Investor Lawyers Blog

UBS Sanctioned For Madoff-Related Losses by Luxembourg Financial Services Regulator

Published on: March 9, 2009 | by Shepherd Smith Edwards & Kantas, LLP

In Europe, the Luxembourg Commission de Surveillance du Secteur Financier (CSSF) has censured UBS’s Luxembourg-based branch for failing to execute due diligence and, as a result, allegedly allowing for the massive losses investors have incurred from the Bernard Madoff’s $50 billion Ponzi scam.

The Luxembourg financial service regulator is accusing Switzerland’s biggest bank of a “serious failure” in the way it managed a feeder fund that funnelled assets to Madoff-related investments. Luxembourg’s CSSF is giving UBS three months to remedy the problems.

UBS, however, is disputing the CSSF’s claim that it violated its contractual obligation to clients. The investment bank says the Luxalpha fund was set up at the request of wealthy clients that wanted a tailor-made fund that would let them invest their assets with Bernard Madoff. UBS says these clients knew that it was not responsible for their assets’ security.

Following news of the Madoff scheme and revelations that some French investors had allegedly lost billions of dollars because their investments were channelled to Madoff through Luxembourg-based mutual funds, the European Commission announced it would start investigating the way EU member states use the EU mutual fund regulatory regime (UCITS, which refers to Undertakings for Collective Investment in Transferable Securities).

The EU also said that approval of a new regulatory regime will more than likely be delayed so more changes can be considered to ensure that investors are protected in the future from losses such as the ones that occurred with Madoff.

The French government accused UBS of lax supervision of mutual funds. French officials have also accused Luxembourg of being lax when it comes to EU mutual fund regulations. They’ve called on the EU to come up with stricter rules. Luxembourg, which has one of the EU’s mutual fund financial service sectors, disagrees with France’s accusations.

Madoff’s scheme has resulted in massive losses for individual investors, institutions, world financial markets, politicians, charities, and many others.

Luxembourg regulator censures UBS over Bernard Madoff, Times Online, February 26, 2009
French investors to take legal action against banks over Madoff feeder funds, Times Online, January 14, 2009

Related Web Resources:
Feds say Bernard Madoff’s $50 billion Ponzi scheme was worst ever, Daily News, December 13, 2008
Luxembourg’s Commission de Surveillance du Secteur Financier
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Outcome of SEC Actions Appear to Favor Larger Broker-Dealers than Smaller Ones, Says Harvard Law School Study

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

The Securities and Exchange Commission may be “too close” to larger investment firms that they give them preferential treatment in SEC Actions, says a Harvard Law School study. One “tentative” explanation cited by the study is that SEC officials look to the larger broker-dealers-especially those located in New York-for future employment opportunities. The study also noted that the SEC was more likely to order smaller broker-dealers (than larger firms) to court, rather than merely slapping the firm with an administrative proceedings.

The Harvard study took a look at patterns the SEC exhibited when it enforced actions against investment firms in 1998, 2005, 2006, and Jan – April in 2007. Findings included:

• When large investment firms and smaller firms faced the same SEC violations for similar levels of harm, there was a 75% smaller chance that a big broker-dealer would have to go to court than one of its smaller counterparts.
• There was a 44% chance that employees from large broker-dealers would have to go to court to fight an SEC action, compared to a 73% possibility for employees of smaller broker-dealers.
• When facing SEC administrative proceedings, bigger firms were less likely to be banned from the industry. 25% of small firms defendants in such actions received permanent industry bans, compared to just 5% of large firm defendants.
• There did not appear to be a justifiable reason for why there was a disparity between the outcomes of SEC actions involving larger broker-dealers and smaller ones.
• However, both large and small firms were slapped with equivalent fines.

The study did not look at SEC enforcement actions in 1999 and 1920 because of worries the findings might be affected by the burst of the “dot.com bubble,” as well as the outcomes of SEC actions from 2008 that may have been impacted by the financial crisis.

Wells Fargo, Goldman Sachs, JP Morgan Chase, Citigroup, UBS Securities, Bank of America, Moody’s Investment Services, and Fitch Ratings are Among Defendants Sued On Behalf of Wells Fargo Certificate Investors for Alleged Securities Fraud Violations

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

The Boilermaker-Blacksmith National Pension Trust is suing a number of investment banks, credit rating agencies, and underwriters, including Wells Fargo, WFASC, Morgan Stanley & Co., Credit Suisse Securities (USA) LLC, Barclays Capital Inc., Bear Stearns & Co., Countrywide Securities Corp., Deutsche Bank Securities Inc., JPMorgan Chase Inc., Bank of America Corp., Citigroup Global Markets Inc., McGraw-Hill Cos., Moody’s Investor Services Inc., and Fitch Ratings Inc., over allegations that they made false statements in the prospectus and registration statement for certificates that were collateralized by Wells Fargo Bank, NA. The lawsuit, filed on behalf of thousands of investors that bought the certificates from Wells Fargo Asset Securities Corp., accuses the defendants of violating the 1933 Securities Act by engaging in these alleged actions.

According to the securities fraud lawsuit, the defendants concealed from investors that Wells Fargo revised its underwriting practices in 2005 and became involved in high risk subprime mortgage lending. The complaint contends that WFASC and a number of defendants submitted to the Securities and Exchange Commision prospectus and registration statements representing that the mortgages were backed by certificates that were subject to specific underwriting guidelines for evaluating a borrower’s creditworthiness. The plaintiffs contend that these prospectuses and registration statements were false because they neglected to reveal that the Wells Fargo-originated certificates were not in accordance with the credit, underwriting, and appraisal standards that Wells Fargo, per the companies, had supposedly used to approve mortgages.

The lawsuit also claims that because Wells Fargo decided to enter the subprime mortgage mortgage market in 2005, the investment bank had to take significant write-downs in 2008 because of its massive exposure to the subprime market and the WFASC certificates that these mortgages backed dropped significantly in value. The Boiler-Blaksmith fund reports that it lost about $5 million, which is more than half of what it invested.

Related Web Resources:
Read the Complaint

The Boilermakers National Funds
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SEC Freezes Assets of Westridge Capital Management, WG Investors, LP, WG Trading Company, LP, and Money Managers Stephen Walsh and Paul Greenwood Over Alleged Misappropriation of Up to $554 Million in Investor Funds

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

The Securities and Exchange Commission is accusing money managers Stephen Walsh and Paul Greenwood, along with their affiliated entities Westridge Capital Management, WG TRADING Company, LP, and WG Investors, LP, of orchestrating an investment fraud scam that has resulted in the misappropriation of some $554 million in investor assets.

According to the SEC, Greenwood and Walsh told investors that their money was going to be placed in a stock index arbitrage strategy, but instead, they used the funds to buy luxury cars, multi-million dollar residences, a horse farm and horses, rare collectibles, as well as pay for other personal expenses. The SEC has obtained an asset freeze against the two money managers and their affiliated entities.

The SEC’s complaint accuses Walsh and Greenwood, through their three affiliated entities, of violating the Securities Exchange Act of 1934, the Securities Act of 1933, and the Investment Advisers Act of 1940. The SEC is seeking a permanent enjoinment of the defendants from committing future violations of the federal securities laws and wants them to pay penalties, disgorgement of ill-gotten gains, and prejudgment interest.

Meantime, the US Commodity Futures Trading Commission filed charges against Walsh, Greenwood, and their affiliated entities, while the US Attorney’s Office for the Southern District of New York filed criminal charges against the two money managers, who have both been arrested.

Because a number of prominent consulting firms recommended the money managers and their affiliated entities to pension and endowment groups, these investors now stand to loose millions. Wilshire Associates, Mercer, and Cambridge Associates are three of the consulting firms that made such recommendations.

For example, the Sacramento County Employees’ Retirement System made its multi-million dollar investment after Mercer highly recommended WG Trading and Westridge. Kern County Employees’ Retirement Association in California and the Iowa Public Employees’ Retirement System invested their money after Wilshire recommended Westridge.

Consulting firms play a huge role in the investment business. One reason is that they give advice to hundreds of institutional investors on where to place their money. The money managers they recommend can end up making millions of dollars, while the clients pay consulting firms either a small percentage of the assets invested or a flat fee for a contract lasting a number of years.

Related Web Resources:
Consultants Touted Firm Accused in Fraud, The Wall Street Journal, February 27, 2009
SEC Charges Two New York Residents For Misappropriating More Than $500 Million in Investment Scheme, SEC, February 25, 2009
Read the SEC Complaint (PDF)
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Morgan Stanley Court Case Demonstrates Why Securities Arbitration is Often a Better Forum

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

Many lawyers and investors complain about securities arbitration. According to Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker Fraud Attorney William Shephard, however, the following Morgan Stanley case is “one of many cases filed in court which would have likely not been dismissed in securities arbitration.”

Earlier this month, the U.S. District Court for the Southern District of New York tossed out a securities class action lawsuit filed against Morgan Stanley, Morgan Stanley DW Inc. (MSDWI), Morgan Stanley & Co. Inc. (MS&Co.), the Technology Fund, the Information Fund, Morgan Stanley Investment Management Inc., Morgan Stanley Investment Advisors Inc. (MSIA), and Morgan Stanley Distributors Inc. The class action case is on behalf of investors in the Morgan Stanley Information Fund and Morgan Stanley Technology Fund over alleged improprieties in initial public offering shares allocations, as well as alleged conflicts of interest between Morgan Stanley’s research and investment banking departments.

According to the court, the investors claim they lost millions of dollars in the purchase of the funds as a result of violations of the 1933 Securities Act. The plaintiffs are also claiming that Morgan Stanley, MSDWI, and MS&Co. publicly said that they kept a “Chinese Wall” between their research and investment banking departments so there wouldn’t be any conflicts of interest when, in fact, this wall had fallen and MS & Co. was acting to benefit its investment banking departments. They also claim they were told that analyst recommendations and research were not influenced by the interests of Morgan Stanley or its affiliates.

Among the conflicts of interest, the investors are alleging that the defendants engaged in at least one of the a number of roles involving companies that with shares included among the funds’ portfolio securities for the class periods, including:

• As underwriters for certain securities.
• As investment bankers for certain companies with securities in the funds’ portfolios.
• Preparing and sending out research reports and recommendations about companies that had shares in the funds’ portfolios.
• Trying to get first-time or more underwriting and additional business from the companies that had shares in the portfolios.

The plaintiffs contend that MS & Co. factored in how much investment bank business research analysts were able to secure when determining their total compensation. This resulted in MS & Co.’s promotion of Morgan Stanley shares or those of potential clients, which then would lead to the price inflation of the companies’ shares. They also claimed that the portfolio funds had a substantial amount of Morgan-Stanley sponsored-stocks and that Morgan Stanley took part in “laddering,” which involved rewarding customers with “hot” IPO shares when they went after research tie-ins that artificially inflated an IPO stock’s aftermarket share price.

The court, however, dismissed the lawsuit saying that the plaintiffs failed to plead material omissions that Morgan Stanley should have disclosed. Continue Reading ›

Bank of America, Citigroup, Goldman Sachs, and Wells Fargo Chief Executives Among Those Defending Bailout Fund Use

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

Earlier this month, the chief executives of the eight biggest banks in the United States, including Citigroup, Bank of America, Wells Fargo, and Goldman Sachs addressed the House Financial Services Committee in an attempt to persuade US lawmakers that billions of dollars in bailout funds were used as intended-to increase consumer and business lending and improve balance sheets. The banking heads also admitted to certain mistakes and promised that compensation in the future would be commensurate with performance.

Under the Capital Purchase Program, the federal government gave the banks $125 billion in cash infusions in November. Bank of America and Citigroup also received $20 billion each in Treasury investments.

At the session, some of the bank executives gave testimony regarding activities performed since they received the government’s financial assistance. For example, Kenneth Lewis, Bank of America’s chief executive, says that during 2008’s fourth quarter, the bank committed to $115 billion in new loans.

Vikram Pandit, Citigroup’s chief executive, said his bank had provided $75 billion in new loans for the fourth quarter. He also said that Citigroup had used $36.5 billion to expand personal loans, mortgages, and credit lines for businesses, families, and individuals, as well as to create secondary market liquidity. He said Citigroup had cancelled an order for a $50 million jet.

While the executives were contrite, Committee Chairman Barney Frank criticized them for giving executives bonuses, in addition to salaries. Lawmakers also asked the banks’ executives to stop home foreclosures until the Obama Administration can executive a $50 billion plan on mortgage modifications and other assistance for borrowers that are experiencing problems.

John Stumpf, Wells Fargo’s chief executive, said that his bank could hold off on foreclosing on loans in which it is the investor or owner. Pandit said Citigroup could support a moratorium for borrowers that live on properties facing foreclosure. Lewis said Bank of America could place a moratorium on home foreclosure for two or three weeks.

Related Web Resources:
Fed Urges Banks to Put Bailout Funds Into Loans, Not Dividends, Bloomberg.com, February 24, 2009 Continue Reading ›

Credit Suisse Securities Ordered by FINRA Panel to Pay $406 Million for Improper ARS Sale to Semiconductor Manufacturer STMicroelectronics NV

Published on: February 25, 2009 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority Panel says Credit Suisse Securities must pay STMicroelectronics $406 million. The award, issued in favor of the semiconductor manufacturer, is over Credit Suisse Securities’s sale of unauthorized auction rate securities. Consequential damages and legal fees are also part of the FINRA award. STMicroelectronics also gets to keep some $25 million in interest award.

STMicroelectronics N.V. had filed for arbitration because Credit Suisse had made unauthorized purchases of credit link notes and collateralized debt obligations when it should have bought student loan securities that were Federally guaranteed, which was what the semiconductor company had mandated and authorized. STMicroelectronics N.V. says Credit Suisse Group engaged in fraud because of its actions.

Also, in STMicroelectronics’s securities fraud lawsuit against Credit Suisse Group, which was filed last year, the semiconductor company alleged that Credit Suisse purposely set out to defraud the company. It also claims that transferring clients’ accounts into auction-rate securities was part of a plan to receive higher fees for the service it was providing.

FINRA Arbitration
FINRA provides a dispute resolution forum for business disputes between investors, individual registered representatives, and securities firms. Recent FINRA dispute resolution statistics through January 2009:

• 525 cases filed through January 2009 • 267 cases were closed
FINRA Dispute Resolution has the biggest securities dispute resolution forum in the world. FINRA oversees nearly all such mediations and arbitrations in the United States.

STMicroelectronics Sues Credit Suisse Over Securities, The New York Times, August 7, 2008

Related Web Resources:

Credit Suisse
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Houston Stockbroker Fraud Law Firm to Represent Stanford Bank Investors Living in Latin America

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

In the wake of the US Securities and Exchange Commission’s accusations that R. Allen Stanford allegedly operated multibillion-dollar fraud scheme through Stanford Group. Co., Stanford investors in Ecuador, Panama, and Venezuela have been contacting the Stanford International Bank’s affiliates in their countries in an attempt to close their accounts. Stanford has Latin American offices in Mexico, Venezuela, Peru, Ecuador, Colombia, and Panama. Stanford and his cohorts are accused of selling securities worth $8 billion in certificates through a bank in Antigua.

Among the reactions from certain Stanford affiliates and Latin American governments:

Stanford Bank Venezuela SA, a separate bank that is commercially affiliated with Stanford Financial Group. Co, says it possesses enough liquidity to be in compliance with international and local standards. In Panama, the country’s banking authority says Stanford Bank of Panama SA had $41.8 million in capital in January 2009 (The Panamanian government, however, does not insure the deposits). In Bogota, the securities exchange says that stock transactions by the Stanford Financial Group’s brokerage unit In Columbia appeared to operating per usual last week. Unfortunately, however, thousands of Stanford clients in Latin America may be victims of this international, multibillion-dollar scam.

Wachovia Fined More than $4.5 Million by FINRA for Sales Violations Involving Mutual Funds and Trusts

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

Two Wachovia units have agreed to fines totaling over $4.5 million for violations related to the sales of unit investment trusts and mutual funds. The Financial Industry Regulatory Authority announced the fines last week. By agreeing to settle, Wachovia, which is now owned by Wells Fargo Bank, is not admitting to or denying wrongdoing.

Wachovia Securities is being fined $4.4 million for failing to give investors sales-charge discounts for eligible unit-investment-trust-transactions, for not making sure investors were given the benefit of net-asset-value transfer programs whenever they were applicable in mutual fund purchases, and for unsuitability violations involving Class B and Class C mutual fund shares.

FINRA also says Wachovia Securities neglected to provide breakpoint and rollover discounts connected to over 20,000 unit-investment-trust purchases. As a result, customers ended up paying excess sales charges worth about $2.7 million.

When a customer pays a sales charge, NAV transfer programs let clients redeem fund shares and use these proceeds to purchase shares in a different mutual fund without having to pay another sales charge. FINRA cites Wachovia’s failure to ensure that investors availed of these kinds of programs as the reason customers ended up paying front-end charges they shouldn’t have or purchasing share classes that were accompanied by higher fees. Also, Wachovia Securities Financial Network must pay a $150,000 fine for the improper sale of Class B shares. Both firms were cited for inadequate supervisory procedures connected to the transactions.

According to FINRA enforcement chief Susan Merrill, failing to recommend an appropriate share class or present existing discounts creates additional costs to investors. She cautioned that regulated firms should take into account all applicable factors when making recommendations to clients.

Wachovia says that its units have returned over $5.4 million to customers affected by the violations.

Financial Industry Regulatory Authority Continue Reading ›

Multibillion-Dollar Stanford Securities Fraud Scam Has Investors Contacting Houston Stockbroker Fraud Lawyers for Help

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

The Securities and Exchange Commission is charging Robert Allen Stanford and three of his companies for their alleged involvement in a multibillion dollar investment fraud scheme. His companies that are named in the complaint include Stanford International Bank (SIB), Stanford Group Company (SGC), which is a Houston-based investment adviser and broker dealer, and Stanford Capital Management, which is based in Antigua. The SEC is asking for emergency relief for the investors that have been victimized by the alleged scheme.

The SEC complaint, filed in Dallas, Texas accuses Stanford and friends and family that he works with of orchestrating the investor scam. The SEC claims that SIB used SGC financial advisers to sell some $8 billion worth of “certificates of deposit” to investors with the promise they would receive high interest rates that were, in fact, unsubstantiated and improbable. The SEC says the defendants misrepresented these CD’s when they told investors that they were safe.

The SEC complaint also contends that another scam involving $1.2 billion in sales of Stanford Allocation Strategy (SAS), which is a proprietary mutual fund wrap program, involved the use of materially bogus historical performance information that helped SGC to grow the SAS program from under $10 million in 2004 to over $1 billion. In 2007 and 2008 , SGC earned fees of about $25 million as a result. The program’s bogus performance was used to bring in registered investment advisers with substantial books of business. These advisers were then provided with substantial incentives to transfer client assets to SIB’s CD program.