Financial Firms

SEC Charges Linkbrokers Derivatives in $18M Securities Fraud

Published on: August 18, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission is charging Linkbrokers Derivatives LLC with involvement in an $18 million fraud scam . The New York-based firm, which is no longer a broker-dealer, is settling the charges by paying $14 million.

According to the regulator, brokers at Linkbrokers secretly manipulated the costs of securities trades that it processed. They promised low commission fees and then charged fees that were 1,000% more than what they misrepresented they would be.

Over 36,000 transactions were involved in the securities fraud, which took place between 2005 and 2009. The SEC has already charged a number of brokers at Linkbrokers’ cash equities desk over this matter.

UBS Wealth, OppenheimerFunds Take Financial Hit From Puerto Rico Muni Bonds

Published on: August 15, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Even though UBS Wealth Management Americas (UBS) has been generating record revenue, the financial firm saw its profits drop upon reporting that had it put aside $44 million for litigation costs primarily related to Puerto Rico bond fraud cases. UBS’s second quarter earnings of $238 million are 3% lower than last year.

Already, UBS clients have filed hundreds of arbitration cases and a number of securities class action lawsuits contending that the brokerage firm put investors’ money in highly leveraged and unsuitable Puerto Rico municipal bond funds that dropped in value last year. These funds begun to lose value again recently.

OppenheimerFunds Inc. (OPY), which is the biggest mutual fund to hold Puerto Rico debt, has also taken a financial hit. Bloomberg reports that in the past year, the firm has seen a loss of close to a third of its funds’ assets. For example, the Oppenheimer Rochester Maryland Municipal Fund (ORMDX) directed approximately 35% of its holdings to the islands as of the end of June. As of August 4, its assets had dropped to $64.9 million. At this time last year, the fund had $96.1 million in assets.

FINRA Panel Orders Morgan Stanley Unit to Pay Banamex Unit $4.5M Over Alleged Unauthorized Third Party Loans

Published on: August 15, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to a Financial Industry Regulatory Authority arbitration panel, Morgan Stanley & Co. (MS) must pay Banco Nacional de Mexico SA unit $4.5 million for allegedly letting funds from a family’s trust account be utilized for paying back third-party loans without authorization. The Mexican bank, also known as Banamex, was trustee to the account. It filed its securities arbitration case in 2012.

The trust was established in 2007 with proceeds from a property that members of a family had inherited and decided to sell. Banamex and the beneficiaries of the trust worked with a Morgan Stanley (MS) broker, who ran their accounts. The trust accounts were at a Morgan Stanley banking unit. They were set up in such a way that the assets were not supposed to be used as guarantees to pay third-party loans that another family member’s account had taken.

Morgan Stanley is accused of compelling the trust accounts to guarantee payment of a third-party loan without getting Banamex’s consent. According to the plaintiffs, the brokerage firm improperly guaranteed or recorded the trust assets for the relative, who did not belong to the trust.

LPL Financial to Pay Illinois $2 Million Fine Related to Variable Annuity Exchanges

Published on: August 13, 2014 | by Shepherd Smith Edwards & Kantas, LLP

In a settlement reached with the Illinois Securities Department, LPL Financial (LPLA) agreed to pay a $2 million fine and $820K in restitution for inadequate books and records maintenance involving 1035 exchanges. According to the firm’s BrokerCheck file, LPL Financial did not enforce “supervisory system and procedures” when certain persons documented variable annuity exchange activities.

Following the settlement, a company spokesperson said that LPL Financial is enhancing its procedures related to surrender charges resulting from variable annuity exchange transactions. This is to make sure these are accurately documented in records, books, and any disclosures that are issued to clients. The brokerage firm is also taking steps so that advisers are properly documenting why variable annuity recommendations were made.

State regulators have been taking a closer look at LPL as they investigate investment product sales. Last year, the broker-dealer settled with the Massachusetts for at least $2 million and a $500,000 fine over nontraded real estate investment trusts. Financial Industry Regulatory Authority fined the firm $7.5 million for 35 e-mail system failures.

Christ Church Cathedral Sues JPMorgan Chase Over Proprietary Product Sales

Published on: August 13, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Christ Church Cathedral in Indiana is suing JPMorgan Chase & Co. (JPM) According to church leaders, the bank made inappropriate recommendations, causing $13 million in losses. They’re accusing JPMorgan of advising that the church invest in proprietary funds that were underperforming.

The church filed its securities fraud lawsuit in the U.S. District Court in Indianapolis. According to the complaint, the firm inappropriately guided the church into 177 investment products that gave the firm high revenues. InvestmentNews reports that the church said the proprietary products made up at least 68% of its investment portfolio.

The plaintiff contends that the private equity and hedge funds, cash sweep accounts, managed accounts, and mutual funds it invested in between 2004 and 2013 were bound to perform poorly, especially with all the associated fees and expenses. The church said that last year, its assets declined from $31.6 million to $19.2 million, while JPMorgan made millions from cross-selling investment products.

Regulators Tell Deutsche Bank to Enhance Its Risk Controls and Reporting Systems

Published on: August 9, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Federal Reserve Bank of New York and the state’s Department of Financial Services want Deutsche Bank AG (DB) to improve its technology and compliance procedures and get rid of risk-management deficiencies. The U.S. regulators made the demand to the financial institution via a private memorandum.

The Wall Street Journal says the confidential pact went into effect two years ago. While it doesn’t appear that regulators plan to take other action against Deutsche Bank over this matter, the New York Fed did give the financial institutional a deadline of the middle of 2015 to remedy a number of priority issues. Sources tell The WSJ that there is worry that reporting or trading mistakes by the bank could result in bigger, unplanned losses for the financial institution and even impact the market.

The Wall Street Journal recently reported that the New York Fed discovered that Deutsche Bank’s U.S. operations has known that it had serious financial reporting problems for years but did nothing to remedy the matter. Last year, New York Fed senior vice president Daniel Muccia sent a letter to the bank’s executives saying that the firm’s reports were not accurate and of poor quality. The extent of their errors was such that “wide-ranking remedial action” is needed. Muccia called the deficiencies a “systemic breakdown.” He said that the regulator has been worried about Deutsche Bank’s US outfit for years.

Judge Rakoff Approves Citigroup’s $285M Mortgage Securities Fraud Deal with the SEC

Published on: August 5, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Two months after the Second U.S. Circuit of Appeals ruled that he had made a mistake in blocking the $285 million mortgage securities fraud settlement between Citigroup (C) and the SEC, U.S. District Judge Jed Rakoff has approved the deal. Rakoff had originally refused to allow the agreement to go through in 2011, chastising the regulator for letting the firm settle without having to admit wrongdoing.

Following his decision, other judges followed his lead and began questioning certain SEC settlements. The regulator went on to modify a longstanding, albeit unofficial, policy of letting companies settle without having to deny or admit wrongdoing.

Even though Rakoff is approving the deal now, he was clear to articulate his reluctance. In his latest opinion he wrote that he worries that because of the Second Circuit’s ruling, settlements with governmental regulatory bodies, and enforced by the contempt powers of the judiciary, will not have to contend with any meaningful oversight. However, Rakoff said that if he were to ignore the Court of Appeals’ dictates this would be a “dereliction of duty.” Nonetheless, he noted that approving this settlement has left his court with “sour grapes.”

SEC Charges Ex-UBS Broker in $730K Elder Financial Fraud Ponzi Scam

Published on: August 4, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed charges against ex-UBS Wealth Management Americas (UBS) broker Donna Tucker for a Ponzi fraud that allegedly bilked elderly investors of over $730,000. Tucker is accused of misappropriating the money from UBS customers over a five-year period while she worked at the financial firm.

According to the SEC, Tucker took part in unauthorized trading, made misrepresentations to customers about the status of their funds, and forged documents and checks. She allegedly gained customers’ trust by becoming friends with them.

For example, she helped one blind couple take care of their medical needs and pay their monthly bills. The latter action gave her access their checkbook. She used this authorization to forge checks written to cash that she then gave to herself.

Bank of America’s Countrywide Must Pay $1.3B for Faulty Mortgage Loans

Published on: July 31, 2014 | by Shepherd Smith Edwards & Kantas, LLP

U.S. District Judge Jed Rakoff in Manhattan is ordering Countrywide, a Bank of America (BAC) unit, to pay $1.3 billion in penalties for faulty mortgage loans that it sold to Freddie Mac (FMCC) and Fannie Mae (FNMA) leading up to the 2008 financial meltdown. This was the first mortgage fraud lawsuit that the federal government brought to go to trial.

The penalty is much less than the $2.1 billion maximum that the government had asked for. The government’s mortgage lawsuit against Countrywide originated from a whistleblower case brought against Bank of America by Edward O’Donnell, an ex-Countrywide executive.

Rakoff determined that Freddie and Fannie paid close to $3 billion for High Speed Swim Lane loans. This, after a jury determined last year Countrywide and Rebecca Mairone, one of its ex-executives, were liable for selling thousands of defective loans to the government-sponsored enterprises. Mairone’s penalty is $1 million.

Deutsche Bank, UBS Are Probed Over Dark Pools & High-Frequency Trading, While An Investor Sue Barclays

Published on: July 30, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Deutsche Bank AG (DB) and UBS AG (UBS) have disclosed that they are cooperating with regulators investigating dark pool trading venues and high frequency trading venues. Currently a number of banks are under investigation.

UBS says that among those probing its dark pool operation, which is consider the largest in the U.S. according to trade volume, are the Financial Industry Regulatory Authority, the U.S. Securities and Exchange Commission, and New York Attorney General Eric Schneiderman. The bank says it is one of many defendants named in related class action lawsuits over dark pool trading.

Meantime, Deutsche Bank also says that it too has gotten requests from certain regulators for data about high frequency trading. The bank’s dark pool is known as the SuperX European Broker Crossing System. Deutsche Bank is a defendant in a class action case claiming that high frequency trading may have violated U.S. securities laws.