Articles Posted in Securities Fraud

Ex-Morgan Stanley Trader’s $25k Settlement Over Alleged Concealment of Proprietary Trades is Inadequate, Says SEC Commissioner Aguilar

Published on: July 20, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Jennifer Kim, an ex-Morgan Stanley (MS) trader, has consented to a $25,000 settlement to resolve SEC allegations that she hid proprietary trades that that went above and beyond the financial firm’s risk limits. The alleged misconduct resulted in approximately $24.5m in losses for Morgan Stanley. SEC Commissioner Luis Aguilar, however, is calling the terms of her settlement “inadequate.” In his written dissent, he said that Kim also should have been charged with committing antifraud provisions violations.

Kim and Larry Feinblum, who was her supervisor, are accused of employing “fake” swap orders a minimum of 32 times to conceal their risks. The swap orders they entered into were ones that they intended to cancel soon after. This let them trick the monitoring systems, which recorded lower net risk positions. This alleged maneuvering allowed them to employ a trading strategy that would let them profit from the difference in prices between foreign and US markets.

In December 2009, Feinblum, who lost $7m in a day, told his supervisor about how he and Kim had concealed their positions and went above risk limits. Feinblum, who no longer works for Morgan Stanley, has settled the related securities claims against him for $150,000.

As part of her settlement, Kim agreed to a minimum three-year bar from the brokerage industry. She also consented to cease and desist from future records and books violations.

Even in settling, Feinblum and Kim are not denying or admitting wrongdoing.

Ex-Morgan Stanley Trader Settles SEC Claims Over Hiding Risk, Bloomberg, July 12, 2011
Ex-Broker to Pay $25K Over Risky Trades; Aguilar Objects to Penalty as ‘Inadequate’, BNA Securities Law Daily, July 14, 2011
SEC Order Against Kim (PDF)

SEC Commissioner Aguilar’s Dissent (PDF)

More Blog Posts:
Ex-Morgan Stanley Trader to Settle SEC Unauthorized Swaps Trading Claims for $150,000, Stockbrroker Fraud Blog, June 13, 2011
Morgan Stanley to Pay $500,000 to Resolve SEC Charges that it Recommended Unapproved Money Managers to Clients, Stockbroker Fraud Blog, July 27, 2009
Broker Settles SEC Charges He Defrauded Elderly Nuns, Stockbroker Fraud Blog, January 13, 2011 Continue Reading ›

Holding Brokers to Investment Adviser Accountability Standards is a Bad Idea, Say Some Wall Street Executives

Published on: July 16, 2011 | by Shepherd Smith Edwards & Kantas, LLP

At the Securities Industry and Financial Markets Association conference on Wednesday, brokerage executives cautioned against imposing the standards of accountability for investment advisers on brokers. Rather than extending the Investment Advisers Act of 1940 to broker-dealers, this year’s SIMFA chair John Taft said that it would be better to create a new standard. Taft is also the head of Royal Bank of Canada’s US brokerage.

Right now, brokers and investment advisers are upheld to separate standards-even though many investors don’t realize that the two belong to different groups. As fiduciaries, investment advisers must prioritize their clients’ interests above that of their own or that of their financial firm. It wasn’t until 2008’s financial crisis when investors lost money on financial instruments that were lucrative for brokers that the call for a higher standard for these representatives grew louder.

At a conference panel, he said that imposing investment adviser accountability standards would not only be bad for the industry, potentially preventing some sales such as IPOs, but also he that this could harm investors.

Will brokers get their way on this? According to Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker Fraud Lawyer William Shepherd, the answer is, likely, yes:
“Decades ago, the difference between a ‘stock broker’ and ‘investment advisor’ was that stock brokers simply charged commissions to execute trades. At the time, there was also no online trading so investors could not do-it-themselves. In fact, May 1, 1975 (unaffectionately called “May Day”) was the first day stock commissions became negotiable. As commissions eventually eroded to just a few dollars per trade, stock brokerage firms migrated to higher charges on hidden-fee products, options, high volume trading, etc.

More recently, ‘stock brokers’ have dropped that moniker and simply become ‘investment advisors’ (whether called ‘financial consultants’, or whatever). Now that Wall Street’s agents have actually become investment advisors, and should be subject to the Investment Advisor Act of 1940, they instead want to escape the law, which has for 70 years been successful in regulating investment advisors. Why? Simply because they do not want to be responsible to their clients for cheating them.”

Related Web Resources:
Brokers say adviser standards could harm markets, Reuters, July 13, 2011
Is Wall Street Ready for Mayday 2?, The New York Times, April 28, 1985
Securities Industry and Financial Markets Association

More Blog Posts:
Do Brokers Owe a Fiduciary Duty to Clients?, Stockbroker Fraud Blog, January 27, 2011
Most Investors Want Fiduciary Standard for Investment Advisers and Broker-Dealers, Say Trade Groups to SEC, Stockbroker Fraud Blog, October 12, 2010
House and Senate Negotiators Can’t Seem to Agree on Fiduciary Standard in Financial Regulatory Reform Bill, Stockbroker Fraud Blog, June 17, 2010 Continue Reading ›

Ex-UBS Financial Adviser Pleads Guilty to Defrauding Private Fund Investors

Published on: July 13, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Steven T. Kobayashi has pleaded guilty to money laundering and wire fraud. The former UBS financial adviser is accused of bilking his private investment fund investors. As part of his plea agreement, he will pay $5,431,600 in restitution and serve a 65-month prison term.

Per the criminal charges, beginning in 2006 Kobayashi, who regularly made financial trades authorized by clients whose account he had access to, started transferring some of these funds into his own bank accounts without the investors’ “knowledge or authorization.” In some instances, clients gave their authorization because they were told the withdrawals were necessary to make investments. On other occasions, he forged their signatures on authorization forms.

Earlier this year, the ex-UBS adviser settled SEC securities fraud charges. The agency says that Kobayashi set up Life Settlement Partners LLC, which is a fund that invested in life settlement polices. He was able to raise millions of dollars for the fund from his UBS customers. However, he also started using the money to pay for prostitutes, expensive cars, and pay off gambling debts.

The SEC says that to try and pay back the fund and investors before they discovered his misconduct, he convinced several other UBS clients to liquidate securities and transfer to the proceeds to entities under his control. This allowed him to steal more money from the investors. Kobayashi settled the SEC charges without denying or admitting to them.

Related Web Resources:
Ex-UBS Adviser Pleads Guilty To Charges He Bilked Private Fund Investors, BNA Securities Law-Daily, June 10, 2011
Ex-UBS Advisor Faces Criminal Charges, in Life Settlement Case, On Wall Street, March 3, 2011
SEC CHARGES FORMER UBS FINANCIAL ADVISER WITH DEFRAUDING LIFE SETTLEMENT FUND INVESTORS, SEC.gov, March 3, 2011

More Blog Posts:
Texas Securities Fraud: Planmember Securities Corp. Registered Representatives Accused of Improperly Selling Life Settlement Notes, Stockbroker Fraud Blog, June 27, 2011
Life Settlements or Viaticals should be Considered “Securities,” Recommends the SEC to Congress , Stockbroker Fraud Blog, August 8, 2010
AIG Trying to Get More Investors to Buy Life Settlements, Institutional Investor Securities Blog, April 26, 2011 Continue Reading ›

Securities Fraud Plaintiffs Don’t Have to Show Loss Causation to Obtain Class Action Status, Rules US Supreme Court

Published on: July 9, 2011 | by Shepherd Smith Edwards & Kantas, LLP

In Erica P. John Fund Inc. v. Halliburton Co., the US Supreme Court said that securities fraud plaintiffs don’t have to demonstrate loss causation to receive class certification. The unanimous ruling reinstated claims made by investors that defendant Halliburton Inc. (HAL) made material misrepresentations and misstatements.

In its securities complaint, Archdiocese of Milwaukee Supporting Fund Inc.—now known as Erica P. John Fund Inc.—wanted to certify as a class all investors who had obtained Halliburton stock between June 3, 1999 and December 7, 2001. The plaintiff contends that investors in the proposed class lost money because of securities fraud committed by the defendant, including making material misstatements about litigation expenses, a merger’s benefits, and accounting methodology changes, making misrepresentations in order to up Halliburton stocks’ price rise, and making corrective disclosures to make the price fall.

The district court, however, refused to give class certification on the ground that the plaintiff did not demonstrate loss causation regarding the claims it made. The U.S. Court of Appeals for the Fifth Circuit affirmed that ruling.

The Supreme Court, however, said that even though private securities plaintiffs must show that the defendant’s misconduct was the cause of their economic loss, loss causation does not have to be demonstrated to obtain class certification. Chief Justice John G Roberts authored the decision, which also said that the court didn’t have to address questions related to its in 1988 ruling Basic Inc. v. Levinson, 485 U.S. 224.

Related Web Resources:
Erica P. John Fund Inc. v. Halliburton Co. (PDF)

More Blog Posts:
Securities Fraud: Mutual Funds Investment Adviser Cannot Be Sued Over Misstatement in Prospectuses, Says US Supreme Court, Stockbroker Fraud Blog, June 16, 2011

Number of Securities Class Action Settlements Reached in 2010 Hit Lowest Level in a Decade, Says Report, Stockbroker Fraud Blog, March 31, 2011

Sonoma Valley Bank Shareholders File Both a Class Action Lawsuit and An Insurance Claim Seeking to Recoup Millions, Institutional Investor Securities Blog, June 30, 2011

Two Years of Wall Street Executives’ Pay To Be Seized For Role Played in a Financial Firm’s Collapse, Says FDIC

Published on: July 8, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Federal regulators have approved a plan that would make Wall Street executives forfeit two years’ pay if it was discovered that he/she played a part in a major financial firm’s collapse. Executives who are considered “negligent” and “substantially responsible” are subject to this rule, which clarifies that “negligence,” rather than “gross negligence,” is the standard.

Banks had complained that an earlier version of the rule, which said that any executive who had made strategic decisions could be found responsible for a financial firm’s failure. They were worried that key executives would quit upon initial signs of trouble rather than risk their pay.

The provision is part of a Federal Deposit Insurance Corporation rule, which is supposed to help retain stability within the economy by unwinding beleaguered firms in a manner that is less disruptive than major bankruptcies and taxpayer-financed bailouts. The rule lets the government take over a failing financial company, break it apart, and sell it off.

The liquidation authority is a significant part of the Dodd-Frank financial oversight law. It also designates the order that creditors will be paid whenever a government liquidates a large financial firm. For example, FDIC or the receiver that carried part of the expense of taking over a firm, administrative costs, and employees that are owed money for benefits are among those that would top the list. General creditors fall lower down in order of priority.

It is not enough that a Wall Street executive pay the government or other entities for any misconduct that caused a financial firm to fail. There are also the investors who sustained financial losses as a result of his/her negligence. Here is where our securities fraud attorneys step in. We are committed to helping institutional investors recoup their money.

Related Web Resources:

Federal Deposit Insurance Corporation

More Blog Posts:

SEC Needs to Keep a Closer Eye on FINRA, Says Report, Stockbroker Fraud Blog, March 15, 2011

SEC is Finalizing Its Whistleblower Rules, Says Chairman Schapiro, Stockbroker Fraud Blog, April 28, 2011

Ex-Colonial Bank Chairman is Sentenced to 30 Years in Prison Over $2.9B Bank Fraud

Published on: June 28, 2011 | by Shepherd Smith Edwards & Kantas, LLP

A federal judge has sentenced ex- Taylor, Bean & Whitaker chairman Lee Farkas to 30-years behind bars for heading up a $2.9 billion financial scheme that led to the downfall of both mortgage lender Taylor Bean and Colonial Bank. The bank fraud cheated the government and investors of billions.

Farkas, who was convicted by a jury of numerous criminal counts, conspiracy to bank fraud, wire fraud, and securities fraud, is accused of making $40 million from the scam. He must now turn over about $35 million.

Also paying a price for her involvement in the fraud is ex-Colonial Bank senior vice president Catherine Kissick. The 50-year-old former head of Colonial’s’ mortgage-warehouse lender pleaded guilty to one count of conspiracy to commit bank fraud, wire fraud, and securities fraud.

The SEC is accusing Kissick of enabling the sale of impaired and bogus securities and mortgage loans to Taylor Bean. She also is accused of mischaracterizing the securities as liquid, quality assets to investors.

Assistant Attorney General Lanny Breuer has said that not only did Kissick assist in the execution of the largest bank fraud ever, but also she used her position at Colonial to purchase hundreds of million dollars in assets from TBW that were worthless to fool investors, shareholders, and regulators. Kissick is sentenced to 8-years in prison.

Several others have pleaded guilty to the financial scam, including Teresa Kelly, a former operations supervisor who worked under Kissick. Kelly, who pleaded guilty to the same charge as Kissick, is sentenced to three months behind bars. She is accused of abusing her access to the accounting systems at Colonial Bank to perpetuate the fraud.

Others who have pleaded guilty for their involvement are ex-Taylor Bean president Raymond E. Bowman and former firm treasurer Desiree Brown. Former chief executive Paul Allen was sentenced to 40 months for his participation in the bank scam.

Related Web Resources:
Mortgage Executive Receives 30-Year Sentence, The New York Times, June 30, 2011

Ex-Colonial Bank Executive Kelly Admits to Conspiracy in Taylor Bean Fraud, Bloomberg, March 16, 2011

More Blog Posts:
Washington Mutual Bank Bondholders’ Securities Fraud Lawsuit Against J.P. Morgan Chase & Co. is Revived by Appeals Court, Institutional Investors Securities Blog, June 29, 2011

JP Morgan Chase Agrees to Pay $861M to Lehman Brothers Trustee, Stockbroker Fraud Blog, June 28, 2011

Texas Securities Fraud: Planmember Securities Corp. Registered Representatives Accused of Improperly Selling Life Settlement Notes, Stockbroker Fraud Blog, June 27, 2011

Securities Fraud: Mutual Funds Investment Adviser Cannot Be Sued Over Misstatement in Prospectuses, Says US Supreme Court

Published on: June 16, 2011 | by Shepherd Smith Edwards & Kantas, LLP

In a 5-4 ruling, the US Supreme Court placed specific limits on securities fraud lawsuits this week when it ruled in Janus Capital Group v. First Derivative Traders, No. 09-525 that the mutual funds investment adviser could not be sued over misstatements in fund prospectuses. Justice Clarence Thomas, who wrote for the majority, said that only the fund could be held liable for violating an SEC rule that makes it unlawful for a person to make a directly or indirectly untrue statement of material fact related to the selling or buying of securities.

The fund and its adviser were closely connected. Janus Capital Group, which is a public company, created Janus Investment Fund, which then retained Janus Capital Management to deal with management, investment, and administrative services. However, in its appeal to the nation’s highest court, Janus argued that the funds are separate legal entities. He said that the parent company and subsidiary are not responsible for the prospectuses, and they therefore cannot be held liable. The investors filed their securities fraud lawsuit after the New York attorney general sued the adviser in 2003.

The plaintiffs claimed that the funds disclosure documents falsely indicated that the adviser would implement policies to curb strategies based on fund valuation delays. At issue was whether it could be said that the adviser issued misleading statements that the SEC rule addressed. Justice Thomas said no. He noted although the adviser wrote the words under dispute, the fund was the one that issued them. Meantime, Justice Stephen G. Breyer, who wrote the dissent, said that there is nothing in the English language stopping someone from saying that if several different parties that each played a part in producing a statement then they all played a role in making it.

Houston Securities Arbitration: FINRA Panel Orders Penson Financial Services, Inc. to Pay Boushy North Investments, Ltd. $500,000

Published on: June 11, 2011 | by Shepherd Smith Edwards & Kantas, LLP

In Houston, a FINRA arbitration panel has awarded Boushy North Investments, Ltd. $500,000 in its securities arbitration case against Penson Financial Services, Inc. Boushy North Investments had initially sought $4M in punitive damages and more than $3.8M in compensatory damages for negligence, unauthorized trading, breach of fiduciary duty, and gross negligence. At the Texas securities arbitration hearing, however, the Claimant amended and reduced its compensatory damages and withdrew punitive damages and legal fees.

Boushy North Investments accused Penson of failing to prevent an unsuitable and unauthorized day-trading strategy for its family limited-partnership account. Meantime, Penson denied the allegations, asserted specific defenses, and submitted a Third-Party Complaint against Thomas Cooper and Second Mile Wealth Management, Inc., which asserted causes of action over crack of contract, indemnification, and rascal linked to the Third-Party Respondents’ purported element representations about the trade and the direction of the trading in Claimant’s account. Penson eventually discharged its Third-Party Claim’s result of action for fraud.

The claim for unauthorized trading hadn’t been included in the Original Statement of Claim submitted in September 2009. The first effort to amend that was February. However, FINRA denied it because different or new pleadings cannot be turned in after a panel has been chosen and if a leave to amend hasn’t been granted. Last month, however, after the proper motions were submitted, the panel granted the unauthorized trading count.

Penson Faced Multi-Million Dollar Day-Trading Claim in FINRA Arbitration, Broke and Broker, June 1, 2011
Multi-Million Dollar Day-Trading Claim Hits Penson in FINRA Arbitration, Forbes, May 31, 2011

More Blog Posts:
District Court in Texas Decides that Credit Suisse Securities Doesn’t Have to pay Additional $186,000 Arbitration Award to Luby’s Restaurant Over ARS, Stockbroker Fraud Blog, June 2, 2011
Texas Securities Commissioner’s Emergency Cease and Decease Order Accuses Insignia Energy Group Inc. of Misleading Teachers, Stockbroker Fraud Blog, May 23, 2011
Texas-Based AIG’s Largest Private Shareholder Says US Will Likely Sell Its Shares in the Insurer At Lower Price than Expected, Stockbroker Fraud Blog, May 13, 2011 Continue Reading ›

US Supreme Court Declines Review of Appeals Court Rulings Involving Issues of Antifraud Liability and Institutional Investment Managers’ Disclosure Obligations

Published on: June 11, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The nation’s highest court has decided not to review three federal appeals court rulings that brought up the securities law issues of disclosure obligations and antifraud liability. The cases are Amorosa v. Ernst & Young LLP, Pacific Investment Management Co. v. Mayer Brown LLP, and Full Value Advisors LLC v. SEC.

In the liability case against Ernst & Young, the U.S. Court of Appeals for the Second Circuit held that the district court was correct in turning down the investor’s lawsuit, which alleged fraudulent accounting practices at America Online and later at AOLTime Warner. The court had found that the plaintiff failed to adequately allege loss causation.

The appeals court also affirmed the dismissal of the second liability-related securities fraud case, this one against Mayer Brown LLP, over the latter’s alleged involvement in the fraud at Refco Inc. The court concluded that secondary actors can only be held liable for false statements that they made at the time it issued them (this finding rejected the SEC’s broader view of liability for secondary actors in securities fraud cases) and that without attribution the plaintiffs cannot demonstrate that they depended on the defendants’ false statements. The court also said that “participation in the creation of those statements amounts, at most, to aiding and abetting securities fraud.”

In Full Value Advisors LLC v. SEC, the U.S. Court of Appeals for the District of Columbia Circuit had found that the hedge fund adviser’s constitutional challenge to the SEC’s disclosure requirements for large investment advisers was not ripe for judicial review. This ruling prevented the plaintiff from receiving a ruling on the merits of its claims unless the SEC puts together a report that is accessible to the public and includes the allegedly proprietary information.

Pacific Investment Management Co. v. Mayer Brown LLP

Full Value Advisors LLC v. SEC (PDF)

More Blog Posts:
SEC Securities Settlements Often Don’t Come with Admission of Wrongdoing, Institutional Investors Securities Blog, March 29, 2011

CalPERS Files Securities Fraud Lawsuit Against Lehman Brothers, Institutional Investors Securities Blog, February 10, 2011

Securities Fraud: Mutual Funds Investment Adviser Cannot Be Sued Over Misstatement in Prospectuses, Says US Supreme Court, Stockbroker Fraud Blog, June 16, 2011

New Bill Would Strengthen the US Justice Department’s Ability to Prosecute Fraud

Published on: May 30, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The 2011 Fighting Fraud to Protect Taxpayers Act is a new bill that would enhance the ability of the US Justice Department to fight fraud. The legislation would channel part of the money recovered from fines and penalties toward the prosecution and investigation of mortgage fraud, financial fraud, foreclosure fraud, and health care fraud.

In a joint release put out by Senate Judiciary Committee Chairman Patrick Leahy (D-Vt.) and Sen. Charles Grassley (R-Iowa), who is a ranking committee member, the Justice Department collected more than $6 billion in penalties and fines over the last fiscal year. The proposed bill would up the percentage of funds that the agency can retain in its Working Capital Fund from 3% to 3.5%. That additional 5% would go toward fraud enforcement. This would give the DOJ approximately another $15 million to investigate and prosecute fraud. It would also lead to greater accountability and transparency at DOJ.

In addition, bill would authorize more funds to DOJ that would go toward the prosecution and investigation of False Claims Act violations. It would also expand the Secret Service’s authority to use funds to advance under cover operations.

Grassley also recently submitted a separate action to FINRA Chairman Richard Ketchum talking about how insider trading is “alive and well” in the US financial markets. He noted the recent criminal charges against hedge fund SAC Capital Advisors LP employees Noah Freeman and Donald Longueuil, who are among those that the Securities and Exchange Commission filed charges against over the alleged $30 million insider trading scheme involving at least six public companies. Grassley wants FINRA to provide more information about any referrals from self-regulatory organizations involving SAC Capital Advisors.

Related Web Resources:
Leahy, Grassley Roll Out New Anti-Fraud Legislation, May 5, 2011

S. 890: Fighting Fraud to Protect Taxpayers Act of 2011

More Blog Posts:
SEC to Propose Rule Banning “Felons and Bad Actors” From Involvement in Private Offerings, Institutional Investors Securities Blog, May 29, 2011

FINRA Chief Ketchum Says Securities Regulators Worried Whether Investors Betting on High-Yield Corporate Bonds Really Know What They Are Getting Into, Stokbroker Fraud Blog, March 21, 2011

SEC Staff Wants an SRO to Oversee Investment Advisers, Stokbroker Fraud Blog, January 31, 2011