Investor Lawyers Blog

U.S. Treasury Official Brags of Close Ties to Wall Street in Advancing Support of the “Race to the Bottom” in Compliance Laws

Published on: July 3, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Treasury Secretary announced the second stage of its “capital markets competitiveness plan” devoted to efforts to “modernize the structure” of the regulatory system for all U.S. financial services providers. The announcement was made before the New York Stock Exchange’s conference on deals and deal-making, hosted by the Wall Street Journal.

As the securities industry is rapidly being globalized, Wall Street insists it can not compete with loose regulations elsewhere in the world unless U.S. standards for reporting, fraud and other wrongdoing are relaxed. Frenzied cries to federal and state officials hype this theme as if the “sky is falling.” Meanwhile, Republicans and Democrats, including candidates for both state and federal office, are taking the bait. Or, perhaps, these candidates know that many of the largest campaign donors around are found on Wall Street.

The fear mongering about losing the battle for listing shares has even invaded the courts as observers, including the SEC, lobby even the U.S. Supreme Court, stating that our nation is on the brink of disaster since it can not compete with foreign markets with almost no oversight.

Wells Fargo and its Former Research Director Fined Over Undisclosed Conflict

Published on: July 3, 2007 | by Shepherd Smith Edwards & Kantas, LLP

NASD levied a fine of $250,000 against Wells Fargo Securities LLC and $40,000 against its former research director, plus other sanctions, for failing to disclose that the lead analyst on reports issued on a company had accepted a position with that company.

The research reports concerned Cadence Design Systems, which designs semi-conductors for use in the global electronics market. According to the NASD, the analyst had applied for a job with that company prior to issuance of a report in 2005, and had two job interviews prior to issuance of others, none of which was disclosed in the reports.

The NASD’s sanctioning order states that the analyst was then offered a position at Cadence to earn over $300,000, plus Cadence stock and options, which she disclosed to the Wells Fargo and its head of research. Yet, weeks later Wells Fargo published a third research report favorable to Cadence, without disclosure of the hiring.

MML Investors Services, NYLIFE Securities, Securities America and Northwestern Mutual Investment Services Fined a Total of $1.2 Million for Mutual Fund Violations

Published on: July 2, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The NASD fined four firms for mutual fund sales violations and for failures to properly supervise such sales. The fine amounts are $473,000 against MML Investors Services, Inc., $354,000 against NYLIFE Securities LLC, $322,000 against Securities America, Inc. and $100,000 against Northwestern Mutual Investment Services.

The violations charged include sales of Class B and Class B shares, causing investors not to receive the benefits of price breaks on Class A shares, failures to properly notify clients of available cost free transfers from one mutual fund to another at the funds’ net asset values and failure to have adequate supervisory systems and procedures to prevent such violations.

In resolving the case, MML and Northwestern must also pay their clients who qualified for, but did not receive, the net asset transfer benefits and pay refunds to those who did not benefit from the price breaks. Including the refunds already paid, it is estimated that thousands of clients of these two firms will receive a total of more than $6.5 million.

H&R Block Earnings are Sunk by Subprime Mortgage Unit

Published on: June 30, 2007 | by Shepherd Smith Edwards & Kantas, LLP

H&R Block reported a loss of $433.7 million for its fiscal year 2007, compared to a gain of $490.4 million a year ago, and it lost $85.6 million in the fourth quarter vs. a gain of $587.5 in the year earlier period. The losses can mostly be attributed to Option One, its subprime mortgage unit, which the company hopes to soon sell.

The nation’s largest tax preparer was started in Kansas City by Henry and Roger “Bloch” brothers when the IRS stopped preparing tax returns free in 1955. The firm has been hugely successful in that business – for a few months out of the year. Yet the firm has been mostly unsuccessful in other ventures seeking to earn revenues the rest of the year.

Its investment subsidiary, H&R Block Financial Advisors, arose from the Block’s purchase of Olde Financial Company in 1998 for $850 million. At the time Olde and its founder were in the midst of many regulatory and other woes, many of which Block inherited.

Securities Industry Regulatory Authority (SIRA) Will Replace NASD as Name of Combined SRO (But Why?)

Published on: June 29, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The newly formed self-regulatory organization for broker-dealers will be called The Securities Industry Regulatory Authority (SIRA). This “new” organization is actually the same NASD, plus the regulatory functions of the NYSE, which it paid-off NASD members to assume. So a question to the NASD is: Why change your name?)

SIRA is scheduled to launch in the next few months. NASD’s Director Linda Shapiro, slated to head SIRA, said the organization will include more “principles-based and prudential regulation” as part of its focus. She said that NYSE Regulation and NASD will combine their rulebooks.

Shapiro said that the organization will use “proactive” regulation to help firms stay in compliance instead of waiting for them to violate regulations before enforcing the rules. “Proactive regulation” is currently used for overseeing a small group of large firms in the Consolidated Supervised Entity (CSE) Program. SIRA will take the CSE model and push it into the industry more. Use of “proactive” regulation will allow firms to understand SIRA’s expectations, which will hopefully protect investors.

Wachovia Securities Settles NASD Supervision Charges and Agrees to $2 Million Fine

Published on: June 28, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Wachovia Securities LLC of Richmond, Virginia says that it will pay $2 million in restitution to settle charges that it did not properly supervise its fee-based brokerage business from 2001 to 2004. It also says that it will pay some 1,300 customers who were either allowed to continue the inappropriate fee-based accounts or were asked to pay account fees on Class A mutual fund shareholdings that had already been paid for.

In a settlement reached with NASD, Wachovia says it will work with an outside consultant to evaluate the way that it identifies and pays customers their restitution. 549 customers collectively paid Wachovia fees of about $1.9 million, although they did not conduct any trades for at least two years.

NASD says that firms are obligated to look at whether fee-based accounts are appropriate. Customers with fee-based accounts are generally asked to pay a yearly fee (either a set rate or a percentage fee) instead of a commission every time a transaction takes place.

JB Oxford Violated Late Trading Rules but Claims Against Its Former General Counsel Are Dismissed

Published on: June 27, 2007 | by Shepherd Smith Edwards & Kantas, LLP

An SEC administrative law judge found that JB Oxford Holdings, Inc. “violated the forwarding pricing rule” when it executed trades after 4pm EST at the same day price, but found the firms former general counsel was not to blame.

ALJ Robert Mahoney determined that JB Oxford Holdings was involved in over 12,000 late mutual fund trades affecting over 600 funds in violation of “forward pricing” rules but dismissed charges against Scott G. Monson, JB Oxford Holdings Inc.’s former general counsel.

The SEC charges stated that seven JBOC clients were allowed to enter into transactions after market closing at prices established and Monson drafted a procedural agreement which allowed this. However, the ALJ said Monson was not to blame because he did not know what the prices were or that there was any issue regarding the legality of the trade time.

Son of Brookstreet Founder Joins Wedbush Morgan and Invites Brookstreet Brokers to Join Him

Published on: June 25, 2007 | by Shepherd Smith Edwards & Kantas, LLP

First announced on this Blog last week was news of problems at Brookstreet Securities. Midweek, the firm then reported that “disaster” had struck because CMOs owned by the firm and its clients had been marked down in price and margin calls had caused the firm to reach the brink of failure. On Friday, Brookstreet closed for business.

Over the weekend we heard a rumor, not confirmed, that Scott Brooks, the son of Brookstreet founder Stanley Brooks, had joined Wedbush Morgan Securities of Los Angeles and invited the Brookstreet brokers to do the same. That rumor was confirmed today in news reports.

Brookstreet’s brokerage business was conducted through independent contractor brokers similar to giant Linsco Private Ledger and other firms. Before now, Wedbush Morgan did not have an independent contractor brokerage arm, as do other firms including Raymond James Financial, Inc.

Brookstreet Liquidates Portfolio after Margin Calls by Fidelity Unit

Published on: June 24, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Brookstreet Securities Corp. has liquidated securities following margin calls by National Fidelity Securities (NFS), a division of Fidelity Investments.

Earlier in the week, it was reported on this blog that Brookstreet informed its agents in an E-mail that “disaster” had struck the firm. NFS had marked down the value of collateralized mortgage obligations (CMOs) that the firm and its clients held and that the firm would likely fail without an infusion of capital. A copy of that E-mail can be found in an earlier Blog story.

Because of the markdowns of the CMOs, margin calls were issued leading to a liquidity crunch, according to a Brookstreet trader. When the margin calls were not satisfied, the securities were liquidated. On Friday, the firm announced that it had closed for business.

Stockbrokers and Their Firms: The Story of Bad Apples from Bad Orchards

Published on: June 24, 2007 | by Shepherd Smith Edwards & Kantas, LLP

As a former Vice President and registered representative at several major brokerage firms for 20 years, I witnessed Wall Street in action. My assessment of Wall Street is that the majority of the 600,000+ registered representatives at over 5,000 brokerage firms are fairly honest people who seek the best interest of their clients. Unfortunately, there are some “bad apples” in that barrel – brokers who seek to line their own pockets with little regard for their clients.

Yet, it is not so much the apples but the “orchard” that is most troubling today. When I began my investment career in 1970, those running investment firms sought to take care of their clients and maintain their firm’s image. Over the following 20 years, I witnessed their profit motive increasingly outstrip those goals.

Today, it is clear that most financial firms pay little more than lip-service to their clients’ welfare. In the past decade, those who run these firms have discovered an important fact: Crime pays on Wall Street! The best example is the widespread research scandal which led to massive investigations, fines and lawsuits.