Articles Posted in Securities Fraud

In the U.S. District Court for the Eastern District of Michigan, a judge refused to throw out an SEC enforcement action against two men accused o f securities fraud. James Mulholland Jr. and Thomas Mulholland allegedly sold fake demand notes connected to a failing real estate venture. Contending lack of subject matter jurisdiction, and also that, per the law, the notes were not securities, the defendants had sought to have the Michigan securities case dismissed, the court, however, disagreed, pointing out that each note is presumed to be a security unless rebutted by fitting under or sufficiently resembling one of a number of note categories that the US Supreme Court has determined to not be a security.

The two men ran Mulholland Financial Services Inc., which they financed by putting out demand notes that they sold through “word-of-mouth referrals,” as well as to relatives, friends, and clients. When the financial firm started to collapse and it had to be dissolved, James and Thomas allegedly kept using the company to raise investor money, including $2 million in 2009, and selling demand notes to over six dozen investors while promising a 7% return. They also are accused of telling prospective investors that MFSI would make the profits that would lead to the returns, with principal and the interest made to be given within 30 days of any written demand request.

Many of these investors were reportedly retirees who were unseasoned investors. When the Mulhollands filed for bankruptcy protection, these investors lost everything they had placed in the notes.

The court said that it is obvious that the defendants’ main motivation for issuing the notes was to make money, they appeared to have a plan for how they were to distribute the notes, the 7% return that was promised constituted a “reasonable expectation” by the public, the notes were uninsured and uncollateralized, and no regulatory scheme was identified by the defendants that would apply if securities laws weren’t applicable. The court said that all these factors meet the criteria of the Reves test, from the US Supreme Court’s Reves v. Ernst & Young, therefore supporting that the demand notes are securities.

COURT CONCLUDES DEMAND NOTES WERE SECURITIES UNDER FEDERAL ACTS, Bloomberg Law, March 13, 2013

Reves v. Ernst & Young (PDF)

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In Gabelli v. SEC, the US Supreme Court has decided that in some securities fraud cases, the SEC needs to move faster when it comes to filing its case. The ruling could affect agencies nationwide.

In a unanimous decision, the justices sided with two officials of Gabelli Funds LLC, who sought to stop the regulator’s claim contending that they acted improperly by allowing a client to take part in market timing. The Commission sought civil penalties from them for illegal activities that allegedly took place leading up to August 2002.

Per the Investment Advisers Act, it is against the law for investment advisers to defraud clients and the regulator is allowed to seek penalties for such actions. However, the Commission only has five years from when the window opens to file. The regulator had argued that Gabelli and Alpert had let Headstart Advisers Ltd. take part in “market timing” in the fund while failing to disclose this and banning others from engaging in the same practice even as statements were issued noting that this was not allowed.

Alpert and Gabelli had argued that the SEC filed its securities complaint about these allegations after the statute of limitations for filing for penalties had passed. They said that under the appeals court decision, which said that the securities fraud lawsuit could go ahead because the statute of limitations doesn’t start with litigation involving fraud until the Commission has grounds to know that there was a violation, the SEC could then make an ancient claim just on the allegation that prior to that it hadn’t and couldn’t have found out about the violation sooner.

The Second Circuit’s ruling, reverses a District Court’s decision to throw out the SEC’s lawsuit against the two men because it said the civil penalty claim was time barred. The Second Circuit, however, disagreed, and accepted the Commissions contention that the discovery rule could be applied, which means that the five-year window to file didn’t start until the regulator found out (or could have reasonably discovered) the fraud.

Now, the US Supreme Court is saying that it never applies the Discovery Rule in a case where the government is the plaintiff bringing an enforcement action that seeks civil penalties in contradistinction to a victim that has been defrauded and wants compensation.

Shepherd Smith Edwards and Kantas, LTD, LLP represents securities fraud victims throughout the US. Your first case evaluation with one of our stockbroker fraud attorneys is free.

Securities fraud robs investors of their money every year. We work with institutional and individual investors seeking to recoup those losses. Call us today. Working with an experienced securities firm increases one’s chances of recovery.

Related Web Resources:
Gabelli v. SEC

Investment Advisers Act of 1940 (PDF)

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Plaintiff Must Arbitrate Faulty Investment Advice Claim With TD Ameritrade But Can Proceed With Litigation Against Oakwood Capital Management, Stockbroker Fraud Blog, October 29, 2012

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In the wake of the recent financial crisis, retail investors, especially those seeking to save for retirement and who lost much when their stock portfolios and mutual funds dropped, are feeling compelled to get involved in complex products that until recently were targeted to their more sophisticated counterparts. Many want better returns than what they can get via government bonds and bank deposits. Unfortunately, regulators now have to contend with a barrage of related investor fraud claims.

According to The New York Times, tens of thousands of retail investors placed money into speculative bets that were marketed by aggressive financial advisers. Many of these alternative investments have started to go bad and are being named in a huge bulk of the more recent prosecutions and securities lawsuits.

It was just earlier this month that Massachusetts Secretary of the Commonwealth William Galvin ordered LPL Financial (LPLA) to pay $2.5 million in a REIT case for the allegedly improper sale of nontraded real estate investment trusts to hundreds of state residents. Approximately $28 million was invested in seven REITs involving 597 transactions. Galvin’s office accused the financial firm of not properly supervising its agents, who pushed the sales, and of engaging in business practices that were “dishonest and unethical.” The state contends that LPL made at least $1.8 million in commissions from the sales, which took place between 2006 and 2009. Meantime, in Arkansas, most of the 66 securities cases that are currently open reportedly involve unsophisticated investors that placed their funds in complex instruments.