Investor Lawyers Blog

US Lawmakers Want SEC and Treasury Department to Answer Questions About Merrill Lynch Executive Bonuses and TARP Funds

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

US lawmakers are asking government regulators some tough questions about executive compensation at investment banks. Last week, Rep Dennis Kucinich, who heads the House Oversight Committee’s Domestic Policy Subcommittee, asked the Securities and Exchange Commission to determine whether Bank of America Corp. violated federal securities laws when it did not tell shareholders that Merrill Lynch was going to pay executives $3.62 billion in bonuses. Kucinich noted that these bonuses were 22 times larger than what AIG executives were offered-equivalent to 36.2% of the Troubled Asset Relief Program (TARP) funds that Merrill received.

A March filing by New York Attorney General Andrew Cuomo (whose office is also pursuing this matter) claims that even though the firm had already made the decision to accelerate bonus payments, Merrill told Cuomo and the House Oversight Committee that it planned to make incentive compensation decisions at the end of the year. Cuomo claims that Bank of America neglected to tell shareholders that Merrill was going to offer executives big bonuses before the BofA merger was final.

When BofA was questioned about Cuomo’s claims, the bank said it revealed everything it was required to before the shareholders voted on the merger. Kucinich says that this makes him wonder about the SEC’s interpretation of fiduciary duty when it comes to revealing all “material” data to shareholders when asking for shareholder action and what is considers “material” information for proxy rules meant to protect investors under the Securities Exchange Act of 1934.

He asked the SEC whether it thinks that B of A’s omission is a material one and, if so, what it would do to redress it. The House Oversight Committee is trying to determine whether officials from Bank of America and Merrill misled Congress about the executive bonuses and their timing.

Meantime, Rep. Edolphus Towns, who oversees the House Committee and Oversight Reform, told Treasury Secretary Tim Geithner that he was worried about media reports that the Treasury Department was trying to “circumvent” statutory restrictions regarding executive pay for companies availing of TARP funds. Towns wants Geithner to respond to news reports that the Treasury Department established special entities to receive federal bailout funds that could then be channeled toward corporate recipients so as to avoid executive pay restrictions and requirements that the US get an ownership interest in the bailout firms. Towns cautioned that it would not be wise for the Treasury Department to allow excessive pay practices to continue at firms that taxpayers had bailed out.

Kucinich Asks If Merrill Bonuses Broke Laws, NY Times, April 7, 2009
Read Representative Towns’ Letter to Treasury Secretary Geithner (PDF)
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Texas Court Freezes Assets of Weizhen Tang After SEC Accuses Him of Operating Multi-Million Dollar Ponzi Scam Targeting Chinese-American Investors

Published on: April 14, 2009 | by Shepherd Smith Edwards & Kantas, LLP

This month, the U.S. District Court for the Northern District of Texas put forth an order freezing the assets of Weizhen Tang, his hedge fund Oversea Chinese Fund LP, a number of related entities, and an investment adviser. The move comes after the Securities and Exchange Commission accused Tang and the fund of running a multi-million dollar Ponzi scam. Tang calls himself the “Chinese Warren Buffet.” The federal judge in Dallas has appointed a receiver to take charge of Tang’s assets.

According to the SEC, Tang raised somewhere between $50 million to $75 million, procuring the funds from over 200 investors. Chinese-American investors were reportedly his primary targets.

The commission says that Tang has been running his hedge fund as a Ponzi scheme for at least a few years and that he allegedly told investors that he posted false profits on their account statements to cover up the significant trading losses and bring in new investors while using money from new investors to return principle and pay at least $8 million in bogus profits to other investors.

The SEC is charging Tang, Oversea Chinese Fund LP, WinWin Capital Management LLC, J.O.R. & Associates LLC, Weizhen Tang Corp. WinWin Capital LP, and Weizhen Tang & Associates Inc. Named as relief defendants are Tang entities Bluejay Investment LLC, and WinWin Capital Partners LP. The Commission is seeking a final judgment, permanent enjoinment from future violations, emergency and interim relief, payment of financial penalties, disgorgement of ill gotten-gains, and prejudgment interest.

The commission says that Tang offered and sold limited partnership interests in WinWin Capital Partners to raise capital for the hedge fund. The SEC says that as of March 10, WinWin Capital Partners had raised nearly $17.3 million in principal investments from about 75 US investors.

On his Web site, however, Tang recently posted a blog saying that he was not running a Ponzi scam. The 50-year-old Toronto hedge fund manager has also been accused by the Ontario Securities Commission of investment fraud and cheating investors in China and Canada.

Related Web Resources:
SEC Halts On-Going Multi-Million Dollar Ponzi Scheme and Affinity Fraud Involving Investments in a Canadian-Based Hedge Fund, SEC, April 6, 2009 SEC sues Toronto’s ‘Chinese Warren Buffett’, Financial Post, April 14, 2009
Weizhen Tang: The Chinese Warren Buffet Accused Of Ponzi Scheme, The Huffington Post, April 14, 2009
Read the SEC Complaint (PDF)
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Did Morgan Keegan Tutor Towns to Invest into Their Own Risky Deals?

Published on: April 11, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The Tennessee city of Lewisburg got an unpleasant surprise this January when they discovered that their annual interest rates on a bond was now $1 million. Officials had gotten themselves involved in risky municipal bonds after speaking with investment firm Morgan Keegan & Co. at a state-sponsored seminar five years ago. Not only did Morgan Keegan offer them advice about these complex financial transactions, but their representatives made the deal.

Unfortunately, Lewisburg is just one of the hundreds of US cities and counties feeling the financial fallout because high-risk municipal bond derivates have gone sour. For example, officials in Tennessee’s Claiborne County were told by Morgan Keegan bankers that they would have to pay $3 million (an amount they can’t afford) to remove themselves from municipal bond derivatives. And in Mount Juliet, city leaders discovered that payment of their bonds had gone up 500% to $478,000.

Morgan Keegan has been able to dominate the lightly regulated municipal bond marketplace. Based in Tennessee, the investment company has sold $2 billion in municipal bond derivates to 38 cities and counties since 2001. Morgan Keegan reps say they’ve managed to save counties and cities money by providing lower interest rates. They also maintained that it is not their fault that the economic crisis has created turmoil in the bond market.

Now, however, federal regulators are trying to figure out how to restrict municipal bond derivative use. They also want to determine whether it makes sense for big investment banks to convince small counties and cities to take part in transactions that decrease interest rates but come with higher risks.

Morgan Keegan’s managing director Joseph K Ayres says that the investment firm is being unfairly blamed for the economic slump and that there was no conflict of interest when it advised municipalities and underwrote bonds. He says that the state of Tennessee had requested and approved the seminar and that the firm did not offer unbiased descriptions of municipal bond options or market any products during the session. Lewisville officials, however, say that Morgan Keegan failed to provide them with proper advice and did not fully explain the risks of their investment to them.

Investment banks make more in yearly income and fees from derivatives than from fixed-income bonds. In Tennessee alone, Morgan Keegan has made millions of dollars in fees. Unfortunately, it’s the municipalities and other investors who stand to lose a great deal.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker Fraud Attorney Bill Shepherd has this to say: “As a former advisor to municipalities I can tell you that those who manage public funds depend heavily on their financial advisors to be not only truthful but candid about investment risks. It is disgraceful when unscrupulous “experts” abuse the trust placed in them to mine public funds for their own greed. Our firm currently represents a number of municipalities, credit unions, etc., which have lost hundreds of millions of dollars.” Continue Reading ›

Former Fidelity Brokerage Reps Says They Were Pressured to Make Sales That Conflicted With CFP Ethic Codes

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

A number of Fidelity Brokerage Services LLC representatives who left the company last year say that they were obligated to acquire certified financial planner certification but were also barred from revealing that part of their bonuses were affected by whether they sold certain proprietary products. About half of Fidelity brokers’ compensation is salary and the remainder is in bonuses. The ex-brokers say they were pressured into selling Fidelity’s life insurance products and Portfolio Advisory Services.

One ex-broker said that he had to meet 80% of his sales target in PAS in order to qualify for the investment portion of the manager bonus and not receive an employment warning. Other brokers say that they were monitored weekly and comparisons were made between them and other representatives to spur productivity. Still another ex-broker said they were warned that representatives who didn’t get the CFP by mid-2009 would be let go.

The Fidelity Investments brokerage unit removed the CFP mandate this January, the same month that that the Certified Financial Planner Board of Standards Inc. instituted a new code of ethics and professional responsibility that obligates certified planners to notify clients about any conflicts of interest. A number of ex-Fidelity brokers says that Fidelity Brokerage withdrew the requirement because approximately 18% of the more than 275 account executives with its Private Client Group resigned last year.

Fidelity disputes the former brokers’ accounts and says that attrition isn’t unusual, broker compensation doesn’t conflict with clients’ best interests, and bonuses are not affected by proprietary products’ sales. A company spokesperson also says that the CFP requirement was withdrawn so that qualified candidates wouldn’t be discouraged from joining the private-client unit and the decision had no connection to service offering. Fidelity says it still encourages representatives to get the CFP.

Related Web Resources:
Ex-Fidelity reps claim sales pressure, Investment News, April 5, 2009
Certified Financial Planner Board of Standards Inc.
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Morgan Keegan Ordered by FINRA to Pay Investors $267,711 Plus Interest for Losses in RMK Bond Funds

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

Separate Financial Industry Regulatory Authority arbitration panels have issued awards to investors who suffered financial losses in Regions Morgan Keegan mutual funds. Last week, a FINRA panel awarded two California residents $267,711 plus interest for their losses-the largest bund fund arbitration award that Morgan Keegan has been ordered to pay to date.

In two arbitration cases last month, investors were also awarded six-figure sums, with one award amount larger than the damages claimed by investors. To date, FINRA panels have awarded over $871,000 to investors for their Morgan Keegan-related claims.

All of the arbitration claims accuse Morgan Keegan of concealing the actual risks associated with their bond funds. The investors have accused Morgan Keegan of selling certain funds as relatively conservative investments when they were actually exposed to a number of high risk debt instruments, including collateral debt obligations and subprime mortgage securities. They say Morgan Keegan engaged in a scheme to defraud investors of certain bond funds and misrepresented the extent of their holdings in riskier investments.

Merrill Lynch & Co Ordered to Pay FINRA Arbitration Panel $39.8 Million

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

Merrill Lynch & Co. must pay an investor $39.8 million in compensatory damages because of negligence on the part of one a subsidiary broker-dealer. A Financial Industry Regulatory Authority arbitration panel issued the award to Trustees of the Masonic Hall & Asylum Fund, which is an endowment for an Utica health-care facility. This is one of the largest awards against a Wall Street firm.

The fund’s arbitration claim had accused Merrill Lynch and subsidiary Advest Inc. of misrepresentation, negligence, breach of fiduciary duty, and breach of contract. The claim had also accused Advest Inc. of encouraging it to buy into Sphinx Managed Futures Index Fund LP, which was owned by Refco Inc. However, Refco Inc. collapsed in 2005 after giving notice that its chief executive had concealed bad debts valued at about $430 million from firm auditors. The fund says it lost money because of Advest Inc.’s poor recommendation.

The FINRA panel awarded the fund $30.6 million plus $9.2 in interest from as far back as November 2005. Merrill Lynch announced that it was not pleased with the ruling and says that the case stemmed from investments that occurred before the Wall Street firm acquired Advest.

The FINRA panel said Merrill Lynch can seek damages in bankruptcy proceedings for the Refco unit in charge of the Sphinx fund, and the broker-dealer says it will do so.

One way for investors who have lost money because of securities fraud to recover their investments is to go through the arbitration process.

Related Web Resources
Merrill to Pay $40 Million in Refco Case, Wall Street Journal, March 30, 2009
Merrill socked with historic arbitration ruling, Crain’s New York Business, March 31, 2009 Continue Reading ›

“Reversible Convertible” Risks are Now a Reality for Investors Dealing with Substantial Losses

Published on: April 2, 2009 | by Shepherd Smith Edwards & Kantas, LLP

A year ago, a Wall Street Journal article warned about the risk of investing in “reversible convertibles.” Now, these risks have become a reality for many investors, who have experienced substantial losses due to these products.

It began with Wall Street tempting investors who were hungry to make money with these risky complex securities while boasting of their potentially extravagant yields. These securities, which are usually linked to a single stock’s performance, can result in yields of 7% to 25% or greater.

In the past couple of years, sales of these notes soared, while yields for numerous fixed-income investments dropped. For example, in 2007, Arete Consulting LLC reported that small US investors purchased about $8.5 billion in reverse convertibles-an 81% increase from the year prior.

Morgan Stanley, ABM AMro Holding NV, and Barclays PLC are among the firms that have issued reverse convertibles, while firms including Wells Fargo and others were also active in the sales of these securities. These products are supposed to offer small investors a high level of income in return for a minimal investment. However, if the stocks drop dramatically, investors can lose most of their investment-especially if they didn’t take part in any of the underlying stock’s gains.

Reverse Convertibles
A reverse convertible is usually sold in notes of $1,000 increments that provide regular interest payments during the investment term. Upon the maturity of the note, an investor will receive their full original investment back in cash-except when certain conditions tied to a set “barrier” level apply.

However, if the underlying stock price drops under that level during the note’s term and finishes under the initial stock price, the investor doesn’t get cash and instead receives beaten down stock shares. This can be very dangerous for investors when reverse convertibles are linked to stock shares.

Reverse convertible buyers, who are selling a “put” option on the underlying stock, are obligated to purchase the shares if they go below a certain amount. The more high risk the stock, the greater the put option, and the higher the yield that investors can get paid.

Reverse convertibles also come with other challenges. An investor who tries selling a reverse convertible before it matures may have problems recovering his or her original investment.

In 2007, the Financial Industry Regulatory Authority sent inquiries to structured providers about their sales and marketing practices. Regulators wanted issuers to better monitor how they market reverse convertibles to small investors.

Issuers stand to gain financially from selling this product, which usually come with substantial fees (generally in the 2% or 3% range) and are priced into the yield that investors are getting. The issuer’s profit will depend on how it hedges against the risk of issuing the note.

Brokerage firms have been known to compare reverse convertibles to investments that are typically safer. FISN INC. lists reverse convertibles on its Web site under “CD Alternatives”-even though CD’s come with a lot less risk. The NASD, in 2005, recommended limiting the sale of structured products to investors who have options trading approval. Yet even sophisticated investors can run into problems with reverse convertibles.

With the markets becoming more volatile, the March 2008 WSJ article warned that circumstances could get “rougher”. Yet at that time last year, issuers were still claiming that even with the risks, reverse convertibles were still a good bet for investors.

Reverse convertibles have left investors with beaten-down shares. For example, investors who purchased reverse convertibles linked to Countrywide Financial Corp. (whose share prices sank over 70%) lost over 50% of their money by the time the notes matured.

Related Web Resources:
Risky Strategy Lures Investors Seeking Yield, The Wall Street Journal, March 28, 2008
Reverse Convertibles Can Turn The Tide On Investor Returns, Investopedia Continue Reading ›

GM, Ford, Chrysler Retirees: Beware of Financial Advisors After Your Severance!

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

About 7,500 General Motors workers recently agreed to a buyout of early retirement incentives and leave the company. Chrysler, Ford and many suppliers of the industry have also made offers to entice workers to take early retirement. This follows tens of thousands of other industry workers who have been bought-out of pension and other benefits in recent years.

Many who retire have little if any experience in investing and are soon beseiged by droves of salespersons hawking financial plans. In the past, strict laws and regulations were enforced regarding investors’ funds, especially retirement funds. However, as we have recently witnessed, securities regulators appear to be overwhelmed or incompetent.

For decades, Wall Street has blamed any abuse of investors on a few “rogue” brokers. Yet, many now believe that Wall Street is actually rotten to the core. In fact, the majority of financial advisors sincerely and diligently seek to serve their clients, although many of the investment products they are told to sell are inappropriate, riddled with costs or just plain fraudulent. Sadly, too many of the worst advisors attract unwary investors with false promises.

Victims of financial abuse are often unaware that they can seek recovery of undue investment losses according to the law. But investors must understand that the regulators “police” the securities industry and write tickets when they catch the bad guys. In order to recover, victims must hire an attorney to represent them in court or in securities arbitration.
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US Supreme Court Won’t Hear InfoSpace Founder’s Appeal Requesting to Sue Attorneys and Stock Management Company for Allegedly Botching Insider Stock Trading Case

Published on: March 31, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The US Supreme Court has decided not to listen to an appeal filed by InfoSpace founder Naveen Jain requesting that he be allowed to sue JP Morgan Securities and his former attorneys for allegedly mishandling an insider stock trading lawsuit.

What happened was that InfoSpace Inc. INSP shareholder Thomas Dreiling filed a derivative action against Naveen and his wife, InfoSpace cofounder Anuradha. Dreiling contended that they violated short-swing trading prescriptions that prevent corporate insiders from selling and buying or buying and selling company stock during a six-month period.

The federal court ruled in Dreiling’s favor and the Jains were ordered to pay $246.1 million in disgorgement. The lawsuit was eventually settled for $105 million.

The Jains, however, then sought to get the amount they were fined for participating in illegal short-swing transactions from their stock management company and their attorneys. He and his wife had accused the defendants for the language in his company’s initial public offering prospectus that contributed to such a healthy judgment against them. Their lawsuit alleged breach of fiduciary duty, negligence, malpractice, and equitable indemnity.

Since then, the lower courts, including the Washington Court of Appeals, have thrown out their lawsuit because federal law bars complaints that blame security companies for such trades. The appeals court, in affirming the initial dismissal, noted that an insider who violates Section 16B of the Securities Exchange Act cannot receive indemnification from others for any liability that results. While the state court acknowledged that the rule against indemnification might protect some securities professionals from the repercussions of their misconduct, Congress still wants corporate insiders to be held strictly liable for short-swing violations.

Related Web Resources:
Supreme Court turns down appeal from InfoSpace founder, Seattle Times/AP, March 9, 2009
InfoSpace

Supreme Court of the United States
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GM, Ford, Chrysler Retirees: Beware of Financial Advisors Seeking to Invest Your Severance!

Published on: March 27, 2009 | by Shepherd Smith Edwards & Kantas, LLP

About 7,500 General Motors workers have agreed to a buyout of early retirement incentives and leave, the company reported today. Chrysler has also agreed to extend its offers bo buy-out workers beyond tomorrow. This follows tens of thousands of other autoworkers workers who were in recent years persuaded to retire and retire early and receive large sums of money.

Unfortunately, many retiring persons have little if any experience in investing. Enter droves of salespersons hawking financial plans. In the past, strict laws and regulations were enforced regarding investors’ funds, especially retirement funds. As we have recently witnessed, securities regulators are apparently overwhelmed or incompetent. This has resulted in tragic results recently as retirees have not only lost their careers but also their only safety net.

For decades, Wall Street has blamed abuse of investors on a few “rogue” brokers. Now many believe it is Wall Street itself that is rotten to the core. In fact, the majority of financial advisors sincerely and diligently seek to serve their clients. Yet, many products they are told to sell are inappropriate, riddled with costs or just plain fraudulent. As well, too many of the worst of advisors attract unwary investors with false promises.

Victims of financial abuse are also often unaware they can recover undue investment losses according to the law. They must understand, however, that regulators “police” the industry, and write tickets when they catch the bad guys. In order to recover, victims almost always have to hire an attorney to represent them in court or securities arbitration.

Our law firm has represented thousands of investors, most who lost retirement funds, and many who are former autoworkers. If you or someone you know has lost retirement funds you feel were invested improperly, contact us today for a free consultation.
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