Securities Fraud

Scottrade Agrees to $950,000 Civil Penalty To Resolve SEC Charges of Fraudulent Misrepresentation Regarding Nasdaq Pre-Open Order Executions

Published on: July 16, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Scottrade Inc. agreed to pay a $950,000 civil penalty to settle Securities and Exchange Commission charges that it made fraudulent misrepresentations to clients related to the execution of Nasdaq pre-open orders. The brokerage firm is not admitting to or denying wrongdoing by settling the charges. Scottrade is, however, agreeing to cease and desist from committing future violations.

Pre-open orders are normally placed after the market closes for execution when the market opens next. The SEC alleges that Scottrade made fraudulent misrepresentations when Scottrade told customers it would direct their orders based on a number of factors, including liquidity at market opening.

The SEC says that when a broker-dealer accepts customer orders, the firm is impliedly representing that it will make sure to review the quality of execution on orders. SEC Enforcement Director Linda Thomsen says that Scottrade not only failed to regularly and properly review the execution process but it neglected to consider the way technological advances were impacting the orders.

Connecticut Brokerage Aide Must Pay $58,825 To Settle Charges He Made Unauthorized Securities Trades

Published on: June 27, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York has ordered a Connecticut man to pay $58,825 in civil penalties, prejudgment interest, and disgorgement to settle charges he engaged in a scheme to take part in unauthorized securities trades, which caused prices to rise dramatically.

The Securities and Exchange Commission says that Joshua Eudowe, who worked at a brokerage firm owned by his stepfather, Lawrence Goldstein, was not a registered representative but was brought in to help with marketing and research efforts.

In 2006, the SEC says that he made several unauthorized purchases of CreditRiskMonitor.com Inc. and FRMO Corp. stocks in client accounts of investment partnerships managed by his stepfather. Eudowe also is accused of hacking into the company Web site and using Goldstein’s password to engage in unauthorized securities trades without permission.

Another Lawsuit Against Former Merrill Lynch Research Analyst Henry Blodget is Dismissed Due to Loss Causation

Published on: June 23, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District has dismissed a securities fraud lawsuit filed by investor Nicholas Vale against ex-Merrill Lynch Internet Group head Henry Blodget on the grounds that Vale failed to factually show how the defendant’s fraud caused his investment losses.

In his lawsuit, Vale accused Blodget of issuing bogus positive reports about Internet Capital Group Inc. and B2B Internet HOLDRs, an exchange traded fund. He says that he depended on reports by Blodget and Merrill Lynch when he bought almost 3,000 ICGE stock shares for about $300,000 in 1999 and he would not have bought the shares if not for Blodget’s reputation as a research analyst.

In 2002, the New York State Attorney General’s Office accused Merrill Lynch, Pierce, Fenner & Smith Inc., Merrill Lynch & Co. Inc., and Blodget of regularly issuing false or misleading recommendations about Internet-based stocks to try and increase the firm’s underwriting business. Merrill Lynch settled the allegations with a $100 million fine. Vale, who says that he suffered major losses after selling the shares in 2000, is one of a large number of investors that have filed lawsuits accusing Merrill Lynch and Blodget of securities fraud.

Securities Fraud Lawsuit Against Ex-Merrill Lynch Analyst Accused of Issuing False Reports About CMGI Inc. is Dismissed

Published on: May 20, 2008 | by Shepherd Smith Edwards & Kantas, LLP

In New York, a judge has dismissed the securities fraud case against former Merrill Lynch research analyst Henry Blodget. The former lead Internet analyst of the company’s Internet Group is accused of allegedly issuing false reports regarding CMGI Inc. stock.

In 2007, investor Ronald Ventura had filed a securities fraud lawsuit against Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Inc., and Blodget. Ventura is one of a number of plaintiffs that have sued the defendants after the New York State Attorney General’s Office made allegations that they had published misleading or false recommendations about Internet-based stocks. Merrill Lynch agreed to a $100 million fine in 2002 as part of a settlement deal with the NYAG.

In The U.S. District Court for the Southern District of New York earlier this month, Judge John Keenan said that Ronald Ventura’s complaint “fails to plead that the alleged false statements made by the defendants were the cause of Ventura’s financial losses.”

W.P. Carey & Co Settles SEC Charges Over Payments of Undisclosed REIT Compensation

Published on: March 25, 2008 | by Shepherd Smith Edwards & Kantas, LLP

REIT Manager W.P. Carey & Co has reached a $30M settlement agreement with the SEC over antifraud charges.

According to the SEC, W.P. Carey, its ex-CFO John J. Park, and its former chief accounting officer Claude Fernandez paid $10 million in undisclosed compensation to a brokerage firm that sold real estate investment trusts (REITs). The three parties then misrepresented these moneys in periodic filings to keep the compensations secret.

These activities allegedly benefited the broker-dealer and W.P. Carey, which received larger fees as a result, including $6.4 million in reimbursements and illegal fees. Park and Fernandez are accused of using fake invoices to hide the payments and get around the regulatory limitations about compensation.

Ex-Wood Rivers Partners Hedge Fund Manager to Serve 3 Years in Prison for Defrauding Investors of $88 Million

Published on: October 23, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Wood Rivers Partners LP Founder John Whittier has been ordered to serve 36 months in federal prison. The former hedge fund manager pled guilty to charges that he defrauded investors of about $88 million over a two-year-period.

Whittier admitted to deceiving investor clients and making them think that he would keep risks low while he employed diverse investment strategies. Prosecutors also say that Whittier lied when he told investors that the hedge fund they had invested in was being audited.

Instead, Whittier placed about 80% of the assets in his Wood River US hedge fund portfolio, worth $127 million, into one stock, called Endwave. In doing so, he was in breach of his investors’ trust.

Morgan Stanley Former Associate and Husband Sentenced in Insider Trading Scheme

Published on: October 16, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York has sentenced former Morgan Stanley Associate Randi Collotta and her husband, an attorney, to home confinement and ordered them to pay more than $10,000 in fines, plus a forfeiture, for their alleged roles in a large insider trading scheme which apparently resulted in at least $15 million of illicit profits.

At all relevant times, Randi Collotta was an associate in Morgan Stanley & Co. Inc.’s global compliance division, the indictment said. Her husband practiced law at a firm in Long Island at the time of his arrest, a source knowledgeable with the case said. The SEC charged the Collottas and 12 others with insider trading violations for using information stolen from UBS Securities LLC and Morgan Stanley.

The indictment detailed trades the Collottas allegedly made with insider information gained by Collotta at Morgan Stanley. She passed the information to her husband, who passed it to a co-conspirator, who then made trades based on the information and passed the information to a second co-conspirator, who traded on the information as well.

MetLife Securities Broker Charged with Stealing from 9/11 Victim’s Widow

Published on: October 15, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission and U.S. Attorney for the Eastern District of New York have filed cases accusing a former MetLife employee of what is perhaps a new low in securities fraud: Misappropriation of funds from the widow of a victim of the September 11 terrorist attack on the World Trade Center.

The SEC said that defendant Kevin James Dunn Jr., then an employee of MetLife Securities Inc., was friends with the widow and convinced her to invest her terror-attack compensation funds with him and MetLife. The SEC said Dunn “then proceeded to betray the customer’s trust” by engaging in a “series of material misrepresentations” about the purchase and sale of securities in her account. That and other fraudulent actions were “aimed at swindling [the client] out of a substantial portion” of her 9/11 widow’s compensation.

Dunn allegedly misappropriated $248,000 from the client by creating a joint account in both their names, forging her signature on transaction documents, and “telling her outrageous lies” concerning the status of the account. He also deceived her into providing him with blank checks which he used to deposit funds into his own bank account.

Stock-Loan Traders from Morgan Stanley, Janney Montgomery Scott, and Other Brokerage Firms Charged In $12 Million Stock-Loan Scam by SEC and DOJ

Published on: October 4, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission and the Department of Justice have separately filed charges against a number of people for their alleged involvement in a $12 million stock-loan fraud scam.

The criminal case involves charges filed for securities fraud conspiracy and other charges against stock-loan traders at Janney Montgomery Scott LLC and Morgan Stanley, including Anthony Lupo, Peter Sherlock, Donato Tramontozzi, Craig DeMizio, and Andrew Caccioppoli.

The DOJ says charges stem from its going investigation kickbacks and bribery that are allegedly happening within the securities industry. It says that securities firms frequently borrow and lend securities to each other, as well as coordinate short-sale transactions. Stock-loan finders look for inventories of a given security and match lenders and borrowers for transactions.

While Former Merrill Lynch & Co. Stockbroker is Found Guilty of Witness Tampering, Seven Other Defendants are Acquitted in “Squawk Box” Securities Fraud Case Involving A.B. Watley Employees

Published on: July 7, 2007 | by Shepherd Smith Edwards & Kantas, LLP

In the U.S. District Court for the Eastern District of New York, a jury issued its verdict in the “squawk box” front running case. Seven people were acquitted of securities fraud, while Timothy O’Connell, a former Merrill Lynch & Co. stockbroker was found guilty of making false statements and of witness tampering. The judge, however, declared a mistrial for the one remaining conspiracy count to commit securities fraud against O’Connell. He faces up to 15 years in prison for the convictions, and prosecutors have announced that they will retry the conspiracy charge.

According to prosecutors, O’Connell, and the two other broker defendants, David Ghysels-a former Lehman Brothers broker-and Kenneth Mahaffy-a former Merrill Lynch & Co. brokers, purposely placed off-the-hook phones that were active next to internal speaker systems at their firms.

The purpose of doing this was to let a number of former A.B. Watley employees, including ex-president Robert Malin, former proprietary trading supervisor Keevan Leonard, former compliance director Linus Nwaigwe, and former CEO Michael Picone, listen in while large orders about to be made by institutional clients were broadcast over the boxes.