Investor Lawyers Blog

Former UBS Executive Director Must Forfeit $15.81 Million in Illegal Profits and Serve 6 1/2 Year Prison Term for Insider Trading

Published on: November 13, 2008 | by Shepherd Smith Edwards & Kantas, LLP

In the U.S. District Court for the Southern District of New York, former UBS Securities LLC Executive Director Mitchell Guttenberg was ordered to forfeit $15.81 million in alleged illegal profits, as well as serve 78 months in prison. Guttenberg is accused of taking part in an insider trading scheme that generated millions of dollars for its participants. Earlier this year, he pleaded guilty to six counts of securities fraud and conspiracy.

Guttenberg allegedly sold material nonpublic data provided by UBS stock analysts regarding upgrades and downgrades before the information became available to the public. Tips included ratings change information about numerous stocks, including Whole Foods Market Inc, Amgen Corp, Caterpillar Inc., and Union Pacific Corp.

Trader David Tavdy, hedge fund manager Erik Franklin, and others allegedly paid Guttenberg for the information, as well as a share of their profits. Tavdy and Franklin, who are codefendants in the insider trading scam case, are among those who then passed on the data to other individuals.

Hundreds of trades took place because of the nonpublic data provided by Guttenberg. The trades resulted in over $15 million in illegal profits for the former UBS executive director, while others made over $17.5 million.

Guttenberg and 12 other individuals, mostly former employees at Morgan Stanley, Bank of America Corp, and Bear Stearns Co., Inc., were criminally charged for their involvement in the insider trading ring. Investigators say the participants tried to conceal their illegal actions by conducting meetings at restaurants, using disposable cellular phones, and coming up with coded text messages. Continue Reading ›

District Court Confirms Merrill Lynch Arbitration Award in Investor Dispute

Published on: November 12, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Merrill Lynch, Pierce, Fenner & Smith, Inc. and a number of its workers have won an arbitration dispute filed by a couple that invested in a money market mutual fund. In U.S. District Court for the Southern District of New York, Judge George Daniels confirmed the award.

Konstantinos Karetsos and Greta Rothstein began their New York Stock Exchange arbitration in February 2006. The married couple accused Merrill Lynch and several of its employees of alleged deceit, fraud, conspiracy, deceptive practices, misrepresentation, obstruction of justice, material omissions, unauthorized transactions, unsuitable investments, gross negligence, breach of fiduciary duty, and account management related to their money market fund purchase.

Arbitration proceedings took place over a six-day period. On the 4th day, the arbitration panel dismissed claims against three Merrill Lynch employees with prejudice. At the end of the proceedings, more claims against Merrill Lynch and a fourth employee were dismissed with prejudice.

The arbitration panel also found that claims against one Merrill Lynch employee were obviously erroneous and that the couple had filed claims against another employee who did not take part in the “alleged investment-related sales practice violations.”

According to the district court, the opposition that was noted in the couple’s pro se pleadings appeared to be based on many of the arguments they made in arbitration. Judge Daniels also said that the couple’s “vague and conclusory” terms” impugned the arbitration panel’s “integrity and neutrality.”

Commenting on Merrill Lynch’s arbitration award, Securities Arbitration Attorney William Shepherd said, “Investors who do not hire a lawyer, or hire one without experience in securities arbitration, fare very poorly in claims against brokerage firms. While securities arbitration has less formalities than court cases, investors simply cannot alone understand how to properly present their claims to the arbitrators.”

Related Web Resources:

Rothstein et al v. Fung et al, Justia
Change in Arbitration Panels Will Allow Investors Only, NY Times, July 25, 2008 Continue Reading ›

Protestors in Asia Decrying Lehman Brothers “Mini-Bond” Collapse Could Be A Sign of More Lawsuits and Claims Against US Broker-Dealers

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

Angry investors in Hong Kong and Singapore began protesting last month over losses they suffered due to the collapse of Lehman Brothers credit-linked notes. Also known as mini-bonds, their value is now at pennies on the dollar, and investors want banks to buy the credit-linked notes back from them.

Investors of Lehman mini-bonds have experienced devastating losses. Reports indicate that financial service firms told Asian investors that Lehman Brothers mini-bonds were a safe alternative to fixed deposits.

Over 30,000 Hong Kong investors suffered losses in Lehman Brothers mini-bonds. Close to 10,000 investors in Singapore could lose more than $338 million dollars as a result of the mini-bond collapse. Last month, 600 Singaporean investors attended a public meeting to ask banks why they sold them Lehman Brothers credit-linked notes. Now, investors in the US that also were influenced by similar marketing messages about Lehman Brothers bonds and other “safe” investments are contacting investment fraud attorneys about filing arbitration claims and lawsuits.

Some lawyers are asking how such an overconcentration of mini-bonds, as well as Freddie Mac and Fannie Mae shares, managed to end up in the portfolios of senior investor who cannot afford to take the kind of financial hits that have come with the market collapse. For example, since July, some Fannie Mae shares have dropped in price from $19.50 to $1.40.

While investor claims against broker-dealers had dropped steadily since 2003 (the lowest number of claims ever, at 3,228, was in 2007), FINRA has already received at at least 3,469 claims this year.

Related Web Resources:

Hong Kong Investors Grapple with Effects of Lehman Collapse

Financial Crisis Politically Awakens Singapore Investors, Reuters, November 7, 2008 Continue Reading ›

Lazard Capital Markets Pays $2.8 Million to Settle SEC Charges Over Allegedly Improper Expenditures Made to Fidelity Investment Traders

Published on: November 7, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Lazard Capital Markets, LLC and a number of associated individuals have agreed to pay fines to settle Securities and Exchange Commission charges that over $600,000 was allegedly spent on entertaining Fidelity Investment traders to garner their business. While the SEC says the privately-held broker dealer failed to supervise the three employees that collectively spent money on the improper gifts, four of the company’s former employees were charged for their involvement in the securities laws violations made by the Fidelity traders.

The SEC has charged Fidelity and a number of current and past executives and employees, including ex-Fidelity equity trader Thomas Bruderman, with improperly accepting lavish gifts from brokers. The SEC accuses the former Lazard Capital Markets employees of supplying Bruderman with expensive entertainment and flying him internationally on private planes.

The commission says that David Tashjian, the Lazard Capital Markets’s former US sales and trading department head, and W. Daniel Williams and Robert Ward, two ex-Lazarus trading representatives, “facilitated” violations made by Bruderman. The SEC is also accusing Tashjian and Louis Gregory Rice, the former head of Lazard Capital Markets’s U.S. equity sales and trading desk, of failing to supervise Williams and Ward while they engaged in the alleged misconduct.

By agreeing to settle, Lazard Capital Markets and its four former employees are not admitting to or denying the SEC’s charges. Lazard Capital Markets has agreed to pay $1,817,629 in disgorgement plus $429,379.04 in prejudgment interest, as well as a $600,000 penalty. The broker-dealer has also agreed to be censured.

Tashjian, Williams, Ward, and Rice have agreed to separate suspensions and penalties.

Related Web Resources:

Lazard Capital Markets to Pay $2.8M for Gifts to Fidelity Traders, Financial-Planning.com, November 4, 2008
SEC Charges Lazard Capital Markets, Former Employees for Improper Gifts and Entertainment to Fidelity Employees, SEC, October 30, 2008
Continue Reading ›

Moody’s, Standard & Poor’s, and Fitch’s Assignment of High Credit Ratings to Mortgage-Backed Securities Contributed to the Financial Meltdown

Published on: November 6, 2008 | by Shepherd Smith Edwards & Kantas, LLP

At a hearing presided over by the House Oversight and Government Reform Committee in Washington DC, the executives of Moody’s, Standard & Poor’s, and Fitch Ratings, the three top credit rating agencies in the country, were grilled about how their assignment of high ratings to mortgage-backed securities, while drastically underestimating their risks, contributed to the current financial crisis.

While the heads of the country’s three leading credit agencies-Standard and Poor’s Deven Sherman, Fitch Ratings’s Stephen W. Joynt, and Moody’s Raymond W. McDaniel-have called the mortgage-backed securities collapse “unprecedented” and “unanticipated and said that any errors the agencies’ made were unintentional, internal documents reveal that the credit rating agencies knew that the ratings they were giving the securities were overvalued. It wasn’t until this past year, when homeowners began defaulting on subprime mortgages, that the credit ratings agencies began downgrading thousands of the securities.

Lawmakers are trying to determine whether the firms’ business model contributed to the conflicts of interests. Issuers pay the credit ratings agencies for evaluating securities. While the credit ratings agencies were giving mortgage-backed securities high ratings, the heads of the three leading credit agencies were earning $80 million in compensation.

At the hearing, former Moody’s credit policy managing director Jerome S. Fons testified that the agencies’ business model prevents analysts from placing investor interests before the firms’ interests. In one confidential document obtained by investigators, Moody’s CEO McDaniels is quoted as saying that bankers, investors and creditors regularly “pitched” the credit ratings agency. According to Frank L. Raiter, the former head of residential mortgage-backed securities ratings at Standard and Poor’s, “Profits were running the show.”

Investors depend on the credit rating agencies for independent evaluations. According to Congressman Waxman, the ratings agencies “broke this bond of trust,” while federal regulators failed to heed the red flags and protect investors.

Related Web Resources:

Credit Rating Agency Heads Grilled by Lawmakers, New York Times, October 22, 2008
Oversight Committee Hearing on Credit Rating Agencies and the Financial Crisis, Polfeeds.com, October 22, 2008
Committee on Oversight and Government Reform
Continue Reading ›

J.P. Turner & Co. Will Pay $250,000 to Settle FINRA Charges Related to Inadequate Supervision of Stock Trade Commissions

Published on: November 5, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority and J.P. Turner & Co. have reached a settlement agreement over charges that the broker-dealer failed to put in place a proper supervisory system for making sure that its registered representatives charged clients reasonable and fair commissions on stock trades. By agreeing to settle, JP Turner is not admitting to or denying the charges involving inadequate supervision.

FINRA says that between January 2002 and March 2005, JP Turner failed to take certain relevant factors into consideration when determining how much commission they should charge clients for equity securities transactions. Instead, FINRA says that the broker-dealer let its brokers charge commissions of up to 4.5% on nearly every stock trade, with discretion on what commission to charge solely limited by whether the security’s price was higher or lower than $25/share. If the security’s price was under $25/share, FINRA says that JP Turner representatives could charge commission of up to 4.5%. They could charge commissions of up to 3.5% if the security price was higher than $25.

FINRA requires brokerage firms to put in place systems and “reasonable procedures” for determining what commission fee a customer should be charged for such transactions, while taking into consideration certain relevant factors. The SRO’s mark-up policy provides a list of these relevant factors, including: the kind of security, the price of the security, the transaction size, the order execution cost, and the availability of the security.

During the review period, FINRA says that 91% of JP Turner’s transactions involved securities priced under $25/share. While the broker dealer’s trading manager was in charge of reviewing and approving trades to make sure charges were reasonable and fair, the SRO says the reviews actually consisted of checking transactions to make sure that commissions did not go above the company’s 4.5% and 3.5% guidelines.

As part of its settlement with FINRA, JP Turner will pay $250,000. The broker-dealer has also agreed to retain an independent consultant who will evaluate for adequacy the company’s systems, policies, procedures, and training related to FINRA’s fair price ruling.
Continue Reading ›

SEC Failed in Its Oversight of Bear Stearns, Says Inspector General

Published on: October 31, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission’s Office of the Inspector General says the agency failed to fulfill its mission in the oversight of Bear Stearns. Inspector General David Kotz says not only did the SEC neglect to order the company to cut back on risk taking, but it missed possible “red flags” leading up to JP Moran Chase & Co.’s purchase of the faltering investment bank.

Kotz’s report says that despite identifying the risks that would lead to the sub-prime mortgage crisis, the SEC staff did not exert its influence to mandate that Bear Stearns add a potential market collapse scenario to its list of possible risks.

Kotz is accusing the SEC of not making any efforts to make Bear Stearns raise money or lower its debt. He is also criticizing the agency for allowing internal audits, rather than external audits, at Bear Stearns.

Also in his report, Inspector General Cox accuses the agency of not doing anything to find the shortcomings in Bear Stearn’s risk management of mortgages and failing to avail of opportunities to prod management at Bear Stearns to deal with problems. He says the SEC should have taken more time to evaluate Bear Stearn’s 2006 annual report and get additional information from the investment firm, which would have required the company to reveal more information about its mortgage portfolio to investors.

The SEC’s division of trading and markets disagrees with Kotz’s findings and claims that that the report began with incorrect assumptions and arrived at unrealistic and inaccurate conclusions that were not practical. SEC Chairman Christopher Cox says that, if anything, the SEC’s failures occurred because the agency had not been given enough authority to oversee the investment banks and that Kotz’s report affirms this.

The sale of Bear Stearns and Merrill Lynch & Co, Lehman Brothers Holding Company’s bankruptcy, and the filings by Goldman Sachs Group Inc. and Morgan Stanley to become bank holding companies means that the SEC is no longer overseeing any large investment firms. While the agency will continue reviewing broker-dealer businesses, it is terminating its oversight program of independent investment banks’ parent companies.

Related Web Resources:

SEC Watchdog Faults Agency in a Bear Case, Wall Street Journal, October 11, 2008
SEC Office of Inspector General

Bear Stearns, A Division of JP Morgan Continue Reading ›

Former UBS AG Co-General Counsel David Aufhauser Agrees to Settle Insider Trading Charges for $6.5 Million

Published on: October 30, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The New York Attorney General’s Office says it has reached a $6.5 million settlement agreement with former UBS AG co-general counsel David Aufhauser over insider trading charges. Aufhauser is also a former general counsel for the Treasury Department.

In the complaint, Attorney General Andrew Cuomo accused Aufhauser of selling his personal auction-rate securities holdings because of inside information he received regarding UBS’s crumbling auction-rate securities market.

Among other allegations included in the complaint, which the New York Attorney General filed in New York State Supreme Court on July 24, 2008:

• A UBS executive received an e-mail on December 14, 2007 from the company’s chief risk officer discussing potential problems with ARS.
• This same UBS executive then sent an email to his financial advisor saying that he wanted to get out of the ARS market.
• AT this executive’s request, the financial advisor sold $250,000 of ARS.
• Cuomo’s complaint identifies Aufhauser as the executive and accuses him of violating New York’s Section 352-c of the General Business Law when he allegedly used insider information to commit securities fraud.
• The complaint also alleges that Aufhauser was in breach of a duty owed to the source of the insider information.

As part of his $6.5 million settlement with New York State, Aufhauser’s payments will include his $6 million UBS discretionary incentive compensation and another half a million dollars. The former UBS attorney is also barred from the industry for two years and cannot practice law or serve as an officer or a director of any public company in the state off New York for two years.

The New York Attorney General’s complaint against Aufhauser is part of Cuomo’s ongoing probe into the ARS market collapse.

Related Web Resources:
Ex-UBS Counsel to Pay $6.5 Million to Settle Auction-Rate Trading Case, NY Times, October 8, 2008
Ex-UBS general counsel settles insider trading case, Newsday, October 8, 2008
Continue Reading ›

NASAA and AARP Launch “Free Lunch Seminar Monitor Program” to Protect Seniors From Investment Fraud

Published on: October 28, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The North American Securities Administrators Association and the AARP are inviting senior investors to take part in their “Free Lunch Seminar Monitor program.” Both organizations say the program will give investors a chance to report any unscrupulous promoters of inappropriate investments to security authorities in their state.

According to statistics, 80% of senior investors (age 60 and above) were invited to attend at least one free investment seminar over the last three years. Three out of five elderly investors received six or more invitations to these free seminars.

The free lunch seminar invitations usually indicate that seniors who attend will be fed a free, expensive lunch while they listen to information about how to invest and manage their money during retirement.The Financial Industry Regulatory Authority and federal and state securities regulators, however, say that these lunches are actually sales presentations, which consist of 50% “misleading” or “exaggerated” advertising claims and 25% unsuitable investment recommendations.

Last year, the SEC and securities regulators released their joint findings pertaining to “free lunch” seminars, including:

• The lunch seminars, while touted as “educational,” were actually held with the purpose of opening new investor accounts and (eventually) selling investment products.

• 59% of firms that oversaw the free seminars exhibited weak supervisory practices.

“Free Lunch Seminar Monitor Program”
Investors who would like to be part of the Free Lunch Seminar Monitor Program can bring a checklist (see below) to the lunch seminar with questions about the presenters and the products being promoted. The information from these forms will allow state securities regulators to determine whether the promoters and the information they are presenting are in compliance with securities laws and regulations.

The program gives investors an opportunity “fight back” against the promoters of these “free seminars” and gives securities regulators another way to protect seniors from investment fraud.

AARP and NASAA Launch “Free Lunch Seminar Monitor” Program, AARP.org
“Free Lunch” Investment Seminar Examinations Uncover Widespread Problems, Perils for Older Investors, SEC.gov, September 10, 2007

Related Web Resources:
What to Listen for Checklist, AARP.org (PDF)

North American Securities Administrators Association

“Free Lunch” Investment Seminars-Avoiding the Heartburn of a Hard Sell, FINRA Continue Reading ›

SunTrust Investment Services to Pay $700,000 Fine to Settle FINRA Charges of Excessive Commission and Supervisory Violations Involving Fee-Based Brokerage Business

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

The Financial Industry Regulatory Authority has announced that SunTrust Investment Services Inc. has agreed to pay a $700,000 fine to settle allegations that it engaged in supervisory violations involving its fee-based brokerage business and charged excessive commissions on low-priced stocks. By agreeing to settle, the investment firm is not admitting to or denying the charges.

SunTrust terminated its Portfolio Choice accounts, which were fee-based accounts, in 2006. The charges by FINRA involve the period between November 2002 and December 2005 when SunTrust opened more than 2,644 Portfolio Choice accounts without properly evaluating whether the accounts were the appropriate fit for customers. According to FINRA, SunTrust neglected to properly monitor the Portfolio Choice accounts to make sure that they continued to be the appropriate account choice for clients.

FINRA found that at least 36 Portfolio Choice accounts that did not engage in any trades for at least eight quarters-yet these accounts were charged more than $129,000 in fees during the last four quarters. FINRA also says that a number of SunTrust Portfolio Choice clients paid an asset-based fee and transaction commission on the same assets.

FINRA was able to identify over 900 incidents when SunTrust neglected to exclude a customer asset that was purchased with a commission from the asset base that is used to determine the account fee. The error resulted in customers being charged twice, leading to about $437,500 in commissions and excess fees for SunTrust clients.

FINRA also accused the investment firm of acting inappropriately when it let a number of customers keep their accounts and pay for them even though they had not traded for years. Between January 2002 and September 2, 2005, FINRA says SunTrust did not establish a supervisor system that could make sure that registered representatives would charges clients fair commissions on securities transactions. The firm used an automated commission system that charged commission of more than 5% when low quantities and/or low-priced stocks were sold or purchased. Because of this, some clients were billed excess commissions nearing $100,000 in total.

Also as part of its settlement, SunTrust said it would certify that it returned $713,362 in interest and fees to clients that were affected by the alleged violations. FINRA says it took this voluntary refund into account when assessing its fine against SunTrust.

Related Web Resources:

SunTrust Investment Services

FINRA
Continue Reading ›