Investor Lawyers Blog

Investor Fraud Lawsuits Stemming $50 Billion Ponzi Scheme May Name Madoff’s Family Members as Additional Defendants

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

The civil lawsuits that will be brought by the victims of Bernard Madoff’s $50 billion fraud scam are expected to be numerous and massive. Not only will they likely target Madoff and his firm, Bernard L. Madoff Investment Securities LLC., but a number of his family members who work for the firm could also be named as defendants.

The company’s chief compliance officer and senior managing director is Madoff’s brother Peter. Madoff’s sons, Mark and Andrew, also are employed by the firm, as is Shana Madoff, Peter’s daughter. While Madoff has maintained that no family members were involved in the Ponzi scheme and that he acted alone, actual knowledge doesn’t have to be involved when there is a fiduciary relationship or if recklessness or negligence is a factor for someone to be held liable.

According to Securities and Exchange Commission staff attorney Peter J. Henning, two main types of litigation are expected from the Madoff scheme. One type of securities fraud litigation will target Madoff, his company, and his family members. Another kind of investor fraud lawsuit will target third parties, such as investment advisers, feeder funds connected to Madoff’s company, and other parties that sent investors Madoff’s way.

Complications are expected. Determining the liability of people who acted in an agent role but did not receive compensation when they referred investors to Madoff, differentiating between claimants that invested in feeder funds and those who directly invested with Madoff, and determining whether money can be gotten back from investors who redeemed their funds earlier, are just some of the difficulties that are likely to arise.

Already, a number of investors have filed class action and group lawsuits against the 70-year-old financial adviser, who remains under house arrest. In October, Bernard L. Madoff Investment Securities LLC., was the 23rd biggest market maker on Nasdaq.

Related Web Resources:
Suits From Madoff Fraud Will Be Massive, Will Involve Family Members, Attorneys Say, BNA, December 22, 2008
Bernie Madoff Victim List, Huffington Post, December 15, 2008
Bernard L. Madoff Investment Securities LLC
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Number of Federal Securities Fraud Cases Prosecuted Drop Significantly

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

A recent New York Times article reports that according to new data, federal officials are prosecuting far fewer cases involving fraudulent stock scams than they did in 2000 before the Bush Administration came into office. According to financial and legal experts, less strict enforcement polices, Securities and Exchange Commission staff cutbacks, and a greater focus on fighting terrorism have led to the federal government’s laxer policing efforts when it comes to pursuing securities fraud cases.

The new information, based on Justice Department information and put together by a Syracuse University research group, says that there haven’t been so few securities fraud prosecutions in a year since 1991. Also:

• During the first 11 months of the 2008 fiscal year, there were 133 securities fraud prosecutions-compare this to 2002 when there were 513 prosecutions, spurred by the WorldCom and Enron scandals, and 2000 when there were 437 prosecutions for this same time period.

Former Stanford Group Co. Financial Advisers Must Arbitrate Constructive Discharge Claims

Published on: December 29, 2008 | by Shepherd Smith Edwards & Kantas, LLP

This month, the Texas Court of Appeals concluded that two ex-Stanford Group Co financial advisers must arbitrate state labor law claims that their former employer constructively discharged them for complaining about its unethical business practices. The appeals court’s decision reverses a lower court’s ruling to not compel arbitration.

According to Chief Justice Hedges, former Stanford advisers Charles W. Rawl and D. Mark Tidwell signed U-4 registration applications that had arbitration provisions. The promissory notes they executed that were payable to Stanford also came with arbitration provisions.

While they worked for Stanford, the two men allegedly discovered that the company engaged in several unethical and illegal business practices, such as the deletion of certain electronic data in the wake of a Securities and Exchange Commission probe and the inflation of certain asset values in order to mislead potential customers. Tidwell and Rawl contend that they told management to investigate the alleged illegal activities, but their requests were ignored. The two advisers then resigned from the company because they thought they could be implicated for the alleged illegal activities.

After they left the firm, Stanford began FINRA arbitration proceedings against the two men to collect on promissory notes that allegedly were due to be paid as soon as they resigned. The former advisers responded by filing an employment discrimination lawsuit. They claim that their constructive discharge violates the Texas Labor Code because they refused to participate in Stanford’s alleged illegal acts. They also maintained that Stanford’s behavior was actionable under Sabine Pilot Services Inc. v. Houck, 687 S.W.2d 733 (Tex. 1985).

Stanford’s response was a motion to compel arbitration. The two men then said that under FINRA Rule 13201, their employment claims were excluded from arbitration.

The appeals court says that although the Texas labor code prohibits employment discrimination, the plaintiffs failed to note that their discrimination was based on any protected classes named in the statute. As a result, Judge Hedges said the trial court was in error when it did not compel arbitration.

According to Shepherd Smith Edwards & Kantas LTD LLP Cofounder and Securities Arbitration Attorney WIlliam Shepherd, “The key on this one is that registered securities representatives must go to securities arbitration and can not take employment cases to court despite language securities arbitration code concerning statutory labor claims in the Texas Labor Code. Our securities arbitration law firm often represents such persons against their employer or former employer.”

Related Web Resources:

3201. Statutory Employment Discrimination Claims, FINRA
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ARS Investors Can Seek Consequential Damages Recovery Through Special Arbitration Procedure Introduced by FINRA

Published on: December 23, 2008 | by Shepherd Smith Edwards & Kantas, LLP

This month, the Financial Industry Regulatory Authority introduced a special arbitration procedure that auction-rate securities investors can avail of to recover consequential damages. This procedure can be used by customers who are allowed to file for such damages under the ARS-related settlements that have been concluded with the Securities and Exchange Commission or with FINRA.

Under the special procedure, investment firms cannot contest liability related to ARS product sales or the illiquidity of ARS holdings. The companies also cannot use as its defense an investor’s choice not to borrow money from the firm (if it offered the ARS holder a loan option) or his or her decision not to sell ARS holdings prior to the settlement date.

Investors have the option to seek their recovery through this procedure or in other applicable forums, including through standard arbitration rules. FINRA Dispute Resolution President Linda Fienenberg says the special procedure offers a quicker, more affordable resolution for clients claiming consequential damages. Any fees related to the special arbitration procedure will be paid for by the firms.

A single public arbitrator will hear consequential damage claims under $1 million. If the amount is larger, the parties have the option, by mutual consent, to have their claim heard by a three-person arbitration panel.

Consequential Damages
These damages are the financial harm that was experienced by ARS investors because the market collapsed. This may include losses incurred by investors whose ARS assets are frozen, as well as opportunity costs.

As of the end of last month, 275 ARS arbitration claims had been filed under FINRA’s standard arbitration procedure. Investors that limit claims to consequential damages can opt to have their case heard under the special arbitration procedure.

In the wake of the ARS market’s downfall last February, FINRA has been working with the SEC and state regulators to provide investors recovery options. FINRA is also investigating some two dozen firms for alleged misconduct involving their handling of ARS.

FirstSouthwest Co and WaMu Investments have reached final settlement agreements with FINRA. Agreement in principles have been reached with City National Securities, Mellon Capital Markets, SunTrust Investment Services, Comerica Securities, SunTrust Robinson Humphrey, Harris Investor Services, and NatCity Investment, Inc.

Related Web Resources:

FINRA Provides Details on Special Arbitration Procedure for ARS Consequential Damages, MarketWatch, December 16, 2008
Special Arbitration Procedures for Investors Involved in Auction Rate Securities Regulatory Settlements, FINRA
FINRA
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UBS and Citigroup to Pay Nearly $30 Billion to Tens of Thousands of ARS Investors

Published on: December 22, 2008 | by Shepherd Smith Edwards & Kantas, LLP

UBS Financial Services, Inc., UBS Securities, LLC, and Citigroup have reached finalized settlements with the Securities and Exchange Commission to pay tens of thousands of ARS investors almost $30 billion. The settlements will resolve SEC charges that the companies misled investors about the risks involved with auction rate securities.

The SEC’s complaint accused UBS and Citigroup of misleading customers by telling them ARS were liquid, safe investments and failing to warn them of the growing dangers when the market started to fail. When the ARS market froze in February, the SEC says both firms left tens of thousands of clients holding billions of dollars in illiquid ARS.

These finalized settlements will restore about $22.7 billion in liquidity to UBS clients who invested in ARS and some $7 billion to Citigroup investors. SEC Chairman Christopher Cox says investors will get back “100 cents on the dollar on their ARS investments.” Both firms will buy ARS from affected customers at PAR. Customers that sold their ARS under the par difference will be paid between par and the ARS sale price. This is the largest settlement in SEC history.

UBS and Citigroup are not admitting to or denying the SEC’s allegations by agreeing to settle. Both investment firms, however, have agreed to enjoinment from future violations.

The U.S. District Court for the Southern District of New York still needs to approve the settlements, and additional SEC penalties could still arise for UBS and Citi. The SEC is also waiting to finalize the settlements-in-principle it reached with Merrill Lynch, Bank of America, Wachovia, and RBC Capital Markets.

Related Web Resources:
SEC Finalizes ARS Settlements With Citigroup And UBS, Providing Nearly $30 Billion in Liquidity to Investors, SEC, December 11, 2008
SEC Complaint Against UBS (PDF)

SEC Complaint Against Citigroup (PDF)
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Senior Investor’s Claim Against Wells Fargo is Remanded on Fraud in Execution by California Court of Appeal

Published on: December 19, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The California Court of Appeal has remanded a lawsuit filed by an elderly woman accusing Wells Fargo of defrauding her and her husband. The case now goes back to the Los Angeles Superior Court, where a judge must determine whether Wells Fargo engaged in fraud when its employees executed its agreement with the couple.

Los Angeles Superior Court Judge Shook had previously concluded that the arbitration clause in the brokerage agreement between Ronnie and Ira Brown and Wells Fargo Bank, NA was unconscionable. However, he had decided that it was up to a jury to decide whether constructive fraud occurred. If Shook now decides that Wells Fargo did engage in the alleged fraud, the arbitration clause and any other portion of the agreement could then be determined unenforceable.

Sometime between 2003 and 2004, Wells Fargo assigned company vice president and trust administrator Lisa Jill Tepper to serve as Ira and Ronnie Brown’s “relationship manager.” Ira Brown, who was 93 at the time and suffering from health issues (he has passed away since), founded the Save-On Drug chain. His wife, Ira, was 81.

Tepper, who is now a defendant in this case, visited the Browns regularly to assist with their financial paperwork. She eventually began providing the couple with investment advice. At one point, she recommended that they open a Wells Fargo brokerage account because she believed that their other investments were inappropriate due to their advanced age. Through Tepper, the couple began working with Wells Fargo stockbroker Jack Harold Keleshian, who is now also a defendant in the case.

With Tepper and Keleshian’s help, the couple opened up a number of investment accounts, including a “Brown Family Trust.” An arbitration clause was included among the documents.

In 2006, Ronnie sued Wells Fargo. She claimed that when she was under duress while caring for her ailing husband, the bank pressured her into selling nearly 75,000 stock shares at $24.71. She says Keleshian told her that if she didn’t sell, the stock’s value would drop dramatically.

Instead, the stocks increased in value while Ronnie experienced an increase in capital gains taxes. Ronnie claims her damages were over $1 million (including Wells Fargo’s commission from the stock sale). Wells Fargo wants to resolve the dispute through arbitration.

Related Web Resources:

C.A. Orders Hearing on Claim Bank Defrauded Drug Chain Founder, MetNews.com, November 26, 2008
Brown v. Wells Fargo Bank N.A., Cal. Ct. App., No. B196258 (PDF)
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Madoff Investors Who Were Victims of “Ponzi” Scam Contact Securities Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LLP to Explore Recovery Options

Published on: December 17, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Wall Street Icon Bernard Madoff’s $50 billion “Ponzi” scam may very well have bilked hundreds, even thousands, of investors of their money. Now, many of Madoff’s victims are contacting the securities fraud law firm of Shepherd Smith Edwards & Kantas LTD LLP to find out how they can recover their investments.

According to SSEK Founder and Stockbroker Fraud Attorney William Shepherd, “a number of recovery options” exist, including pursuit of:

• Securities Industry Protection Corp: SIPC has a $500,000 maximum guarantee limit per account. Its reserves are also limited and it needs government infusion to be able to cover losses in the billions of dollars. To be able to recover claims, legal action against SIPC is usually necessary. On Monday, a judge ruled that investors who were Madoff’s direct clients are covered under SIPC.

Former NEXT Financial Group Stockbroker’s Claim that He Was Fired for Refusing to Conceal Churning is Subject to Arbitration

Published on: December 16, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Texas Supreme Court says that former NEXT Financial Group Inc. stockbroker Michael Clements’s claim that the brokerage firm fired him for refusing to cover up churning activity must be arbitrated. Clements was hired as a NEXT Financial regional supervisor in September 2006. Nearly a year later, the brokerage firm fired him because he allegedly failed to perform his required broker responsibilities related to an NASD audit.

Clements filed a lawsuit against the company, claiming he was terminated from his job because he refused to conceal the fact that a NEXT trader had violated federal securities laws by churning client accounts. NEXT pushed for arbitration, claiming that Clements had signed a Form U-4 when he was hired, which requires that he resolve any claims with the brokerage firm through arbitration-per the Federal Arbitration Act.

Clements has maintained that because his claim was based on at-will employment and wrongful termination, rather than a contract connected to a commercial transaction, his claim is exempt from the FAA’s arbitration requirement. He also asserted that his claim resulted from NEXT’s alleged illegal behavior, not its business dealings, and that a recent change in NASD code (following the National Association of Securities Dealers’s merger with the Financial Industry Regulatory Authority) indicated an intent to exclude disagreements involving employment matters from arbitration. Clements noted Sabine Pilot Services v. Hauck, (1 687 S.W.2d 733, 1985), a case where the Texas Supreme Court held that an employer had to pay an ex-employee damages because the worker was fired for refusing to perform an illegal act.

The Texas Supreme Court, however, upheld that the FAA was applicable in this case, NEXT could compel arbitration, and the NASD rule 13200 (a) did not exclude employment and termination-related claims. The court’s decision reverses the trial court’s ruling, which denied NEXT’s request, as did the court of appeals.

Related Web Resources:

Next Financial Group Inc.
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Do Broker-Dealers Hire Brokers Already Suspected of Securities Fraud?

Published on: December 11, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Even though regulators are calling on broker-dealers to employ stricter hiring standards when it comes to screening brokers who have already gotten in trouble for alleged broker misconduct, many firms continue to hire these suspect workers. It doesn’t help that broker-dealers have a tendency to not reveal key details when a registered representative leaves the company under suspect circumstances in order limit the firm’s liability from potential investor lawsuits and arbitration claims.

For example, in 2003, Jeffrey Southard was working for American Express Financial Advisers (now Ameriprise Financial Inc.) when he was accused of selling unregistered securities and combining client funds with his own money. At the time, Southard accused American Express Financial Advisors of falsely accusing him of misdeeds and acting unprofessionally by violating his personal confidentiality. He left the firm to join Gunn-Allen Financial Inc. In July 2008, GunnAllen fired him.

Last month, the New Jersey Bureau of Securities accused the former GunnAllen broker of stealing $1.3 million from 16 senior investors. The state regulators also barred Southard from the securities business and ordered him to pay $50,000 in restitution.

The New Jersey regulators say American Express Financial Advisors failed to properly disclose to clients the problems that could have arisen from working with Southard. The regulators’ order also accuses Southard of misleading his clients. Many of them switched to GunAllen when he left American Express Financial Advisors after he told them that he was leaving was to pursue better opportunities. The New Jersey regulators say that while working with GunnAllen, Southard continued to engage in broker misconduct by selling fake bonds as tax-free investments.

Opinions among industry members are mixed about whether broker-dealers are doing enough to weed out broker candidates with already questionable performance records.

Related Web Resources:

Busted brokers continue bilking clients at new firms, Investment News, December 7, 2008
Ex-GunnAllen broker bilked $1.3M from seniors, Investment News,
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US Treasury Department Extends Money Market Fund Guarantee Program Through April 2009

Published on: December 10, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The US Treasury Department has announced that it will keep guaranteeing money market funds until the end of April 2009. The Temporary Guarantee Program for Money Market Funds was created because of worries that the funds’ net asset values would fall under $1 (a value drop known as “breaking the buck”).

The money market fund program guarantees a $1 minimum share price and insures the holdings of any publicly offered eligible funds that pay to take part in this temporary plan. The program, which covers over $3 million in assets, covers the participating funds’ shareholders up to the amounts that they held when business closed on September 19, 2008.

Only mutual funds that are currently taking part in the plan and meet the extension requirements can continue to participate in the program. To avail of the extended coverage, funds must submit a payment based on their net asset value since September 19. The extension notice must be sent by December 5.

The Temporary Money Market Fund Guarantee Program offers four kinds of Guarantee Agreements:

• Guarantee Agreement • Guarantee Agreement (Single Fund)
• Guarantee Agreement (Stable Value)
• The Guarantee Agreement (Stable Value Single Fund)

It is important to investors hat the standard $1 net value asset for money market mutual funds remain. Worries that money market funds would “break the buck” increased global market turmoil and resulted in serious liquidity strains. These repercussions resulted in greater volatility in exchange markets and caused certain short term interest and funding rates to spike.
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