Investor Lawyers Blog

Pondering the SEC’s Role in the Subprime Mortgage Crisis

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

What was the role of the Securities and Exchange Commission in the collapse of the subprime mortgage bubble? Although mortgage brokers, investment banks, and ratings agencies are frequently held responsible for the demise, little is said about the roles of the Financial Industry Regulatory Industry (FINRA) and the SEC-both watchdog agencies that are responsible for monitoring complex credit derivatives and their suitability requirements for investors.

Yet where was the SEC when it was time to oversee investment banks and determine whether they had sufficient capital for their balance sheets, trading positions, and the appropriate risk management systems so that major losses could be avoided?

One notable problem is that there is not enough clear data available about the credit derivatives market. Structured finance products, including collateralized debt obligations (CDOs) are traded over-the-counter in the United States. This means that price information for these products is not easily accessible.

Banc One Securities Will Settle FINRA “Unsuitable” Deferred Variable Annuities Charges for $225,000

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

Banc One Securities Corp. (BOSC) says it will pay $225,000 to settle Financial Industry Regulatory Authority (FINRA) charges that it made “unsuitable” sales of deferred variable annuities to 23 clients-21 of them elderly customers over 70 years of age.

FINRA says that BOSC representatives told clients that they should exchange their fixed annuities for variable annuities, which all 23 clients did. The SRO says that the clients then placed 100% of their assets into the variable annuity’s fixed-rate fixture. The payment was 3% maximum.

FINRA says that considering each client’s age, financial situation, investment goals, and income needs, the recommendations were inappropriate. FINRA says that BOSC should have properly supervised these transactions and that oversight procedures and policies failed to require that supervisors look at and assess certain information.

Heartland Advisors Inc. Settles SEC Charges for $3.9 Million

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

Heartland Advisors Inc. and several of the investment adviser’s employees have agreed to pay $3.9 Million to settle Securities and Exchange Commission charges that they allegedly violated the Federal Securities Act.

The SEC case stems from incidents that allegedly took place from March through October 2000, when Heartland “negligently mispriced certain bonds owned by two high-yield municipal bond funds.” Because the funds were mispriced during that time period, net asset values for the funds were incorrect and so were the prices for funds’ shares.

Redeeming investors therefore benefited at the expense of new and remaining investors when investors bought and redeemed fund shares at these incorrect prices.

SEC-Commissioned Report Finds that Investors Have A Hard Time Telling the Difference Between the Roles of Broker-Dealers and Investment Advisers

Published on: February 4, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Investors have a hard time understanding the differences between investment advisers and broker-dealers, as well as distinguishing between the different services and protections that each group offer. This finding was reported last month in an SEC-commissioned study conducted by Nonprofit policy group Rand Corp.

Rand gathered its findings from data that came from six investor focus groups and a survey it conducted of 654 U.S. households.

Included among the findings:

Former LFTC and LRAIC Broker Settles CFTC Charges that He Defrauded Investors

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

Leslie Weiner, a former broker for Liberty Financial Trading Corp. (LFTC) and Liberty Real Assets Investment Corp. (LRAIC), has agreed to pay $170,000 in penalty and restitution to settle charges made by the Commodity Futures Trading Commission (CFTC) that he defrauded investor clients.

The CFTC says that LRAIC, LFTC, and Weiner engaged in fraudulent soliciting practices to persuade investors to open accounts. The CFTC has accused Weiner of “false and misleading solicitations.” The CFTC had filed its complaint in the U.S. District Court for the Southern District of Florida on September 21, 2004.

The consent order, issued on January 8, found that Weiner, when working for LFTC and then later LRAIC, made sales solicitations that misrepresented the risks involved in trading commodity options and did not disclose customer accounts’ actual performance records or the fact that both companies had poor track records when it came to trading commodity options.

Commodity Futures Trading Commission Charges Argentine Investment Adviser With Defrauding Investors in $43.8 Million International Scam

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

The Commodity Futures Trading Commission (CFTC) is charging Diego Mariano Rolando, an Argentine investment adviser, for his role in a $43.8 scheme that defrauded some 400 investors in the United States, South America, and Europe. Earlier this month, the U.S. District Court for the District of Connecticut issued a restraining order to freeze his assets.

According to the CFTC, Rolando allegedly engaged in the following activities:

• Fraudulent trading of customer funds in options contracts and commodity futures.

Deutsche Bank Trust Company, Goldman Sachs Group, and Bank of America Corporation are Among the 21 Lenders Named in Cleveland, Ohio Lawsuit

Published on: January 24, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The city of Cleveland, Ohio is suing 21 financial institutions for hundreds of millions of dollars in damages caused by subprime lending and securitization. The defendants named in the lawsuit are:

• Deutsche Bank Trust Company • Ameriquest Mortgage Company • Bank of America Corporation • The Bear Stearns Companies • Citigroup, Inc.

• Countrywide Financial Corp.

SEC & FINRA Examine CMO Sales and Marketing Practices

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

The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have each began their own investigations into the sales and marketing practices of certain collateralized mortgage obligations (CMOs),

FINRA sent more than 12 broker-dealers a sweeps letter requesting more information about: the sales of principals only, interest only, and inverse floater trenches of CMOs and details about actions taking place between June 30, 2006 and July 31, 2007.

FINRA specifically requested:

K.W. Brown & Company, K.W. Brown Investments, & 21st Century Advisors Are Held Liable in $4.5 Million Cherry-Picking Scam

Published on: January 21, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of Florida has found K.W. Brown & Company, K.W. Brown Investments, 21st Century Advisors, the companies’ owner Kenneth Brown, his spouse Wendy Brown, and representative Michael Cimilluca liable for their involvement in a cherry-picking scam that earned them $4.5 million and cost investors $9 million. The three of them were also found liable for violating federal securities laws.

According to the Florida Court, from September 2002 up until at least June 2006, Brown and his friends took part in a fraudulent cherry-picking scheme that helped him and his friends earn millions of dollars in illegal gains while clients lost money as a result.

Industry regulators had warned Brown that he needed to put in place procedures and policies that would prevent this type of illegal activity, yet the oversights persisted. A Securities and Exchange examination staff had discovered a number of violations in June 2003, including undisclosed conflicts of interest and breaches of fiduciary duty.

Investors into Bear Stearns’ “Mult-Strategy Fund Warrants” Lose over 99% on Their Investment

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

On Christmas Eve a Bear Stearns client received a present – a check for $1,000 – less some fees. While a check for $1,000 at Christmas time can come in handy, it was no gift since this was to close out an investment by the client in 2001 of almost $120,000!

Accoording to the paperwork provided to the investor, management chose to terminate early the Bear Stearns Multi-Stragegy Warants expiring March 31, 2009. The warrants, stated in the notice provided, were “linked to the performance of the Bear Stearns Multi-Strategy Fund, L.P.” the value of the warrants at maturity was to be based upon the average of the six month-end “net asset value” of the fund. That maturity never occured because the warrants were ended abruptly more than a year early.

According to the notice “the underlying constituents of the Fund were: New Castle Millennium II, L.P., New Castle Market Neutral, L.P. and Bear Stearns Emerging Markets Macro Fund, L.P., Bear Stearns Institutional Leveraged Loan Fund, L.P. Bear Stearns ABS Partners, L.P. and Bear Stearns High-Grade Structured Credit Strageties Enhanced Leverage Fund, L.P., with approximatelly equal wieghting.”