Securities Fraud

Several Claims in Securities Fraud Lawsuit Against Ex-IndyMac Bancorp Executives Are Dismissed by Federal Judge

Published on: May 30, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In U.S. District Court for the Central District of California, federal judge Manuel Real threw out five of the seven securities claims made by the Securities and Exchange Commission in its fraud lawsuit against ex-IndyMac Bancorp chief executive Michael Perry and former finance chief Scott Keys. The Commission is accusing the two men of covering up the now failed California mortgage lender’s deteriorating liquidity position and capital in 2008. Real’s bench ruling dilutes the SEC’s lawsuit against the two men.

The Commission contends that Keys and Perry misled investors while trying to raise capital and preparing to sell $100 million in new stock before July 2008, which is when thrift regulators closed IndyMac Bank, F.S.B and the holding company filed for bankruptcy protection. They are accusing Perry of letting investors receive misleading or false statements about the company’s failing financial state that omitted material information. (S. Blair Abernathy, also a former IndyMac chief financial officer, had also been sued by the SEC. However, rather that fight the lawsuit, he chose to settle without denying or admitting to any wrongdoing.)

Attorneys for Perry and Keys had filed a motion for partial summary judgment, arguing that five of the seven filings that the SEC is targeting cannot support the claims. Real granted that motion last month, finding that IndyMac’s regulatory filings lacked any misleading or false statements to investors and did not leave out key information.

The remaining claims revolve around whether the bank properly disclosed in its 2008 first-quarter earnings report (and companion slideshow presentation) the financial hazards it was in at the time. The judge also ruled that Perry could not be made to pay back allegedly ill-gotten gains.

Real’s decision substantially narrows the Commission’s securities case against Perry and Keys. According to Reuters, the ruling also could potentially end the lawsuit against Keys because he was on a leave of absence during the time that the matters related to the filings that are still at issue would have occurred.

Before its collapse in 2008, Countrywide spinoff IndyMac was the country’s largest issuers of alt-A mortgage, also called “liar loans.” These high-risk home loans are primarily based on simple statements from borrowers of their income instead of tax returns. Unfortunately, loan defaults ended up soaring and a mid-2008 run on deposits at IndyMac contributed to its collapse. The Federal Deposit Insurance Corp, which places its IndyMac losses at $13 billion, went on to sell what was left of the bank to private investors. IndyMac is now OneWest bank.

Judge dismisses parts of IndyMac fraud case, Los Angeles Times, May 23, 2012

Read the SEC Complaint (PDF)

More Blog Posts:

Citigroup’s $75 Million Securities Fraud Settlement with the SEC Over Subprime Mortgage Debt Approved by Judge, Stockbroker Fraud Blog, October 23, 2010

Institutional Investment Securities Round-Up: Citigroup Agrees to $3.5M FINRA FIne Related to Subprime RMBS, Ex-Broker Consents to $600K CFTC Fine Over Alleged Options Trading Scam, and Senate Ag Chair Presses Regulators To Fully Implement Dodd-Frank

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

Citigroup Global Markets Inc. (CLQ) has consented to pay the Financial Industry Regulatory Authority a $3.5M fine to settle allegations that he gave out inaccurate information about subprime residential mortgage-backed securities. The SRO is also accusing the financial firm of supervisory failures and inadequate maintenance of records and books.

Per FINRA, beginning January 2006 through October 2007, Citigroup published mortgage performance information that was inaccurate on its Web site, including inaccurate information about three subprime and Alt-A securitizations that may have impacted investors’ assessment of subsequent RMB. Citigroup also allegedly failed to supervise the pricing of MBS because of a lack of procedures to verify pricing and did not properly document the steps that were executed to evaluate the reasonableness of the prices provided by traders. The financial firm is also accused of not maintaining the needed books and records, including original margin call records. By settling, Citigroup is not denying or admitting to the FINRA securities charges.

In other institutional investment securities news, in U.S. District Court for the Southern District of New York, Kent Whitney an ex-registered floor broker at the Chicago Mercantile Exchange, agreed to pay $600K to settle allegations by the Commodity Futures Trading Commission that he made statements that were “false and misleading” to the exchange and others about a scam to trade options without posting margin. The CFTC contends that between May 2008 and April 2010, Whitney engaged in the scam on eight occasions, purposely giving out clearing firms that had invalid account numbers in connection with trades made on the New York Mercantile Exchange CME trading floors. He is said to have gotten out of posting over $96 million in margin.

Alleged Ponzi-Like Real Estate Investment Scam that Defrauded Victims of $9M Leads to SEC Charges Against New Jersey Man

Published on: May 24, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has charged David M. Connolly with running a Ponzi-like scam involving investment vehicles that bought and managed Pennsylvania and New Jersey apartment rental buildings. According to prosecutors in New Jersey, Connolly’s alleged victims were defrauded of $9 million. He also faces criminal charges.

None of Connolly’s securities offerings were registered with the SEC. (Since 1996, he had raised more $50 million from over 200 clients who invested in over two dozen investment vehicles.)

Per the Commission’s complaint, in 2006 Connolly allegedly started misrepresenting to clients that their funds were to be solely used for the property linked to the vehicle they had in invested in when (unbeknownst to them) he actually was mixing monies in bank accounts and using their funds for other purposes. Although clients were promised monthly dividends from cash-flow profits that were to come from apartment rentals and their principal’s growth from property appreciation, these projected funds did not materialize. Instead, Connolly allegedly ran a Ponzi-like scam that involved earlier investors getting their dividend payments from the money of newer investors.

He also allegedly made materially false and misleading omissions and statements about: investors’ money being placed in escrow until a purported real estate transaction closed, the financial independence and state of each property, the amount of equity victims had in properties, and the condition of each property. (Also containing allegedly false material misrepresentations and omissions was the “offering prospectus,” which provided information about how the investment vehicles would use the investor funds, the projected investment returns, prior vehicles performances, the mortgage financials for the real estate held in the investment vehicles, and the apartment buildings’ vacancy rates.)

Connolly is accused of improperly using proceeds from refinanced properties to keep his scheme running, and he even allegedly took $2 million of investors’ funds for himself. After he stopped giving dividend payments to investors in April 2009 (when money from new investors stopped coming in and the investment vehicles’ properties went into foreclosure), Connolly allegedly kept making sure he was getting dividends and a $250,000 income from the remaining client funds.

Meantime, a federal grand jury has charged him with one count of securities fraud, three counts of wire fraud, five counts of mail fraud, and seven counts of money laundering. A conviction for securities fraud comes with a 20-year maximum prison term and a $5 million fine. The other charges also come with hefty sentences and fines.

Read the SEC Complaint (PDF)

Multimillion-Dollar Real Estate Ponzi Schemer Indicted For Fraud And Money Laundering, Justice.gov, May 17, 2012

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Dallas Man Involved in $485M Ponzi Scams, Including the Fraud Involving Provident Royalties in Texas, Gets Twenty Year Prison Term, Stockbroker Fraud Blog, May 8, 2012

JPMorgan Chase $2B Trading Loss Leads to Probes by the SEC, Federal Reserve, and FBI, Institutional Investor Securities Blog, May 15, 2012

Ex- NAPFA Chairman Indicted by Grand Jury and Sued by SEC For Allegedly Diverting $47.7M of Investors’ Funds Into His Own Start-Ups

Published on: May 19, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed a civil lawsuit against former National Association of Personal Financial Advisors Mark Spangler for allegedly bilking clients by secretly investing $47.7 million of their money in two start-ups that he co-founded. These were risker investments than if he had kept their money in the mostly publicly traded securities, which is where he told clients their funds were going. The investment strategy that he actually employed allegedly was not in line with their investment goals and they ended up losing millions.

Also going after Spangler is the government. A federal grand jury just Spangler indicted him over these allegations. He now faces 23 criminal counts, which include charges of fraud and money laundering. U.S. Attorney Jenny Durkan said the government was working closely with the SEC to make sure that he was held accountable.

Per the SEC’s complaint, starting around 2003 through 2011, Spangler and his advisory firm The Spangler Group (TSG) started putting most of their clients’ money, which had been in the private investment funds that he managed, into two private technology companies. He did not notify investors of this move.

JPMorgan Chase Shareholders File Securities Lawsuits Over $2B Trading Loss

Published on: May 17, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Two securities lawsuits have been filed on behalf of shareholders and investors of JPMorgan Chase & Co. (JPM) over the financial firm’s $2 billion trading loss from synthetic credit products. According to CEO Jamie Dimon, the massive loss is a result of “egregious” failures made by the financial firm’s chief investment officer and a hedging strategy that failed. Both complaints were filed on Tuesday in federal court.

One securities case was brought by Saratoga Advantage Trust — Financial Services Portfolio. The Arizona trust is seeking to represent everyone who suffered losses on the stock that it contends were a result of alleged misstatements the investment bank had made. Affected investors would have bought the stock on April 13 (or later), which is the day that Dimon had minimized any concerns about the financial firm’s trading risk during a conference call.

Per Saratoga Advantage Trust v JPMorgan Chase & Co., the week after the call, losses from the trades went up to about $200 million a day. The Arizona Trust is accusing Dimon and CFO Douglas Braunstein of issuing statements during that conversation that were misleading and “materially false,” as well as misrepresenting not just the losses but also the risks from major bets placed on “derivative contracts involving credit indexes reflecting corporate bonds interest rates.”

The 11th Circuit Revives SEC Fraud Lawsuit Against Morgan Keegan Over Auction-Rate Securities

Published on: May 8, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The 11th U.S. Circuit Court of Appeals has revived the US Securities and Exchange Commission’s fraud lawsuit against Morgan Keegan & Co. accusing the financial firm of allegedly misleading investors about auction-rate securities. The federal appeals court said that a district judge was in error when he found that alleged misrepresentations made by the financial firm’s brokers were immaterial. The case will now go back to district court. Morgan Keegan is a Raymond James Financial Inc. (RJF) unit.

The SEC had sued Morgan Keegan in 2009. In its complaint, the Commission accused the financial firm of leaving investors with $2.2M of illiquid ARS. The agency said that Morgan Keegan failed to tell clients about the risks involved and that it instead promoted the securities as having “zero risk” or being “fully liquid” or “just like a money market.” The SEC demanded that Morgan Keegan buy back the debt sold to these clients.

In 2011, U.S. District Judge William Duffey ruled on the securities fraud lawsuit and found that Morgan Keegan did adequately disclose the risks involved. He said that even if some brokers did make misrepresentations, the SEC had failed to present any evidence demonstrating that the financial firm had put into place a policy encouraging its brokers-dealers to mislead investors about ARS liquidity. Duffey pointed to Morgan Keegan’s Web site, which disclosed the ARS risks. He said this demonstrated that there was no institutional intent to fool investors. He also noted that a “failure to predict the market” did not constitute securities fraud and that the Commission would need to show examples of alleged broker misconduct before Morgan Keegan could be held liable.

Global Investing Round Up: SEC Sues Chinese Company for Overstating Asset Values, 11th Circuit Reinstates Investor Claims Over Alleged Financial Scam in Involving India Entities, EC Calls for Delay in Imposing U.S. Swap Regulations, and Switzerland Propos

Published on: May 2, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In SEC v. SinoTech Energy Ltd., Securities and Exchange Commission is suing SinoTech Energy Ltd. (CTESY), a Chinese oil field services company, for securities fraud. According to the Commission, SinoTech allegedly made misrepresentations about how its IPO proceeds were used, as well as misrepresented its assets’ value. The company also is accused of repeatedly deceiving both investors and the SEC, the latter with filings it submitted to the Commission in 2010 and 2011.

Per the SEC’s complaint, SinoTech claimed that $120 million of its IPO proceeds would be used to purchase lateral hydraulic drilling units when it spent less than $17 million to buy them. Also, its chairman, Qingzeng Liu, has admitted to skimming $40 million from a company bank account. This monetary withdrawal allegedly was not noted in SinoTech’s records or books. The Commission wants injunctive relief, disgorgement, and penalties from SinoTech and its chairman.

In other Global investment news, the 11th Circuit Appeals Court has decided to reinstate the unjust enrichment and racketeering claims made by investors over an alleged financial fraud involving City Group, which is based primarily in India, and the company’s affiliates in the US. The plaintiffs, Virendra Rajput and Mansingh Rajput, are claiming that they suffered financial losses after investing in a network of firms with ties to the Masood family. Rajput and Rajput are accusing the family of keeping the investments, running a financial racket, and never having intended to issue the payouts of high return rates that they promised investors. The two of them are also alleging that City Group’s US branches were set up to launder money from the scam in India.

District Court Won’t Dismiss Securities Fraud Lawsuit Over Alleged Oral Misrepresentations

Published on: April 30, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Middle District of Florida has decided not to throw out a securities fraud lawsuit filed by a couple of unsophisticated investors contending that allegedly false oral misrepresentations were made to them causing them to think that their money would be placed in low risk, conservative investments when, in fact, the financial instruments recommended for them were very volatile and speculative. The case is Hemenway v. Bartoletta.

Plaintiff Jason Hemenway had received about $13.8 million in a lump sum after winning the Florida lottery in 2007. He and his wife then opened up an investment account at Capital City Bank Trust Co. Although they expressed a preference for investments with low risks, two of the financial firm’s representatives, private equity group High Street Capital Management LLC managers John Bartoletta and Erick Arnett, convinced the couple to move their money to a hedge fund limited partnership. High Street was that fund’s general partner.

Arnett and Bartoletta allegedly told the Hemenways that the investment was conservative and safe even though it wasn’t really appropriate for unsophisticated investors. The two men also failed to mention that the interests of the limited partnership were a lot risker than traditional equities and bonds and weren’t in line with the couple’s risk tolerance or investment goals.

Over 14 months the couple lost about $1.2 million. That is when they filed a federal securities fraud lawsuit against Bartoletta, Arnett, and High Street Capital Management, LLC, High Street Financial, LLC, and High Street Group, LLC.

The defendants sought to have the federal securities case dismissed on the grounds of failure to state a claim. Not only did they want the other allegations dropped due to lack of subject matter jurisdiction, but also they argued that the alleged misrepresentations and omissions could be countered because the plaintiffs had been given written documents that contradicted the statements made to them. Countering the defendants’ reasons for why the case should be dismissed, the plaintiffs argued that even though they were given written materials to counter any alleged misrepresentations (and omissions), they still had a valid claim under the 1934 Securities Exchange Act Section 10(b) and Rule 10b-5.

Explaining its decision to reject the defendants’ dismissal motion, the district court noted that although per “usual presumption” a plaintiff has no justification for depending on oral representation rather than what is written, a previous decision issued by an appeals court in another case, Bruschi v. Brow, had found that there are circumstances that warrant a departure from this presumption. That ruling took into consideration the plaintiff’s sophistication regarding financial matters (or lack thereof), whether the defendant and plaintiff have a longstanding relationship and if it is a fiduciary one, how much access the plaintiff had to material information, if the plaintiff was the one that sought the transaction, and the specifics of the alleged misrepresentations.

Now, in Hemenway v. Bartoletta, this court has found that “no single factor” was “dispositive” and that all factors must be considered when deciding whether reliance is merited. Therefore, the defendants’ motion to dismiss is denied.

Hemenway v. Bartoletta

Reliance Issues Bar Dismissal Of Suit by Unsophisticated Investors,Bloomberg/BNA, April 19, 2012

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FINRA Bars Former Wells Fargo Advisors Broker that Bilked Child with Cerebral Palsy, Stockbroker Fraud Blog, April 26, 2012
Texas Broker-Dealer Pinnacle Partners Financial is Expelled by FINRA Hearing Officer Over Allegedly Fraudulent Sales of Unregistered Securities and Private Placements of Oil and Gas, Stockbroker Fraud Blog, April 25, 2012
SEC to Make Sure Rule Writing Process Incorporates Better Cost-Benefit Analysis, Stockbroker Fraud Blog, April 25, 2012 Continue Reading ›

Silicon Valley Man Faces SEC Securities Fraud Charge After Allegedly Bilking Internet Start-Up Investors of the “Next Google” of Millions

Published on: April 19, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has charged Benedict Van with investment fraud. The San Jose, California man is accused of making false promises to get investors to put their money into two of his Internet companies that he claimed would become the “next Google.”

The names of the start-ups: eCity, Inc. and hereUare, Inc. Van allegedly falsely told prospective investors that the companies were to go public soon, which would result in millions of dollars in fast returns. However, according to the SEC, Van had no intention of taking his companies public and he used the money given to him by investors to stay in operation. About 100 investors gave funds to Van.

The Silicon Valley local would allegedly travel to cities in Northern California to visit potential investors in their own homes. Per the Commission’s complaint, investors gave Van over $6.2 million in 2007 and 2008 for hereUare. He was able to collected $880,000 in investor funds for eCity.

Principals of Global Arena Capital Corp. and Berthel, Fisher & Company Financial Services, Inc. Settle FINRA Securities Allegations

Published on: April 6, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Harry Friedman, a principal of Global Arena Capital Corp. has agreed to a bar that prevents him from associating with any Financial Industry Regulatory Authority member. Although he has not admitted to or denied the allegations against him, Friedman has consented to the sanction and the entry of findings accusing him of not properly supervising a number of employees who used improper markups in a fraudulent trading scheme that, as a result, denied clients of best execution and the most favorable market price.

It was Friedman’s job to make sure that the head trader provided accurate disclosure on order tickets, such as when they were received and executed, the role that the broker-dealer played, and how much compensation the financial firm would get from each securities transaction. According to FINRA, Friedman either knew or should have known that order tickets were not being marked properly.

FINRA also found that Friedman, whose job it was to supervise and review trading activity involving his firm, failed to reconcile daily positions and trades in principal accounts. Also, per the SRO, Global Arena Capital Corp., through Friedman, did not set up, maintain, and enforce supervisory control policies and procedures that were supposed to ensure that registered representatives and others were in compliance with securities regulations and laws. Also, for three years, Friedman allegedly falsely certified that the financial firm had the necessary processes in place and that they had been evidenced in a report that the CCO, CEO, and other officers had reviewed.

In other FINRA-related news, Berthel, Fisher & Company Financial Services, Inc. registered principal Marsha Ann Hill has been suspended from associating with any Financial Industry Regulatory Authority member for a year. She also will pay a $20,000 fine.

Hill is accused of allegedly making unsuitable recommendations to a customer regarding the purchase of a variable annuity for $110,418.97 and two private placement offerings for $10,000 each. Per the findings, the transactions were not suitable because over 90% of the client’s liquid net worth had been placed in the variable annuity, which was illiquid and had a seven-year surrender period. (The SRO says that the private placement offerings were not only high risk, but also they failed to meet the client’s investment objectives.) Hill is accused of misusing the customer’s funds when she delayed the investments, resulting in her firm violating SEC Rule 15c3-3.

She also allegedly sold a private placement to an unaccredited investor. When her supervisor noted that this was an accredited-only investment, Hill erased certain information on the Account Information Form and put different yearly income, liquid net worth, and net worth amounts without letting her client know. Hill is settling the securities fraud allegations against her without deny or admitting to them.

Broker-Dealers are Making Reverse Convertible Sales That are Harming Investors, Says SEC, Stockbroker Fraud Blog, July 28, 2011
Despite Reports of Customer Satisfaction, Consumer Reports Uncovers Questionable Sales Practices at Certain Financial Firms, Stockbroker Fraud Blog, January 7, 2012
SIFMA Wants FINRA to Take Tougher Actions Against Brokers that Don’t Repay Promissory Notes, Institutional Investor Securities Blog, January 17, 2012 Continue Reading ›