Articles Posted in Securities Fraud

Stockbroker Securities Roundup: Criminal Convictions Vacated Against Six Charged in Front Running Scam and Citigroup Broker Cleared in $1B CDO Deal SEC Case

Published on: August 11, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Second has vacated the convictions of six brokers who were criminally charged in a front-running scam to give day traders privileged information via brokerage firms’ squawk boxes. The case is United States v. Mahaffy.

Judge Barrington Parker said that confidence in the jury’s verdict was undermined because the government did not disclose a number of SEC deposition transcripts “pursuant to Brady v. Maryland, 373 U.S. 83 (1963).” Also, noting that there were flaws in the instructions that the jury was given, the second circuit vacated the honest-services fraud convictions that they had issued against the defendant.

The brokers, who were employed by different brokerage firms, had been charged for conspiring to provide A.B. Watley day traders confidential data about securities transactions. This entailed putting phone receivers close to the broker-dealers internal speaker systems so that the traders could make trades in the securities that were squawked before the customer orders were executed.

Securities Roundup: Court Says Investors’ American Funds Securities Litigation Claims Were Timely, Nasdaq Proposes $62M Fund to Repay Facebook IPO Participants, Indictment Made in Alleged Muni Bond Rigging Plot, & Investment Advisers Could Pay User Fees

Published on: July 31, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to the US Court of Appeals for the 9th Circuit, a lower court was in error when it dismissed on the grounds of timeliness investors’ putative securities fraud class action lawsuit accusing the American Funds mutual fund family of charging marketing and management fees that were too high and giving brokers improper kickbacks. Now, the plaintiffs have the opportunity to amend their case to remedy scienter pleading-related deficiencies.

The district court had found the investors’ securities claims untimely because it said that the defendants provided evidence establishing that the media and regulatory agencies had already looked at the alleged financial scam in question at least three years before the plaintiffs filed their securities complaint. The appeals court, however, said none of the sources (from 2003 and 2004) that had implied that the defendants acted with the intent to deceive could have caused a plaintiff that was “reasonably diligent” to discover this intention (if it even existed). Because of this, the 9th circuit said that the two-year statute of limitations didn’t start running more than two years before the complaint was filed, which means that the lower court made a mistake when it said the case was time-barred.

In an unrelated securities fraud case, this one involving criminal charges, federal officials indicted ex-financial services executive Phillip Murphy over an alleged conspiracy to manipulate the bidding process for multiple finance contracts, including those involving municipal bonds. He is charged with one count of wire fraud, two counts of conspiracy, and one can of conspiring to falsify bank records.

The SEC Penalties Act of 2012 Would Create Tough Financial Punishments for Securities Fraud

Published on: July 29, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Stronger Enforcement of Civil Penalties Act of 2012, is bipartisan legislation that seeks to enhance the Commission’s power to clamp down on violations of securities law while raising the statutory ceilings on civil monetary penalties by tying a penalty’s size to the degree of harm wrought and amount of investor losses sustained. This bill is S. 3416 and is also known as the SEC Penalties Act. It was introduced by Senators Chuck Grassley (R-Iowa) and Jack Reed (D-RI).

Currently, the SEC is only allowed to fine individuals that violate securities laws no more than $150,000/offense. Institutions can be penalized up to $725,000 maximum. If a case goes to federal court, the Commission has sometimes been able to determine a penalty according to the gross amount of gains that were ill-gotten.

The bill raises the cap per securities law violation offense to $10 million for entities and $1 million for individuals. If how much was made because of the misconduct and the penalty are linked, the Commission could up the penalty times three. Penalties could also be tripled for a recidivist that has had a securities fraud conviction or was the target of administrative relief by the SEC in the last 5 years. The Commission could assess in-house penalties for even cases not heard in federal court.

Montana Supreme Court Says Lower Court’s Finding that Tenancy-in-Common Investment Is Not A Securities Was In Error

Published on: July 20, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Supreme Court of Montana says that a lower court erred when it found that an investor’s stake in a tenancy-in-common venture promising fixed return rates is not a securities under the Montana Securities Act. The case is Redding v. Montana 1st Judicial District .

Holding that the Montana First Judicial District Court improperly ruled that the plaintiff failed to invest in a common venture that would be considered an “Investment contract” under the act, the state’s highest court granted plaintiff Billie Redding’s petition seeking writ of supervisory control over the district court.

Redding had filed her Montana securities lawsuit against her accountant and number of entities, after a failed $4.5M investment in four TICs in commercial property through DBSI Housing Inc., which promised a steady return and that it would manage the properties. (Unfortunately, DBSI not only had to file for bankruptcy protection in 2008, but also its receiver found out that the company had been running a Ponzi scam.) Both sides moved for summary judgment on a number of matters, including whether a TIC constitutes a security under the state’s law.

Finding there was no common venture between DBSI and Redding, the district court said that the TICs in question are not to be considered securities. The lower court applied the horizontal commonality approach to reason that the plaintiff hadn’t been burdened with the same risks as other investors because her contract stated there would be fixed profit returns. The court also said that the vertical commonality test was not satisfied because Redding stood to gain regardless of how much was collected from the properties at any month.

Montana Supreme Court Justice Michael Wheat noted that under the Montana securities law, the courts in the state interpret that an investment contract has to satisfy the prongs that it is an a) investment having a b) common venture that c) comes with reasonable expectations and profits d) through the managerial or entrepreneurial efforts of others. Wheat said that seeing as the state hasn’t adopted a method to determine what satisfies the common prong venture for the Montana Securities Act’s purposes, a common venture can be set up by fulfilling the element of “either horizontal, broad vertical, or narrow vertical commonality.” In the matter of Redding, the state’s Supreme Court said that the district court’s finding in regards to common venture conflicted with United States Supreme Court precedent in SEC v. Edwards and was therefore incorrect.

In that case, the nation’s highest court determined that a fixed return rate could be an investment contract and, hence, a security that was “subject to federal securities laws.” The Montana Supreme Court found that the district court’s “reliance on a promised return as dispositive of common venture” needed to be reversed. The state’s highest court said that vertical commonality or horizontal community is the “keystone” when it comes to common venture and not the investment return’s accompanying fluctuation and risk.

Court Erred in Finding TIC Investments Not Securities, Montana High Court Rules, Bloomberg/BNA, July 10, 2012

Redding v. Montana 1st Judicial District (PDF)

SEC v. Edwards

More Blog Posts:
Securities Fraud Lawsuit Seeks to Recover $49M From 96 Independent Broker-Dealers Liable Over Sales of Tenant-In-Common Exchanges, Stockbroker Fraud Blog, December 15, 2010
SEC to Push for Money Market Mutual Fund Reform Provisions Despite Opposition, Stockbroker Fraud Blog, July 6, 2012

Barclays LIBOR Manipulation Scam Places Citigroup, Credit Suisse, Deutsche Bank, JP Morgan Chase, and UBS Under The Investigation Microscope, Institutional Investor Securities Blog, July 16, 2012 Continue Reading ›

Institutional Investor Roundup: Evergreen Ultra Short Investor Lawsuit Settled for $25M, FINRA Launches Pilot Program for Huge Claims, Ex-AmeriFirst Funding Manager’s Conviction Appeal is Rejected, & EU Regulator Examines Credit Raters’ Bank Downgrade

Published on: July 12, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Evergreen Investment Management Co. LLC and related entities have consented to pay $25 million to settle a class action securities settlement involving plaintiff investors who contend that the Evergreen Ultra Short Opportunities Fund was improperly marketed and sold to them. The plaintiffs, which include five institutional investors, claim that between 2005 and 2008 the defendants presented the fund as “stable” and providing income in line with “preservation of capital and low principal fluctuation” when actually it was invested in highly risky, volatile, and speculative securities, including mortgage-backed securities. Evergreen is Wachovia’s investment management business and part of Wells Fargo (WFC).

The plaintiffs claim that even after the MBS market started to fail, the Ultra Short Fund continued to invest in these securities, while hiding the portfolio’s decreasing value by artificially inflating the individual securities’ asset value in its portfolio. They say that they sustained significant losses when Evergreen liquidated the Ultra Short Fund four years ago after the defendants’ alleged scam collapsed. By settling, however, no one is agreeing to or denying any wrongdoing.

Meantime, seeking to generally move investors’ claims forward faster, the Financial Industry Regulatory Authority has launched a pilot arbitration program that will specifically deal with securities cases of $10 million and greater. The program was created because of the growing number of very big cases.

CFTC Accuses Peregrine Financial Group of Securities Fraud Related to $200M Customer Funds Shortfall

Published on: July 10, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The CFTC is accusing Peregrine Financial Group and its owner Russell R. Wasendorf, Sr. of misappropriating client monies, including statements that were untrue in financial statements submitted to the CFTC, and violating customer fund segregation laws. The Commission filed its securities fraud complaint against the registered futures commission merchant in the United States District Court for the Northern District of Illinois.

Per the CFTC’s complaint, during an audit by the National Futures Association, Peregrine misrepresented that it was holding more than $200M of client funds when it only held about $5.1M. The regulator says that the whereabouts of this at least $200 million in customer fund shortfall are not known at this time. In the wake of the allegations, Peregrine has told its clients that it was being investigated for “accounting irregularities.”

The Commission contends that beginning at least 2/2010 until now, Peregrine and Wasendorf did not meet CFTC Regulations and the Commodity Exchange Act by not maintaining enough client money in accounts that were segregated. The brokerage and its owner also are accused of making false statements about the funds that were being segregated for clients that were trading on US Exchanges in required filings.

Wasendorf, who reportedly tried to kill himself on Monday is now in a coma. The NFA just recently was given information that he may have been responsible for a number of falsified bank records.

The CFTC wants a restraining order to preserve records, freeze assets,, and establish a receiver. It is seeking disgorgement, restitution, financial penalties, and other appropriate financial relief.

Yesterday, Peregrine’s clearing broker Jefferies Group Inc. said that it had started unloading positions held for the futures brokerage’s clients after a margin call was not met. Jeffries Group doesn’t expect to sustain losses.

Meantime, the NFA and “other officials, have frozen all customer funds and Peregrine is not allowed to accept or solicit new client funds or accounts or make trades for customers unless it involves liquidating positions or distributing their money. Also looking into this financial matter is the US Federal Bureau of Investigation.

It was just this year that a court-appointed receiver in Minnesota sued Peregrine over allegedly disregarding warning signs that the futures brokerage’s client Trevor Cook was running a Ponzi scam. According to the securities lawsuit, investments by Cook and others with Peregrine that were supposedly profitable sustained over $30 million in losses as the allegedly culpable participants moved about $48 million from clients to Peregrine accounts.

According to Fox Business, the fallout from these latest allegations against Peregrine could be bigger than the MF Global collapse as traders blame regulators for not doing enough and industry members fight to recapture investor confidence.

CFTC Files Complaint Against Peregrine Financial Group, Inc. and Russell R. Wasendorf, Sr. Alleging Fraud, Misappropriation of Customer Funds, Violation of Customer Fund Segregation Laws, and Making False Statements, CFTC, July 10, 2012

Peregrine Financial Allegedly Has $200 Million Shortfall, Bloomberg, July 10, 2012

PFG Scandal Deepens as CFTC Files Claim, Fox Business News/Reuters, July 10, 2012

More Blog Posts:
ABA Presses for Self-Funding for SEC and CFTC, Institutional Investor Securities Blog, May 31, 2012

CFTC and SEC May Need to Work Out Key Differences Related to Over-the-Counter Derivatives Rulemaking, Institutional Investor Securities Blog, January 31, 2012

SEC and CFTC Say They Found Out About JPMorgan’s $2B Trading Loss Through Media, Institutional Investor Securities Blog, May 31, 2012

Securities Law Roundup: Merrill Lynch Pays Customers $32M For Allegedly Overcharging Them with Unwarranted Fees, Brookstone Securities is Accused of $1.6M in Fraudulent CMO Sales to Elderly Retirees, and Planner Loses CFP Designation Following After Maine

Published on: June 28, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority says that it is fining Merrill Lynch, Pierce, Fenner & Smith, Inc. $2.8M in the wake of certain alleged supervisory failures that the SRO says led to the financial firm billing clients unwarranted fees. The financial firm paid back the $32M in remediation to affected clients, in addition to interest.

According to FINRA, from 4/03 to 12/11, Merrill Lynch lacked a satisfactory supervisory system that could ensure that certain investment advisory program clients were billed per the terms of their disclosure documents and contract. As a result, close to 95,000 client account fees were charged.

Also, due to programming mistakes, Merrill Lynch allegedly did not give certain clients timely trade confirmations. These errors caused them to not get confirmations for over 10.6 million trades in more than 230,000 customer accounts from 7/06 to 11/10. Additionally, FINRA contends that Merrill Lynch failed to properly identify when it played the role of principal or agent on account statements and trade confirmations involving at least 7.5 million mutual fund buy transactions. By settling, Merrill Lynch is not denying nor admitting to the charges. It is, however, agreeing to the entry of FINRA’s findings.

Securities Law Roundup: Ex-Sentinel Management Group Execs Indicted Over Alleged $500M Fraud, Egan-Jones Rating Wants Court to Hear Bias Claim Against SEC, and Oppenheimer Funds Pays $35M Over Alleged Mutual Fund Misstatements

Published on: June 13, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Former Sentinel Management Group Inc. CEO Eric Bloom and head trader Charles Mosley have been indicted for allegedly defrauding investors of about $500 million prior to the firm’s filing for bankruptcy protection in 2007. The government is seeking forfeiture of approximately that amount.

The two men are accused of fraudulently getting and retaining “under management” this money by misleading clients about where their money was going, the investments’ value, and the associated risks involved. According to prosecutors, defendants allegedly used investors’ securities as collateral to get a loan from Bank of New York Mellon Corp. (BK), in part to buy risky, illiquid securities. Bloom is also accused of causing clients to believe that Sentinel’s financial problems were not a result of these risky purchases, the indebtedness to the BoNY credit line, and too much use of leverage.

In other securities law news, Egan-Jones Rating Co. wants the Securities and Exchange Commission’s attempts to pursue claims against it in an administrative forum instead of in federal court blocked. The credit rating agency, which has long believed that the SEC does not treat it fairly even as it “historically coddled and excused” the larger credit raters, contends that if it were forced to make its defense in an administrative hearing it would not be able to avail of its constitutional due process rights due to the SEC’s bias.The Commission’s administrative claims accuse Egan Jones and its president Sean Egan of allegedly making “material misrepresentations” in its 2008 registration application to become a nationally registered statistical rating agency for government and asset-backed and securities issuers.

Egan-Jones filed a complaint accusing the SEC of “institutional bias,” as well as of allegedly improper conduct when examining and investigating the small credit ratings agency (including having Office of Compliance Inspections and Examinations staff go “back and forth between divisions and duties” to engage in both examination and enforcement roles.)The credit rater is also accusing the Commission of improperly seeking civil penalties against it under the Dodd-Frank Wall Street Reform and Consumer Protection Act, even though the actions it allegedly committed happened way before Dodd-Frank was enacted.

One firm that has agreed to settle the SEC’s administrative action against it is OppenheimerFunds Inc. Without denying or admitting to the allegations, the investment management company will pay over $35 million over allegations that it and its sales and distribution arm, OppenheimerFunds Distributor Inc., made misleading statements about the Oppenheimer Champion Income Fund (OPCHX, OCHBX, OCHCX, OCHNX, OCHYX) and Oppenheimer Core Bond Fund (OPIGX) in 2008.

The SEC contends that Oppenheimer used “total return swaps” derivatives, which created significant exposure to commercial mortgage-backed securities in the two funds, but allegedly did not adequately disclose in its prospectus the year that the Champion fund took on significant leverage through these derivative instruments. OppenheimerFunds also is accused of putting out misleading statements about the financial losses and recovery prospects of the fund when the CMBS market started to collapse, allegedly resulting in significant cash liabilities on total return swap contracts involving both funds. The $35 million will go into a fund to payback investors.

Meantime, Nasdaq Stock Market and Nasdaq OMX Group are proposing a $40M “voluntary accommodation” fund that would be used to payback members that were hurt because of technical problems that occurred during Facebook Inc.’s (FB) IPO offering last month. Nasdaq would pay about $13.7 million in cash to these members, while the balance would be a credit to them for trading expenses.

A technical snafu had stalled the social networking company’s market entry by about 30 minutes, which then delayed order confirmations on May 18, which is the day that Facebook went public. Many investors contend that they lost money as a result of Nasdaq’s alleged mishandling of their purchases, sales, or cancellation orders for the Facebook stock. Some of them have already filed securities lawsuits.

Sentinel Management Chief, Head Trader Indicted in Illinois, Bloomberg/Businessweek, June 1, 2012
Investors sue Nasdaq, Facebook over IPO, Reuters, May 22, 2012

Credit Rater Egan-Jones, Alleging Bias, Sues To Force SEC Proceeding Into Federal Court, BNA Securities Law Daily, June 8, 2012

OppenheimerFunds to pay $35M to settle SEC charge, Boston.com, June 6, 2012 Continue Reading ›

Investor Fraud Claims Against Prescott City, AZ are Dismissed by District Court

Published on: June 9, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In the wake of the US Supreme Court’s ruling in Janus Capital Group Inc. v. First Derivative Traders, the U.S. District Court for the District of Arizona is now saying that investors did not succeed in stating a securities fraud claim against Prescott City, Arizona related to the $35 million in revenue bond sales that paid for the construction of a 5,000 seat event center. The case is Allstate Life Insurance Co. Litigation, D. Ariz.

Allstate Life Insurance Co. and other investors had bought the bonds in accordance with the offering documents. Because the official statements failed to include key information that only the defendants knew, the plaintiffs contend that these omissions made parts of what was stated misleading and false. As a result, they are claiming that the defendants violated Section 10(b) of the 1934 Securities Exchange Act.

The district court, in a 2010 order, had said that case law indicates that a party could be held liable under Section 10(b) for “making” a statement that was untrue. Liability could also be held under this section of the Act if a party was involved in “substantially” taking part in preparing, creating, editing, or drafting a statement that was materially false or misleading even without saying or signing the statement in question. However, in the wake of the US Supreme Court’s Janus decision last June that rejected the “substantial participation” approach and found that under Role 10b-5, the statement’s maker is the one with the final authority over the statement, the defendants asked the district court to reconsider.

Now, after Janus, the district court is saying that the plaintiffs have failed to make valid Section 10(b) claims against Prescott City and the securities fraud claims against the town are therefore dismissed. Per the court, the plaintiffs did not allege any facts to make it plausible that Prescott City is the one that made the misleading statements or any of the alleged misrepresentations in the official statements.

Commenting on the district court’s May 24 ruling, Institutional investor securities lawyer William Shepherd said: “The Janus case and this one demonstrate further erosion of the liability standards for investors’ claims. Almost 20 years ago, courts decided that Wall Street and other defendants cannot be held liable for ‘aiding and abetting’ in federal securities fraud cases. (Those who assist in other kinds of wrongdoing are not granted this kind of get-out-of-jail-free card.) Because of this free pass, most of those that assisted Enron in defrauding the public were not held liable for their actions. The Janus case is proving to be yet another case of ‘judicial activism’ to help big shots escape responsibility for their misdeeds and omissions.”

Janus Capital Group Inc. v. First Derivative Traders

Prescott Valley loses motion to dismiss investor lawsuit against events center, The Daily Courier, October 26, 2011

More Blog Posts:
Bank of America and Countrywide Financial Sued by Allstate over $700M in Bad Mortgaged-Backed Securities, Stockbroker Fraud Blog, December 20, 2010

Morgan Stanley Sued by MetLife for Securities Fraud Over $757 Million in Residential Mortgage-Backed Securities, Institutional Investor Securities Fraud, April 28, 2012

Not All Municipal Bond Issuers Are Adjusting Well to the SEC’s Efforts to Make the Market More Transparent, Institutional Investor Securities Fraud, February 22, 2012

Institutional Investor Securities Roundup: SEC Sues Investment Adviser Over $60M Ponzi Scam, Michigan Investment Club Manager Gets Prison Term for Defrauding Over 900 Investors, & IOSCO Seeks Comments on Report About Credit Raters’ Conflicts & Controls

Published on: June 7, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The SEC is suing investment adviser John Geringer for allegedly running a $60M investment fund that was actually a Ponzi scheme. Most of Geringer’s fraud victims are from the Santa Cruz, California area.

According to the Commission, Geringer used information in his marketing materials for GLR Growth Fund (including the promise of yearly returns in the double digits) that was allegedly “false and misleading” to draw in investors. He also implied that the fund had SEC approval.

While investors thought the fund was making these supposed returns by placing 75% of its assets in investments connected to major stock indices, per the SEC claims, Geringer’s trading actually resulted in regular losses and he eventually ceased to trade. To hide the fraud, Geringer allegedly paid investors “returns” in the millions of dollars that actually came from the money of new investors. Also, after he stopped trading in 2009, he is accused of having invested in two illiquid private startups and three entities under his control. The SEC is seeking disgorgement of ill-gotten gains, financial penalties, preliminary and permanent injunctions, and other relief.

In an unrelated securities case, this one resulting in criminal charges, Michigan investment club manager Alan James Watson has been sentenced to 12 years behind bars for fraudulently soliciting and accepting $40 million from over 900 investors. Watson, who pleaded guilty to the criminal charges, must also forfeit over $36 million.

Watson ran and funded Cash Flow Financial LLC. According to the US Justice Department, he lost all of the money on risky investments—even as he told investors that their money was going to work through an equity-trading system that would give them a 10% return every month. In truth, Watson only put $6 million in the system, while secretly investing the rest in the undisclosed investments. He would go on to also lose the $6 million when he moved this money into risky investments, too.

Watson ran the club as a Ponzi scam so investors wouldn’t know what he was doing. He is still facing related charges in a securities case brought by the Commodity Futures Trading Commission.

In other institutional investments securities news, the International Organization of Securities Commissions’ technical committee is asking for comments about a new consultation report describing credit rating agencies’ the internal controls over the rating process and the practices they employ to minimize conflicts of interest. The deadline for submitting comments is July 9.

The report was created following the financial crisis due to concerns about the rating process’s integrity. 9 credit rating agencies were surveyed about their internal controls, while 10 agencies were surveyed on how they managed conflict.

IOSCO’s CRA code guides credit raters on how to handle conflict and make sure that employees consistently use their methodologies. Two of the report’s primary goals were to find out how get a “comprehensive and practical understanding” of how these agencies deal with conflict when deciding ratings and find out whether credit ratings agencies have implemented IOSCO’s code and guiding principals.

Read the SEC’s complaint against Geringer (PDF)

Investment Club Manager Sentenced To 12 Years In Prison For $40 Million Fraud, Justice.gov, May 24, 2012

Credit Rating Agencies: Internal Controls Designed to Ensure the Integrity of the Credit Rating Process and Procedures to Manage Conflicts of Interest, IOSCO (PDF)

More Blog Posts:
FINRA Initiatives Addressing Market Volatility Approved by the SEC, Institutional Investor Securities Blog, June 5, 2012

Several Claims in Securities Fraud Lawsuit Against Ex-IndyMac Bancorp Executives Are Dismissed by Federal Judge, Institutional Investor Securities Blog, May 30, 2012

Leave The 2nd Circuit Ruling Upholding Madoff Trustee’s “Net Equity” Method for Investor Recovery Alone, Urges SEC to the US Supreme Court, Stockbroker Fraud Blog, June 5, 2012