Articles Posted in Texas Securities Fraud

In her Texas securities lawsuit, investor Lillian Hohenstein is suing Behringer Harvard REIT I, one of the biggest nontraded real estate investment trusts. Hohenstein, who purchased 1,275 shares from the trust between 2004 and 2008, claims that the REIT, Behringer Harvard Holdings LLC, President and Chief Executive Robert Aisner, other company executives, and its board members of breach of fiduciary duty and negligence. Aisner and board members also are accused of making allegedly misleading and false statements when they recommended that investors turn down outside fund offers from those wanting to pay the REIT’s shares for as low as $180/share.

According to Hohenstein ‘s Texas REIT lawsuit, the REIT attempted to conceal its poor performance by using investors’ own money to pay them, while simultaneously depleting the company of millions of dollars even as top executives benefited. Behringer Harvard REIT I is among the nontraded REITs that have seen their value drop significantly following the collapse of the real estate market.

The REIT complaint contends that for a certain period of time, HPT Management Services LP and Behringer Advisors respectively collected fees of $77 million and $104 million, which, per the securities lawsuit, over the life of the trust is about 4% of the REITs existing assets. Behringer Harvard COO Jason Mattox, who says Hohenstein ‘s case is meritless, says the company has since lowered his fees, even waiving asset management fees of over $30 million.

Three months after pleading guilty to obstruction of an SEC proceeding related to its probe of the Stanford Ponzi scam, ex-Stanford Financial Group chief investment officer Laura Pendergest-Holt, 38, has been sentenced to three years behind bars. Texas financier R. Allen Stanford defrauded investors of over $7 billion. Pendergest-Holt was the first person indicted in the case involving him.

According to prosecutors, a number of former Stanford executives worked to conceal the true financial health of the bank and gave the SEC misleading information during its investigation into the Ponzi scheme in 2009. Pendergest-Holt had been scheduled to go to trial on 21 criminal counts before she decided to plead guilty to the single count of obstruction.

She owned up to lying to the firm’s financial advisers and investors, including telling them that the international money managers that she oversaw had placed most of the bank’s assets in investments that were liquid and conservative. She also claimed to supervise the bank’s whole investment portfolio, when she was actually only familiar with about two portions of it comprising just 12% of total assets. It wasn’t until 2009 that she found out that the portfolio’s third and biggest tier was made up of real estate that was overvalued, high-risk private equity investments, and a $1.6 billion personal loan issued to Stanford himself. Pendergest-Holt admitted that when she met with the SEC after making that discovery she purposely tried to stall the Commission’s investigation. She said that she had wanted to give the company-not Mr. Stanford-an opportunity to amend the disclosures so they “could fall into line.”

According to Assistant U.S. Attorney Jason Varnado, Pendergest-Holt was allowed to plead guilty to just one criminal count because she didn’t know that Stanford was running a Ponzi scam until it was almost over. However, although her legal team tried to get her confinement moved from prison to her home or a halfway house, Varnado opposed the change of venue. He pointed out that because of federal sentencing guidelines, this could have left her with a much shorter sentence. Her efforts to have another month at home with her family, including her 16-month old daughter, were also rejected. (Pendergest-Holt’s friends and family have promoted the image of her as just another Stanford Ponzi scam victim who also lost a great deal financially, Varnado, however, said that he didn’t think Pendergest-Holt, who also gave her own statement in court, was taking responsibility for her actions, which included misleading investors. He said that not only was she not a victim, but “she is a federal felon.”)

Meantime, Stanford is serving his 110 years behind bars in Florida. His Stanford International Bank in Antigua sold fake CDs to investors and he took their money to fund a number of businesses that failed, support his lavish lifestyle, and bribe regulators. All the while, investors from over 100 countries were wrongly led to believe that their money was being invested in bonds, stocks, and other securities.

Ex-Stanford Exec Gets 3 Years for $7B Swindle, ABC News/AP, September 13, 2012

Stanford Ex-Investment Chief Pendergest Holt Gets 3 Years, Bloomberg News, September 13, 2012

United States v. Laura Pendergest-Holt, Gilberto Lopez and Mark Kuhrt, Court Docket Number: H-09-342, US Department of Justice

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A number of mutual funds are suing BP (BP) in Texas for common fraud, negligent misrepresentation, and statutory fraud. They are contending that they wouldn’t have paid top price for the company’s shares if they’d known the “truth.” Plaintiffs include Skandia Global Funds, Yorkshire Pensions Authority, and GAM Fund Management.

The institutional investors are claiming that they lost huge amounts of money because of misleading statements that BP made about having a priority ‘safety first’ policy and that the oil giant tried to mislead them about the true extent of the 2010 oil spill while downplaying the likely scope of its responsibility for the disaster, which killed 11 people and is now considered the worst offshore spill in our nation’s history. They believe that statements were made to make it seem as if: the leak wasn’t as widespread, BP didn’t do anything wrong to cause the tragedy, and “consequential damages were limited,” not only minimized the seriousness in the decline of BP’s stock price but also caused Plaintiffs to make the decision to buy more shares. The mutual funds are accusing BP executives of exhibiting a “reckless disregard” of what was actually happening and concealing that the oil spill was a lot bigger.

The disaster began on April 20, 2010 when an explosion rocked the Deepwater Horizon, a drilling rig that was licensed to BP. Not only were lives lost, but also in two days, the rig, which sank, left an oil slick of five miles in its wake, with millions of gallons of crude oil spilling out before the well could be capped. Already, BP has put aside about $38 billion for lawsuits involving US authorities over civil claims related to the oil spill. (Criminal charges could be likely).

According to the U.S. District Court for the Western District of Texas, the SEC violated the Federal Rules of Civil Procedure when it deposed a third party witness in its enforcement case dealing with an allegedly fraudulent life settlements accounting scam. The case is SEC v. Life Partners Holdings Inc. While the Commission contended that under its regulatory authority to look into possible securities law violations the deposition was properly obtained, the Judge James Nowlin disagreed, backing up the defendants’ claim that the regulator was trying to get ex-parte discovery.

In the Texas securities lawsuit it filed against Life Partners Holdings and three of its senior executives several months ago, the Commission is accusing the defendants of being allegedly involved in an accounting scam over life settlements involving the selling and buying of fractional interests of life insurance policies in the secondary market. The agency also said that they neglected to tell shareholders that the financial firm was materially underestimating the life expectancy estimates it employed to determine transaction prices.

According to the Court, prior to the Rule 26(f) conference between the two parties and after the SEC lawsuit was filed, the Commission deposed Peter Cangany, who was a Life Partner auditor and a third party. Contending that the deposition was obtained without the court’s leave, before the conference, and without them being notified, the defendants filed a motion for sanctions. Meantime, the SEC came back with the defense that the subpoena it sent to Cangany had been an administrative one seeking more information about possible violations that hadn’t been made in the lawsuit.

Per the court’s recap, what is pertinent here is whether the FRCP governs Cangany’s deposition or it was obtained pursuant to the investigatory authority of the FRCP. It noted that although the SEC doesn’t explicitly point to the reason for the deposition, it “implies” that Cangany was deposed to look into possible violations he made as the auditor of Life Partner. Topics that came up during the deposition included the practices of Life Partners as they relate to revenue recognition, life expectancy, and asset impairment-areas that are the basis of the SEC’s lawsuit against Life Partners.

Although per Rule 26(d)(1), a party cannot pursue recovery before parties have spoken pursuant to Rule 26(f) and in instances where the parties have not stipulated, a defendant looking to obtain a deposition before the conference has to first get the court’s permission first, and also, a party looking to depose a witness must give notice to other party, the court noted that the Commission deposed Cangany before the Rule 26(f) conference, without the stipulation of the other parties, and without getting the court’s leave. The court also said that even though the Commission gave the defendants the transcript and contended that, as a result, they were not prejudiced, this is not the end result. By taking an extra-judicial deposition from a non-party witness to get testimony against the defendants, the court said that the SEC did cause the defendants to be prejudiced. Also, not notifying the defendants that Cangany was to be deposed prevented them from being able to cross-examine him and object to testimony that the agency had elicited.

The court says the SEC cannot use this deposition testimony in its lawsuit against Life Partners. It also has to pay the defendants’ legal fees legal fees for filing the motion for sanctions.

Read the Complaint (PDF)

Court Raps SEC for Discovery Violation In Suit Over Alleged Life Settlements Scam, Bloomberg BNA, August 21, 2012

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Reversing a trial jury’s ruling, the Texas Court of Appeals has said that a letter of intent to sell Fiduciary Financial Services of the Southwest, Inc.’s outstanding stock to Corilant Financial, L.P. and Corilant Financial Management, LLC is not an enforceable contract. The appeal’s court ruling also reverses the lower court’s decision to award Corilant more than $1.8 million in would-be purchaser damages, interest, and legal fees.

Corilant filed a breach of contract lawsuit against Fiduciary Financial Services of the Southwest after the latter, a Dallas-based registered investment advisory firm, changed its mind and decided not to sell the company stock to it. Corilant and FFSS Paul Welch had met in April 2006 regarding a potential acquisition.

In May 2007, they signed a letter of intent that included provisions stating that Corilant would pay for legal fees related to the drafting of definitive agreements, the “Definitive Agreements” would be signed as soon as was “practicable,” and the letter of intent was an agreement that was “legally binding and enforceable.” Also, per the letter, there would be earn-out payments for the next five years after closing and Corilant would issue payments equivalent to gross revenues minus 19.1% of gross revenues minus FFSS-borne expenses, “including salaries.”

After Corilant sent drafts of a stock purchase agreement, an employment agreement, and a proxy and voting rights agreement to FFSS, the latter said it wouldn’t sign the agreement and notified Corilant that discussions between both parties were over. Corilant then filed its breach of contract lawsuit against the Texas-based RIA and 10 of its stockholders/employees. A first trial concluded with a hung jury. The lawsuit was retried and that jury ruled in favor of Corilant.

To the Texas appeals court, FFSS brought up 11 issues, including its assertion that the trial court made a mistake when it found that the contract with Corilant to sell 98.5% of FFSS’s outstanding stock was enforceable. FFSS contended that the LOI terms were not definite enough to be enforced.

The appeals court found no evidence that there was a “mutual understanding” on how earn-out payments between the two parties would be structured. The court said the letter lacked specific terms about how the 19.1% earn-out payments would be characterized. While FFFS held the belief that the 19.1% payments were to be considered a management fee and would minimize tax liability, Corilant thought that the 19.1% was a dividend and that FFSS would not be able to deduct it as a management fee.

The appeals court said that seeing as at least one essential term was lacking, per the law it not enforceable. It also said that the management agreement provision, which allows material matters to stay open for future negotiations and modifications for “indefiniteness” cannot be enforced.

In Fiduciary Financial Services of Southwest Inc. v. Corilant Financial LP

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The U.S. District Court for the Southern District of Texas has tossed out a would-be class action securities lawsuit challenging BP plc’s (BP) cancellation of a 2010 first quarter dividend announcement after the Deepwater Horizon disaster. Per the court, the plaintiff did not demonstrate that BP or subsidiary BP American had minimum contact with the state of Oregon and failed to succeed in making out a prima facie case for specific jurisdiction over BP. Oregon rules were applied to this case, said the court, because the claim was originally submitted to the U.S. District for the District of Oregon.

The Deepwater Horizon rig was involved in a blast on April 20, 2010. Seven days later, BP said its Board of Directors announced that $0.84/ADS was the quarterly dividend for the year’s quarter and that this would be paid to “shareholders of record as of May 7, 2010” on June 2, 2010. The plaintiff contends that even though BP gave shareholders assurances that the dividend would be paid, due to pressure from the Obama Administration and the US Congress, on June 16 it announced that first quarter dividend was now canceled.

The plaintiff’s lawsuit makes various claims in an attempt to make BP pay the dividend. The court, however, has thrown out the case due to lack of jurisdiction. The district court said that the plaintiff failed to plead any facts suggesting what actions (if any) BP America executed in Oregon for BP or “at its behest.” The plaintiff therefore did not succeed in satisfying its burden of producing enough evidence to establish that BP is the corporate parent of a subsidiary with “continuous and systematic business contacts” that would approximate a “physical presence in Oregon.” The court also said that if even if the plaintiff were able to demonstrate that BP America had minimum contact with Oregon, the plaintiff did not plead an agency relationship between BP America and BP to let the court “impute to defendant” any theoretical contacts of BP America. Also, per the court, no facts exist to imply that BP had direct contacts with the state that resulted in this cause of action.

Suit Over BP’s Dividend Cancellation After Deepwater Disaster Is Dismissed, Bloomberg/BNA, July 9, 2012

Glenn v. BP plc, Justia, August 10, 2011

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