Financial Firms

US Will Likely Arrest Two Ex-JPMorgan Chase Employees Over Trading Losses Related to the London Whale Debacle

Published on: August 10, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The United States Government is expected to announce criminal charges against two ex-JPMorgan Chase & Co. (JPM) employees over allegations that they tried to cover up trading losses last year related to the London Whale fiasco. The ex-employees are Javier Martin-Artajo, the executive who was in charge of supervising the trading strategy, and Julien Grout, a trader that worked under him. Prosecutors also may impose penalties on the investment bank over this matter.

The securities fraud allegations stem from a probe into whether JPMorgan employees at its London offices tried to inflate certain trades’ values on the banks’ books, and charges could be filed over the falsification of documents and the mismarking of books. The criminal probe also has looked at whether the firm’s London traders engaged in the type of market manipulation that let them inflate their own positions’ value.

JPMorgan first revealed the losses at the London office May 2012. The trades were made by Bruno Iksil, dubbed the London Whale because of the vastness of his holdings. The bank would go on to lose over $6.2 billion when the trades failed. Other traders also were purportedly involved. They used derivatives to bet on the health of huge corporations.

Citigroup Must Pay $11M Claimant for Royal Bank of Scotland Investment Losses, Says FINRA Arbitration Panel

Published on: August 7, 2013 | by Shepherd Smith Edwards & Kantas, LLP

A FINRA arbitration panel has decided that Citigroup (C) and Edward J. Mulcahy, one of the firm’s ex-branch managers, has to pay $11 million to investor John Fiorilla. Fiorilla is a legal adviser to the Holy See who went to Citigroup because he wanted to de-risk a $16 million stock position in Royal Bank of Scotland (RBS).

According to the claimant, he asked Citigroup to employ derivatives to assist in hedging his position against losses but the firm did not fulfill the request. When the market failed in 2008 his account suffered over $15 million in losses.

Fiorilla is claiming breach of contract, failure to control and supervise, breach of fiduciary duty, gross negligence, negligence, and other violations. His claim against Mulcahy is over an alleged failure to supervise.

Oppenheimer & Co. to Pay $1.4M to FINRA For Allegedly Unregistered Penny Stock Sale & Anti-Money Laundering Violations

Published on: August 5, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority says that Oppenheimer & Co. (OPY) will pay a $1,425,000 fine for the purported sale of penny stock shares that were unregistered and for not having an anti-money laundering (AML) compliance program that was adequate enough to identify and report suspect transactions. The financial firm also must get an independent consultant to perform a comprehensive review of its AML procedures, systems, and policies and its penny stock.

According to the SRO, from 8/18/08 to 9/20/10, Oppenheimer sold over a billion shares of twenty penny stock that were low-priced and very speculative but were not registered or lacked an exemption that was applicable. Soon after opening accounts, customers deposited huge blocks of penny stock and then liquidated them, moving proceeds out of the accounts.

FINRA contends that each sale came with “red flags” that should have spurred the firm to additional review to find out whether or not these were registered sales but that adequate supervisory assessment did not happen.The regulator also believes that Oppenheimer’s procedures and systems over penny stock transactions were not adequate and that because its AML program wasn’t focused on securities transactions it was unable to detect patterns of suspect activity linked to penny stock trades.

Morgan Stanley to Pay New Jersey Regulators $100K for Selling Exotic ETFs to Investors, Including Seniors

Published on: July 30, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley will pay $100,000 to the New Jersey Bureau of Securities for allegedly selling exotic exchange-traded funds to investors. The state’s regulators say that the firm’s financial advisers were not properly trained and sold inverse and leveraged ETFs to senior investors that wanted to earn additional income. These clients instead would go on to sustain losses. A state official contends that the financial firm did not properly supervise staff that was dealing with ETF transactions.

Commenting on the securities settlement, Morgan Stanley said it was “pleased’ to have arrived at a resolution and that since the period in question-1/07 to 6/09, the brokerage firm has overhauled its process involving these products. The amount includes $65K in civil penalties, $25K to pay the state back for its investigative expenses, and $10,000 toward investor education. Already, the broker-dealer has paid $96,940 in restitution to investor in New Jersey.

Last year, Morgan Stanley consented to pay close to $2.4 million to settle Financial Industry Regulatory allegations over the firm’s handling of ETFs. According to the SRO, from 1/08 to 1/0, the firm did not set up or maintain a supervisory system and written procedures to ensure compliance with FINRA and NASD rules related to the sale of inverse, leveraged, and inverse leveraged ETFs.

Both Sides Rest in Ex-Goldman Sachs Bond Trader Fabrice Tourre’s Trial For Alleged Mortgage-Backed Securities Fraud

Published on: July 29, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In federal court, both the Securities and Exchange Commission and former Goldman Sachs Group (GS) vice president Fabrice Tourre have both rested their case in the civil trial against the bond trader. Tourre is accused of MBS fraud for his alleged involvement in a failed $1 billion investment connected to the collapse of the housing market. After the SEC finished presenting its evidence, U.S. District Judge Katherine Forrest turned down Tourre’s bid to have the securities case against him thrown out. He denies wrongdoing and says that his career is in now in shambles.

According to the regulator, Tourre purposely misled participants in the Abacus 2007-AC about the involvement of John Paulson’s hedge fund Paulson and Co. The Commission contends that Tourre concealed that Paulson helped select the portfolio of the subprime MBS underlying Abacus—a $2 billion offering linked to synthetic collateralized debt obligations. The latter then shorted the deal by betting it would fail.

The SEC’s complaint points to Tourre as primarily responsible for the CDO, which it says says he devised and prepped marketing collateral for and was in direct contact with investors. The regulator believes that by failing to disclose Paulson’s role, Tourre broke the law. They also contend that instead the bond trader instead told customers that as an Abacus investor, Paulson’s hedge fund expected the securities to go up.

Nontraded REIT News: Securities America Stops Selling American Realty Capital Trust V and Advisor Group Ends Selling Deal with Cole Holding

Published on: July 18, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Securities America Stops Selling Nontraded REIT ARC V

Securities America Inc. has severed ties with American Realty Capital Trust V Inc., a top-selling nontraded REIT. The independent broker-dealer blamed this on an overconcentration risk and its own exposure to real estate programs that AR Capital, a brokerage firm, distributes.

The nontraded real estate investment trust, known as ARC V, was the number one seller last month with about $10.8 million in daily sales. Already, between April, when the REIT launched, through the end of June, brokers have sold $406 million of them.

Highland Capital Sues Credit Suisse For $350M Over Resort Loans

Published on: July 17, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Entities of Highland Capital Management LLP are suing Credit Suisse Group AG (CS) for over $350M. The plaintiffs are Haygood LLC and Allenby LLC. They claim that the financial firm marketed loans for high-end residential communities using appraisals that were deceptive and not reasonable. The disagreement is related to dividend capitalization loans for the Turtle Bay Resort, the Yellowstone Club, Ginn Clubs & Resorts and Rhodes Homes and the Park Highlands Master Planned Community. The securities case was filed in New York State Supreme Court.

According to the financial fraud lawsuit, managed investment funds that served as the loans’ lenders assigned the plaintiffs the claims. The latter are accusing Credit Suisse of working with “compliant stooges” in global appraisal firms to overvalue the communities that secured the loans so that lenders would invest in under-collateralized loans that would go on to fail.

A spokesperson for Credit Suisse says that Texas-based debt manager Highland Capital Management and entities related to it are behind this securities case and that this is one sophisticated investor’s “unfounded” effort to wrongly use the legal system to get back losses. The investment bank says it will fight the case.

Financial Firms Update: Morgan Stanley Now Owns Smith Barney, Wells Fargo & JPMorgan Defeat Estimates, MLB All-Star Sues UBS for $7.6M, & Ray Lucia, His Firm Fined Over “Buckets of Money” Strategy

Published on: July 12, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley Buys Smith Barney from Citigroup

Morgan Stanley (MS) now owns Smith Barney, which it just bought from Citigroup (C) for $9.4 billion. Smith Barney’s new name is Morgan Stanley Wealth Management. Based on its new number of financial advisers, the deal makes Morgan Stanley the largest Wall Street firm and comes in the wake of Federal Reserve approval.

Wells Fargo & JPMorgan Defeat Analysts’ Estimates

The 21st Century Glass-Steagall Act Seeks to Separate Investment and Commercial Banking Again

Published on: July 12, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Senators Elizabeth Warren (D-Mass) and John McCain (R-Ariz.) have joined forces to unveil the 21st Century Glass-Steagall Act, which aims to create a definite divide between speculative activities and traditional banking. This is a modern day revision of the original Glass-Steagall legislation from the 1930’s, which placed definite limits on the types of business that regulated banks were allowed to conduct. That act was repealed 14 years ago. Then, the mergers that would form the biggest banks existing today happened. Senators Angus King (I-Maine), and Maria Cantwell (D-Wash.) also are co-sponsoring this bill.

Warren, who is spearheading the legislation, noted that the nation’s largest banks continue to take part in risky practices that could again jeopardize our economy. She said she is prepared for a tough fight, seeing as it may be hard to drum up enough support in Congress or get the Treasury Department or Federal Reserve to jump on board. If the 21st century version of Glass-Steagall becomes law, a lot of these banks might have to give up their trading operations.

Fond feelings for the 1993 Glass-Steagall Act could help build interest on this new version. The original act, unlike the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was just 37 pages long and easy to implement. It also made sure that banks that use federal deposit insurance did not get involved in volatile activities on Wall Street, including certain kinds of trading. No crisis like the one that happened in 2008 occurred while the original Glass Steagall Act was in place—although some critics don’t believe that it would have stopped that economic meltdown from happening.

Securities Headlines: Court Says SLUSA Precludes JPMorgan Mutual Fund Practices, Provident Royalties Ex-Executives to Pay $2.3M, & Two Securities America Advisers Are Rehired

Published on: July 10, 2013 | by Shepherd Smith Edwards & Kantas, LLP

SLUSA Precludes JPMorgan Securities Allegations Involving Mutual Fund Sales

As preempted by the Securities Litigation Uniform Standards Act, the U.S. District Court for the Northern District of Illinois dismissed what would have been a would-be state law class action against JPMorgan Securities LLC (JPM) and related entities over mutual-fund sales practices that allegedly maximized defendants’ revenues at cost to fund investors. Per the securities lawsuit, financial advisers were pressured and given incentives to sell the defendants’ proprietary mutual funds rather than ones run by third parties, placing their own financial interests before those of clients. The would-be class includes advisory clients from 2008 through that paid management fees and had assets in the defendants’ proprietary funds.

The defendants sought to have the case dismissed, contending that the claims alleging fraud related to the buying and selling of securities are precluded by SLUSA. The district court concurred, with Judge John Darrah noting that although the complaint presented state law claims involving breaches of fiduciary duty and contract, the allegations’ substance describes a fraudulent scam to sell securities.