691 million in losses, the case is slated to go to trial next month. AIB reportedly wants $872M from the New York-based bank— $372M in damages and about $500M in pre-judgment interest.

It was in 2003 that AIB sued Citigroup subsidiary Citibank and Bank of America Corp. (BAC). AIB contends that the defendants were linked to a scam that led to significant losses for its former unit, Allfirst Financial. Bank of America has already settled the allegations against it.

In 2002, trader John Rusnak’s losses were discovered and he pleaded guilty to banking fraud. Rusnak admitted to concealing $691M in trading losses while employed at Allfirst. The losses were sustained over five years and came from primarily trading the Japanese yen and for taking even bigger risks as he sought to get back some of these losses.

While Rusnak did not make a direct profit from the losses, he made over $650K in bonuses when he made it appear as if Allfirst was making money. He was released from prison in 2009.

SEC Cases: Ex-Stockbroker Accused of Bilking Investor for Home Renovations, Marwood Group Admits to Wrongdoing Over Compliance Failures, and Ex-Goldman Sachs Employee Faces Insider Trading Charges

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

Former Stockbroker Raises Over $1.2M from Customers to Remodel His Home
The Securities and Exchange Commission is charging ex-stockbroker Bernard M. Parker with Securities Act of 1933 and Securities Exchange Act of 1934 violations, as well as violations of Rule 10b-5. The regulator says that Parker raised over $1.2M from long-term brokerage customers and others by getting them to think they were buying real estate tax client certificates and would make up to 9% yearly interest.

Instead, says the SEC, Parker only used a small part of that money to buy the liens. He used their other funds to remodel his house, pay his father-in-law’s bills, and make car payments. The agency also claims that the ex-broker conducted the unregistered and fraudulent investment offering using his Parker Financial Services from ’08 to ’14. He also purportedly failed to notify the investment advisory firm and broker-dealer where he was dually registered about his side business.

The Attorney’s Office for the Western District of Pennsylvania has filed criminal charges against Parker in a parallel case over the alleged broker fraud.

Political Intelligence Firm Admits to Compliance Failures
Marwood Group Research LLC has admitted to compliance failures and will settle the SEC’s case against it by paying a $375,000 penalty. According to the Commission, the firm did not properly notify compliance officers about the times that analysts received potential material nonpublic data from government employees.

The firm’s own written policies and procedures are supposed to play a key part in Marwood Group’s efforts to stop nonpublic and confidential data from reaching its clients so as not to influence their decisions regarding securities trading. Yet its misconduct happened in 2013 when analysts were looking for information about pending regulatory approvals and policies at the Food and Drug Administration and the Centers for Medicare & Medicaid Services.
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RBS May Be Subject to More Criminal Charges Over Alleged Loan Securities Price Inflations

Published on: November 24, 2015 | by Shepherd Smith Edwards & Kantas, LLP

According to the New York Post, sources say that the US Attorney’s office in Connecticut is going after Royal Bank of Scotland (RBS) and at least two traders over complex debt securities that investors bought up through 2013. Ex-RBS banker Matthew Katke, who pled guilty earlier this year to inflating collateralized loan obligation prices, reportedly provided cooperating testimony in the case.

Federal prosecutors are also reportedly pursuing criminal charges against RBS. That investigation is over the alleged sale of flawed mortgage securities related to the 2008 financial crisis.

The Wall Street Journal says that sources have told them that prosecutors are looking at a $2.2B deal that repackaged home mortgages into bonds eight years ago. It was just two years ago that RBS settled a Securities and Exchange Commission case that described the lead banker as attempting to push the deal through even though the diligence department had raised red flags.

The RBS probe mirrors the $150M civil settlement the bank reached in 2013. That case resolved SEC claims accusing it of misleading investors on a $2.2B subprime mortgage offering.

Securities News: Barclays to Pay $120M to Settle Libor Rigging Litigation, Investment Advisor Firm Settles Charges Over Custody Rule Violations, and SEC Accuses Man of $190M Scam Involving Private Placements, Nursing Homes

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

Barclays Resolves Securities Fraud Claims Related to Libor Rigging
Barclays PLC (BARC) has consented to pay $120 million to resolve securities fraud claims accusing the bank of conspiring with competitors to manipulate the London Interbank Offered Rate, also known as Libor. Barclays is the first to settle allegations made by “over-the-counter” investors.

It was just last month that the British bank consented to pay $94M to resolve litigation accusing it of trying to rig Euribor, which is the euro-denominated equivalent of Libor. Barclays has admitted to rigging both benchmarks. The bank paid settlements to regulators in the United States and in Great Britain.

Libor is used to establish rates on hundreds of trillions of dollars of transactions, such as those involving student loans, credit cards, and mortgages. Banks use Libor to assess how much it will cost to borrow from each other. To date, over a dozen banks have been sued for conspiring to rig Libor.

U.S. District Judge Naomi Reice Buchwald in New York, who approved the class action settlement, said in August that the plaintiffs could win fraud claims if they proved that panel banks lied to the administrator of Libor about borrowing costs and the plaintiffs had depended on these fallacies. Buchwald, in 2013, threw out a “substantial” chunk of this private case, which included federal antitrust claims.

Investment Advisory Firm, Co-Founders to Pay $1M to Settle Custody Rule Violation Charges
Sands Brothers Asset Management LLC and co-founders Steven Sands and Martin Sands will pay a $1 million penalty to resolve Securities and Exchange Commission charges accusing them of violating the custody rule. They also have consented to a year suspension from raising funds from existing or new investors. The firm will under go compliance monitoring for three years. Ex-COO and CCO Christopher Kelly will pay a $60K penalty and serve a one-year suspension from acting as a COO or practicing in front of the SEC as a lawyer.

Under the custody rule, firms have to get independent confirmation of assets when they can control or access client funds or securities. This is so that investors know their money is protected from misuse or theft. The firm, the two Sands brothers, and Kelly settled the charges without or denying or admitting to them.
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FINRA Cases: Deutsche Bank Fined $1.4M for Reg SHO and Short Interest Reporting Violations, Scottrade to Pay $2.6M for Email and Electronic Record Failures, and Cantone Capital Faces Fraud Charges

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

FINRA Fines Deutsche Bank Securities $1.4M

The Financial Industry Regulatory Authority is fining Deutsche Bank Securities Inc. (DB) $1.4M for Regulation SHO violations, as well as for supervisory failures. According to the self-regulatory organization, for more than 10 years, the firm improperly included securities positions of a broker-dealer affiliate who isn’t from the US in a number of aggregation units. Deutsche Bank purportedly did this when trying to figure out the net position of each unit.

Under Reg SHO, firms can use an aggregation unit to track positions in security from certain trading operations or trading desks separate from other positions. However, to determine the aggregation unit’s net positions, firms are not allowed to use the securities positions of a non-US brokerage firm affiliate.

Also, FINRA mandates that firms—barring specific exemptions—regularly report total short positions in customer and proprietary firm accounts in equity securities. The positions have to be reported not on a net basis. Instead, they should be based on a gross basis. The SRO said that for more than eight years, Deutsche Bank reported net positions in its financial aggregation accounts, submitting those as its short interest position.

The SRO said that Deutsche Bank’s supervisory system as it relates to short interest reporting and its aggregation unit structure was not designed in a reasonable enough manner to identify and stop these rule violations. By settling, Deutsche Bank is not denying or admitting to the violation charges.

Scottrade Ordered to Pay $2.6M Fine for Electronic Records, Email Retention Failures

Scottrade, Inc. must pay a $2.6M fine to settle FINRA allegations accusing the firm of not keeping a lot of securities-related electronic records in the format mandated, which is known as WORM. Scottrade is also accused of not keeping specific categories in outgoing email and failing to have a supervisory system in place that could fulfill compliance related to certain FINRA and Securities and Exchange Commission rules regarding books and records.