Investor Lawyers Blog

Ex-Enron Broadband CEO Goes to Prison for Texas Securities Fraud

Published on: October 16, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Joseph Hirko, the ex-Enron Broadband Chief Executive Officer, has been sentenced to a prison term of 16 months for Texas securities fraud. Hirko pleaded guilty to wire fraud a year ago for giving out false information to improve Enron’s financial figures.

The former Enron Broadband CEO and others knew that the broadband operating system was still in development yet Hirko promoted it in press releases and during analyst conferences in order to to elevate Enron’s stock price.

The US Justice Department says Hirko consented to give up approximately $7 million, which will be given through the SEC’s Enron Fair Fund to Enron victims. As part of Hirko’s plea agreement, Enron Creditor’s Recovery Corp. will get $1.7 million from him.

The sentence issued by US District Court Judge Vanessa Gilmore is the maximum possible under federal guidelines for the wire fraud charge. If Hirko had been found guilty during trial, he could have been sentenced to years in prison.

The former Enron Broadband CEO and several others were accused of numerous activities connected to the artificial inflation of the company’s stock. Chief Operating Officer Kevin Hannon and Hirko’s co-CEO, Ken Rice, also pleaded guilty.

Hirko and four other defendants, Rex Shelby, Kevin Ward, Scott Yeager, and Michael Krautz, went to trial in 2005. They were acquitted on certain charges but the jury deadlocked on the rest of the charges. Retrials were scheduled.

A jury acquitted Krautz and convicted Howard, but Judge Gilmore threw out the latter’s conviction on the grounds that the government applied a flawed legal theory. Howard then pleaded guilty. The Supreme Court ruled that because the jury acquitted Yeager of other charges connected to the same alleged scam, he could not be retried.

Related Web Resources:
Former Broadband CEO given 16-month sentence, Chron.com, September 28, 2009

Ex-Enron Broadband Co-CEO Sentenced for Wire Fraud, Bloomberg, September 28, 2009
Read May 15, 2000 Enron Broadband press release, HighBeam.com
The Fall of Enron, Houston Chronicle Continue Reading ›

SEC Warns Charles Schwab Corp. of Possible Civil Charges Over Two Bond Funds

Published on: October 15, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Charles Schwab Corp. has received a Wells notice from the Securities and Exchange Commission about possible civil charges related to the discount brokerage’s Schwab Total Bond Market Fund and Schwab YieldPlus Fund. Schwab has been the target of regulatory investigations over the two funds and is a defendant in a number of civil lawsuits.

SEC staff members plan on recommending civil charges against a number of Schwab affiliates over possible securities violations. The Wells notice is not a finding of wrongdoing or a formal allegation. It does, however, give Schwab an opportunity to respond before the SEC makes a decision on whether to move forward with an enforcement action. The discount brokerage says the possible charges are unwarranted.

In San Francisco, Schwab is defending itself against a class-action fraud lawsuit in federal district court. YieldPlus fund investors are accusing the brokerage firm of failing to fully disclose the risks connected with some securities in the Schwab funds.

Notice: Schwab YieldPlus Investors Must Act Quickly To File Independent Claims For Losses

Published on: October 13, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Investors who invested into YieldPlus Funds issued by the Charles Schwab Corp. must take immediate action to avoid being limited in recovery to the amount obtained through a class action suit. Many with significant losses have been advised by attorneys to seek individual recovery in Securities Arbitration through the Financial Industry Regulatory Authority (FINRA). Those with smaller losses are being advised to remain in the class action.

Most investors who seek recovery of investment losses through private claims receive a greater portion of their losses than those who remain in class actions, even after paying expenses including legal fees. In some cases investors can recover many times the amount paid through class action settlements.

To file a private claim a YieldPlus investor must “opt out” of the class on or before December 28, 2009. This requires the investor to provide a written statement requesting exclusion from the Schwab YieldPlus class-action lawsuit, sign and date the request, include their mailing address and mail this information by the due date. It is highly recommended that this be done earlier than that date and on a form provided by the Administrator. Any flaw in the process can result in a failure to be eligible to proceed.

Citigroup ordered to pay $600,000 FINRA fine for inadequate supervision that may have allowed foreign clients to avoid paying taxes on dividends

Published on: October 12, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup, Inc. has agreed to pay a $600,000 Financial Industry Regulatory Authority fine to settle claims that its alleged inadequate supervision of certain derivative transactions between 2002 and 2005 allowed a number of foreign clients to avoid paying taxes on dividends.

The way this allegedly worked is that during a period of dividend payments, the customer would sell stock to Citigroup. The bank would pay the client an income equal to the dividend. It would also pay any share price increase.

FINRA is accusing Citigroup of failing to control trades and failing to prevent improper trades, both internally and with trading partners. The dividend equivalent that certain foreign Citigroup clients obtained was not considered subject to withholding taxes. Citigroup’s strategy was allegedly intended to lower its tax bill.

NASAA Releases Investment Adviser Best Practices To Improve Compliance

Published on: October 10, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The North American Securities Administrators Association has updated its best practices for investment advisers. The best practices were developed after a series of exams revealed several problem areas.

458 state-level investment advisers took part in examinations between January and May 2009. Some 1,887 deficiencies in 13 compliance areas, including the areas of books and records, registration, supervision, unethical business practices, and financials, were found.

NASAA President Denise Voigt Crawford says the best practices should help strengthen internal compliance programs. This will hopefully decrease the chances of regulatory violations (that can lead to securities fraud) while helping investment advisers provide better client services and meet compliance challenges.

NASAA Best Practices Recommendations for Compliance Procedures and Practices:

• Update contracts.
• Revise and update the disclosure brochure and form ADV every year.
• Back up information that is stored electronically.
• Ensure records are protected.
• Prepare and maintain financial records, other mandatory records, and client profiles.
• Develop a manual of relevant, written compliance and supervisory procedures.
• Make sure financials are always accurate.
• Each year, prepare and send out a current privacy policy.
• If necessary, maintain surety bond.
• If applicable, put into place the proper custody safeguards.
• Ensure that all advertisements are accurate.
• Look at disclosures, solicitor agreements, and delivery procedures.

At this time, state regulators are in charge of overseeing investment advisers who manage under $25 million. The Securities and Exchange Commission supervises investment advisers who manage over $25 million. NASAA is seeking to increase state oversight to include investment managers who oversee assets of up to $100 million. The Financial Industry Regulatory Authority also wants to expand its investment adviser authority.

Related Web Resources:
State inspectors find fewer problems among investment advisers, Investment News, September 29, 2009
NASAA Outlines Best Practices For Investment Advisers, NASAA.org Continue Reading ›

SEC Office of Administrative Services’ Office of Acquisitions Has Shortfalls that Could Impede Operation, Says Audit

Published on: October 8, 2009 | by Shepherd Smith Edwards & Kantas, LLP

According to an external audit of the SEC Office of Administrative Services’ Office of Acquisitions (OA), there exists “significant risk areas” that could affect operation and lead to improper accounting of federal resources. OA is responsible for the SEC’s contracting and procurement functions.

Shortfalls revealed included:

• Failure to submit accurate information in the Federal Procurement Data System • Failure to keep accurate information and records about contracting and procurement • Failure to engage in contract close-out procedures that are in accordance with Federal Acquisition Regulation and SEC regulations.
• Failure to properly manage and supervise personnel training and contract activities at regional offices
Per the report, shortfalls appear to have occurred due to a number of issues, including insufficient data for properly managing operations, poorly trained employees, and operational procedures that are not consistent.

Also, after checking the SEC’s Office of Financial Management records, the Audit found $13 million in contracts that were not identified in OA’s consolidated spreadsheet. In certain cases, OA had marked certain contracts as closed when OFM still noted them as open.

Following the audit, 10 recommendations were issued, including establishing new internal review processes, revising recordkeeping procedures, modifying operational processes, and coming up with a training plan for contracting obligations and personnel performing procurement duties.

SEC Inspector General H. David Kotz also issued a separate audit which found problems within the SEC’s Office of Freedom of Information. His audit found that the SEC had compliance issues with the Freedom of Information Act, which outlines procedures that have to by abided by when members of the public ask the federal agency for information.

Deficiencies included a lack of written procedures and policies for handling such requests, improper or inadequate procedures for disclosing documents that are not in compliance, failing to properly manage certain information, discriminating against certain entities asking for data, the improper processing of certain request, and failure to comply by rules requiring that an information request receives a response within 20 days.

Related Web Resources:
Watchdog:Flaws In SEC Acquisitions,Freedom Of Information Offices, Dow Jones, September 25, 2009
SEC Office of Administrative Services’ Office of Acquisitions

SEC FOIA/PA Program, The Freedom of Information & Privacy Act Office, SEC.gov Continue Reading ›

Make Credit Rating Agencies Collectively Liable for Inaccuracies, Proposes Lawmaker

Published on: October 7, 2009 | by Shepherd Smith Edwards & Kantas, LLP

House Financial Services subcommittee chair Paul Kanjorski introduced a new draft bill that proposes making credit ratings agencies collectively liable for inaccuracies. The agencies received a lot of heat when they failed to properly warn investors about the risks associated with subprime mortgage securities before the market fell.

One problem with the current system is that the firms issuing the securities are the ones paying the credit ratings agencies for rating the securities. Kanjorski’s draft bill lets investors pursue lawsuits against credit rating agencies that recklessly or intentionally did not examine key data to determine the ratings. He says that collective liability could compel the ratings agencies to provide reliable, quality ratings while providing the proper incentive for them to monitor each other.

Critics of the plan, including Republicans and industry executives, warned that collective liability could result in a slew of expensive complaints while decreasing competition even more in an industry that Fitch Ratings, Moody’s Investors Services, and Standard and Poor’s already dominate.

Former Merrill Lynch Employee, Guilty of $1.4 Million Texas Securities Fraud Scheme, Receives Prison Term

Published on: October 5, 2009 | by Shepherd Smith Edwards & Kantas, LLP

A judge has ordered a former Merrill Lynch employee, San Antonio stockbroker Bruce E. Hammonds, to serve almost five years in prison and three years supervised release for Texas securities fraud. Bruce E. Hammonds also must pay $1.1 million in restitution to the Merrill Lynch investors he defrauded and almost $60,000 to two clients that he continued to defraud after the broker-dealer fired him in June 2008.

Hammonds reportedly did not deny the alleged fraud when Merrill Lynch confronted him about his activities. The broker-dealer has paid the investment fraud victims back in full.

According to the criminal complaint affidavit, Hammonds opened a working capital account under the name B & J Partnership.He was supposed to register the account in an internal monitoring system, which he never did. Instead of placing investors’ funds in a Merrill Lynch fund, he deposited $1.4 million of their money in his working capital account. He provided clients with charts demonstrating the performance of the B&J Partnership investment fund even though no such fund existed.

Hammonds pleaded guilty to federal securities fraud charges earlier this year after an investigation found that between August 2006 and October 2008, Hammonds didn’t invest clients’ funds in stocks and hedge funds. Instead, he used the money for personal purposes, including an alleged house-flipping business. He gave back $486,000 to clients so it would appear as if they had made money off their investments.

Related Web Resources:
Judge sends ex-stockbroker to jail for bilking investors, Business Journal, October 2, 2009
Stockbroker sent to prison for $1.4 million scheme, My San Antonio, October 3, 2009 Continue Reading ›

Colorado Sues Stifel, Nicolaus for Misrepresenting Auction-Rate Securities to Investors

Published on: October 3, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The Colorado Securities Division is suing Stifel, Nicolaus & Co. for securities fraud. State regulators are accusing the broker-dealer of making false assurances to investors about auction-rate securities.

In its Colorado securities fraud complaint, the securities division accused Stifel Nifel, Nicolaus of violating the Colorado Securities Act by allowing investors to think that their ARS-investments would always be liquid, failing to properly supervise sales team members, and making unsuitable investment recommendations to clients.

The Division claims that Stifel, in the role of underwriter, knew that there were liquidity risks linked to ARS but never let its sales force know about them. Stifel brokers allegedly compared ARS to money market funds on a regular basis and sold them as if they were appropriate for cash management purposes. Investors were told they would always be able to access their funds as if it were cash. However, when the ARS market collapsed in February 2008, the Colorado investors that purchased auction-rate securities were unable to get their funds or sell their bonds.

Indiana Accuses Stifel Nicolaus & Co. of Auction Rate Securities Fraud

Published on: October 1, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The Indiana Secretary of State’s Office filed an administrative complaint today accusing Stifel Nicolaus & Co.’s local office of securities fraud, failing to properly train members of its sales team, and failing to disclose risks associated with purchasing auction-rate securities. As a result, some 141 Hoosiers who had invested $54.0 million sustained losses when the ARS market fell apart last year and their securities were frozen.

92 of the ARS investors who were affected were Jeffrey Cohen’s clients. Cohen is the local Stifel office’s managing director. His clients had invested $45 million.

For violating the Indiana Securities Act, the broker-dealer could be ordered to pay a $10,000 fine/violation, as well as restitution to the securities fraud victims. Other states, including Colorado and Missouri, have made similar charges against Stifel Nicolaus.

Colorado’s securities regulator also filed its auction-rate securities complaint against Stifel Nicolaus today alleging that the broker-dealer failed to fully inform local investors about ARS risks. The securities fraud lawsuit also accuses the broker-dealer of violating the Colorado Securities Act, misrepresenting ARS as short-term investments that were liquid, and providing clients with unsuitable recommendations.

Missouri’s complaint, filed in March by Secretary of State Robin Carnahan, claims that over 1,200 investors suffered losses when ARS worth $180 million were frozen.

Auction-Rate Securities
Many investors throughout the US were shocked to discover that the ARS they had purchased were not, as broker-dealers had told them, investments that were liquid like cash. Our stockbroker fraud law firm continues to work diligently with many ARS clients to recover their investments.

Related Web Resources:
Local Stifel office accused of securities fraud, IBJ, October 1, 2009
Colorado charges Stifel unit with ARS sales fraud, Reuters, October 1, 2009
Continue Reading ›