Investor Lawyers Blog

First New York Securities LLC and Four Ex-Traders to Pay $435,000 in FINRA Sanctions Over Short Selling

Published on: March 26, 2009 | by Shepherd Smith Edwards & Kantas, LLP

First New York Securities LLC and four of its ex-traders have reached a settlement with the Financial Industry Regulatory Authority over allegations that they improperly covered short positions involving secondary offering shares, as well as engaged in associated oversight failures.

Per the FINRA settlement, First New York Securities LLC will pay $170,000 and disgorge $171,000. The former First Securities New York traders are to pay: $7,500 from Kevin Williams, $50,000 from Joseph Edelman, $30,000 from Michael Cho, and $30,000 from Larry Chachkes. By agreeing to settle with FINRA, the firm and its former brokers are not admitting to or denying the allegations.

FINRA says the trading addressed by the short selling case took place during a specific restricted period (usually five business days) when the Securities and Exchange Commission doesn’t allow for short sales to be covered with securities from secondary offerings and before the secondary offering is priced. This matter is addressed in Rule 105 of Regulation M.

The self-regulatory organization says that a 2005 probe found that the investment bank violated the rule related to five public offerings. The SRO says First New York Securities and its traders engaged in short selling during the period when they weren’t allowed to and covered short positions using shares from the offering. FINRA says that as a result, the firm and its four traders earned $171,504 and effectively got rid of their market risk.

FINRA also accuses the investment firm of neglecting to properly supervise its traders, as well as neglecting to establish proper supervisory procedures or to enforce such a system. The SRO also accuses First New York Securities of failing to maintain the proper books and records connected to the transactions that are being addressed.
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Associated Securities Ordered by Arbitrators to Pay $8.8 Million to Investors for Losses in APEX Equity Options Fund

Published on: March 24, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Members of 16 different California households were sold shares of APEX Equity Options Fund which collapsed in August 2007. Collectively, these investors lost almost $9 million. They contacted an experienced securities law firm which advised them to jointly file a claim in Securities Arbitration through The Financial Industry Regulatory Authority (FINRA), formerly the National Association of Securities Dealers (NASD)

The investors claimed that Jeffrey Forrest of WeathWise LLC failed to properly advise them when selling the shares of the APEC fund. Because Forrest was licensed as a securities broker by Associated Securities, the claim in arbitration included claims against Associated, which is responsible to supervise the activities of its brokers.

Because of the large number of parties involved, hearings on the arbitration claim lasted for 12 days. After the conclusion of the hearings the three person arbitration panel deliberated, then rendered an award requiring the respondents to pay back these investors all of their losses of $8.8 million.

Houston Broker at Deutsche Bank Alex Brown Leaves Suicide Note Suggesting Clients Sue over Aravali Fund

Published on: March 23, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Tales of the stock market crash of 1929 contain images of victims jumping from windows of Wall Street buildings. An eerily sign of the similarities to the current 21st Century crash may be the recent suicide of a despondent broker at Deutsche Bank Alex Brown Securities (Deutsche Bank), who left a note telling clients to contact a lawyer to seek recovery of losses.

A law suit, with Smith’s suicide letter attached, was soon filed by Bernard and Joan Spain, of Pennsylvania, and Lonnie Duncan, of California, trustee of the Duncan Family Trust. The initial paragraph of the letter states:

“Since you are reading this, I have just taken my life. It was necessary because the alternatives were totally unpalatable. I consider you a friend first and a client second. That said, I had a fiduciary relationship with you that charged me with putting your interest first. I can say that I always tried to do that. However, some of the investment recommendations that I chose did not work out the way I had anticipated. I regret that very much.”

Merrill Settles SEC Charges Over ‘Squawk Box’ Misuse for $7 Million

Published on: March 22, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Merrill Lynch will pay $7 million to settle Securities and Exchange Commission administrative charges that the investment bank neglected to protect customers whose orders were transmitted over “squawk boxes.” The penalty is the second highest fine that the SEC has imposed for cases involving Section 15(f) of the 1934 Securities Exchange Act and Section 204A of the 1940 Investment Advisers Act violations. These statutes mandate that investment advisers and broker dealers implement procedures and policies that would keep employees from misusing nonpublic, material data.

The SEC says that from 2002 to 2004, a number of Merrill Lynch brokers at three branch offices let day traders, who did not work for the company, hear customers’ unexecuted orders as they were being broadcast over the internal intercom systems. The traders used the information to trade before Merrill’s institutional clients’ orders were placed.

The SEC says Merrill did not have the procedures or polices to prevent employees from accessing the squawk boxes or to supervise them to make sure that they did not misuse customer order data. In addition to paying the penalty, Merrill Lynch says it will implement a number of measures to ensure that customer order data is protected any time it is sent over squawk boxes or other technologies used for their transmission.

U.S. Attorney for the Eastern District of New York had filed criminal charges related to the squawk box front-running activities against a number of Merrill employees, A.B. Watley Group Inc., and several individuals. While seven defendants were acquitted of nearly all the charges, they must go back to trial for a single count of conspiracy to commit securities fraud. Former Merrill stockbroker Timothy O’Connell was found guilty of witness tampering and issuing false statements.

Wachovia Securities Must Pay Texas $4 Million for Auction-Rate Securities

Published on: March 20, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The Texas State Securities Board has fined Wachovia Securities $4 million for misleading investors about auction-rate securities. The Wells Fargo & Co unit must also have completed buying back ARS from investor clients in Texas by June 30.

This is the final step in the auction-rate securities case against Wachovia in which a tentative settlement agreement was reached last year when Wachovia Securities agreed to pay back over $8.5 billion in ARS from investors throughout the US.

It is also part of Texas’s efforts to deal with problems related to securities. The nearly $4 million is Texas’s share of the $50 million penalty Wachovia said it would pay. Last December, the Texas State Securities Board issued a final order mandating that Citigroup pay the state $3.6 million for making misrepresentations to investors about the auction-rate securities.

According to the Texas order, Wachovia Securities created misconception when it told investors that ARS were like cash and could be retrieved at nearly any time. The order accused Wachovia and its registered securities agents of knowing that the ARS market was in trouble yet neglecting to provide investors with this information. Wachovia Securities is one of the registered securities dealers in Texas.

UBS Financial Services, Merrill Lynch, and Citigroup are among the large investment firms that reached similar billion-dollar settlements with state regulators and the Securities and Exchange Commission. The collapse of the auction-rate securities market in February 2008 left many investors with frozen ARS that they thought were going to remain liquid and safe.

Wachovia Securities Ordered To Pay Texas $4 Million In ARS Probe, CNNMoney.com, March 17, 2009
Texas State Securities Board
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Stifel Nicolaus Will Repurchase Auction-Rate Securities from Costumers Within Three Years

Published on: March 19, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Stifel Financial Corp says that subsidiary Stifel Nicolaus & Co. Inc. will buy back all of its customers’ auction-rate securities in the next three years. This is a significant change from its initial offer to purchase 10% of the clients’ ARS holdings.

The ARS repurchase will occur in four stages:
• By June 30, 2009: $25,000 or 10% (whichever is greater).
• Before June 30, 2010, $25,000 or 10% (whichever is greater).
• Prior to June 30, 2011, $25,000 or 10% (whichever is greater).
• Prior to June 30, 2012, the balance of any outstanding ARS.

Employee accounts, however, are only eligible once the last phase of the enhanced plan begins.

Stifel CEO & Chairman Ronald J. Kruszewski says the plan reflects the proper balance between shareholder and client interests. He says the plan will give relief to its 1200 ARS clients and that about 40% of the accounts would be completely liquidated by the end of June 2009.

The repayment offer applies to ARS that are held by retail clients who purchased the securities through Stifel before the ARS market fell. In return, Stifel says it will take assignment of actionable legal claims by customers against the large players in the ARS market for the amounts it buys back. Stifel maintains that it would not have told its clients to purchase ARS if the key market participants had told the financial firm what they knew about the ARS market collapse.

Missouri securities regulator Secretary of State Robin Carnahan, however, is still concerned that this new offer is still not enough to guarantee that customers will get back all their funds. She noted that three years might be too long for many investors and she called on Stifel to guarantee that it would make its investors whole again.

Soon after Stifel’s announcement of its ARS repurchase plan, Carnahan filed a lawsuit against the St. Louis-based financial firm for misleading clients that had purchased ARS.

Related Web Resources:
Missouri’s Carnahan files suit against Stifel, Forbes/AP, March 12, 2009
Stifel Financial plans 100 percent buyback of ARS, The Street.com, March 9, 2009

Missouri Secretary of State Robin Carnahan
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Madoff and Stanford Victims Can Claim Theft Losses as Tax Deductions, Says Internal Revenue Service

Published on: March 18, 2009 | by Shepherd Smith Edwards & Kantas, LLP

According to Internal Revenue Service Commissioner Douglas Shulman, investors who were defrauded by R Allen Stanford and Bernard Madoff can claim these theft losses as deductions when filing their taxes. The IRS announced these new procedures on Tuesday. These new IRS rules are applicable to victims of any Ponzi scam but the tax filings must be filed for the year 2008.

Theoretically, the investors would have been paying capital gains taxes if their investments had made profits. Now that it has been discovered that the profits were bogus, however, the IRS says that these same investors should be refunded those taxes.

Under the new guidance, investment losses incurred because of arrangements involving criminal fraud will be classified as theft losses instead of capital losses (usually capped at $3,000 annually). This will allow the victim to receive the larger deduction. For small businesses with $15 million in gross annual receipts, theft loss deductions can be carried back up to five years for 2008 returns instead of the usual 2-years. Also, fictitious income can also be claimed as theft losses.

Investors that file securities fraud lawsuits against Bernard Madoff because they were bilked by his multibillion-dollar Ponzi scam are allowed a 75% deduction for theft losses. Investors who don’t sue the 70-year-old investment advisor can obtain an immediate 95% deduction as soon as possible and seek to obtain the rest in the future if they don’t get back any of their monies. They could also take a deduction for investment income they thought they made.

Related Web Resources:
IRS Says Madoff Victims Can Claim Theft Losses, Bloomberg.com, March 17, 2009
IRS To Allow Madoff Victims To Deduct Theft Losses For 2008, Fox Business, March 17, 2009
Securities Investor Protection Corporation

Internal Revenue Service
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Despite Financial Market Volatility, Most Investment Advisors Are Telling Clients To Stick With Their Investment Plans

Published on: March 17, 2009 | by Shepherd Smith Edwards & Kantas, LLP

According to a TD Ameritrade Institutional survey, most investment advisers continue to tell their clients that now is a great time to invest in the financial market rather than encouraging them to cash out their investments in the wake of the financial crisis:

• 93% of investment advisers are not telling clients to cash out investments.

• Over 50% of these registered advisers believe now is the time to invest in equities.

• 43% of them are telling clients to increase their fixed income allocations.

• 53% are having clients increase cash allocations.

• 41% have dramatically increased their communications with clients so they can offer them reassurance.s

506 registered investment advisers participated in the survey. TD Ameritrade Institutional managing director of advisor advocacy and industry affairs Brian Stimpfl says that the results demonstrate how most advisors are staying committed to sticking with their clients’ investment strategies despite volatility in the financial market.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker Fraud Lawyer William Shepherd, however, had this to say: “When markets fell 20% or so by early September, brokers and financial advisors should have been listening to their clients carefully to learn the true nature of their risk-tolerances. When any investor expresses strong feelings about losses in an account the investment advisor must act to revise the client’s objectives. Several of our clients told their advisors they were losing sleep over their investments. Yet, instead of revising the clients’ investment objectives – and their investments – as required, the advisors adamantly told their clients not to sell. Now that these investors’ nightmares have come true, the advisors want to hide behind objectives marked on the old forms without taking responsibility for their reckless inaction.”

Related Web Resource:
FA Magazine
TD Ameritrade Institutional
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Morgan Keegan Settlement with Children’s Wish Fund Shows the Impact Recouping Investment Losses Can Have On The Little People

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

In 2007, Morgan Keegan settled an arbitration claim with the Indiana Children’s Wish Fund for an undisclosed amount. The charity had reported losing $48,000 in a mutual fund it had invested in with the brokerage firm.

The Wish Fund became involved in mortgage securities after a local banker persuaded the charity’s executive director, Terry Ceaser-Hudson, to invest money in a bond fund through Morgan Keegan. Ceaser-Hudson was put in touch with broker Christopher Herrmann. When she asked him about the risks of investing in the fund, she says he assured her that investing it would be as safe as investing in a CD or a money market account.

In June 2007, the Wish Fund invested nearly $223,000 in the fund. That week, two Bear Stearns funds collapsed.

Less than three weeks after investing the charity’s money in the Morgan Keegan fund, Ceaser-Hudson says she was surprised to see a $5,000 loss. As the bond fund’s net asset value fell in September, she ordered the sale of the stakes to be sold. She got back about $174,000 of the $223,000 she had invested on behalf of the Wish Fund-that’s a 22% loss in just three months. Ceaser-Hudson filed an arbitration claim against Morgan Keegan and accused Herrmann of breach of duty when he making an unsuitable recommendation to the Wish Fund.

It appears as if the Regions Morgan Keegan mutual fund board members, like many investment professionals, did not properly assess the risks that came with investing in mortgage securities. Most of the brokerage firm’s directors do not own shares in the bond funds that were devastated, which means that the majority of them were not impacted by their decline.

For a charity like the Children’s Wish Fund, however, the losses it incurred had been preventing nine sick children from having their wishes granted.

Related Web Resources:
The Debt Crisis, Where It’s Least Expected, New York Times, December 30, 2007
The Indiana Children’s Wish Fund
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Moody’s Investors Can Pursue Securities Fraud Class Action Lawsuit Accusing the Credit Rating Agency of Falsely Claiming Independence

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

A US District Court judge says Moody’s Corp. investors can go ahead in part with a lawsuit accusing the credit rating agency of securities fraud. The class action lawsuit accuses Moody’s of claiming it was an independent body that impartially published accurate financial instrument ratings when such misrepresentations artificially inflated its stock price (until media reports about its compromised objectivity caused the value of its stocks to drop).

In the U.S. District Court for the Southern District of New York, Judge Shirley Wohl Kram said the plaintiffs sufficiently alleged that the credit rating agency’s statements over its independence were false. She did find deficiencies with other pleadings, however, including a failure to properly plead scienter against Michael Kanef, the group managing director of Moody’s US asset finance group, and Brian Clarkson, Moody’s chief operating officer. The court also approved the plaintiffs’ request that they be allowed to cure the pleading deficiencies.

The court also said that it did not consider Moody’s statements about its independence to be inactionable puffery. Moody had declared independence and made a list of verifiable actions it executed to make sure it continued to stay independent. However, other specifics, the court said, were not actionable, including statements about the meaning of structured finance securities or that its structured finance revenues came from legitimate business practices.

The court said that the plaintiffs’ class action case survives the defendants’ motion to dismiss the lawsuit.

Credit Rating Agencies
It is the job of credit rating agencies to help manage financial market risk. CRA’s are responsible for publishing creditworthiness evaluations about their clients. These evaluations not only help in the assessment of credit risk but they are important for regulation.

Related Web Resources:
Moody’s Must Defend Investor Suit Over Independence, Bloomberg.com, February 23, 2009
Shareholder lawsuit vs Moody’s allowed to proceed, CNBC.com, February 23, 2009
Moody’s
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