Investor Lawyers Blog

PBHG Investors Harmed By Fraudulent Market Timing To Receive $73 Million

Published on: June 19, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission says that investors who were affected by the fraudulent market timing in the PBHG Funds will receive $73 million. This is the second of three disbursements to be made from the Pilgrim Baxter Fair Fund.

Pilgrim Baxter & Associates, Ltd. was the investment adviser for PBHG Funds during the time when the fraudulent market timing took place. By the time the third disbursement is made, 384,000 investors affected by this fraud scheme will have been paid.

The Fair Fund came about because of the SEC enforcement actions charging the PBHG Funds of “unlawful market timing” by Harold J. Baxter, Gary L. Pilgrim, and Pilgrim Baxter & Associates Ltd. The charges against PBA for allowing certain investors to market time were settled three years ago when PBA agreed to the fine of $90 million in civil penalties and disgorgement (although PBA did not deny or admit guilt). It also agreed to put into place mutual fund governance and compliance reforms.

NASD Says Citigroup To Pay $15.2 Million For Misleading BellSouth Retirees

Published on: June 18, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup Global Markets Inc is being charged $3 million by NASD to settle charges connected to misleading materials it allegedly gave Bellsouth employees during retirement meetings and seminars held in North Carolina and South Carolina. NASD also says that Citigroup has to pay over 200 ex-Bellsouth employees $12.2 million in restitution. The latter comes came from a civil class action involving Smith Barney, which had tried to get the case dismissed under SLUSA.

NASD says that Citigroup neglected to properly supervise certain brokers located in Charlotte, North Carolina that used the misleading sales materials during numerous meetings with BellSouth Corp. employees. The materials made “exaggerated and unwarranted projections of future earnings” and did not elaborate on the related risks of making certain investments.

Following these presentations, over 400 BellSouth employees opened more than 1100 accounts via these brokers. Many of their investors had retired early from BellSouth and had less than $350,000 in savings. Many of them cashed out their 401(k) accounts and pensions and invested these funds with the Citigroup brokers.

Wall Street Wars: SEC Chairman’s “Payback” to Investment Advisors?

Published on: June 16, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Last year, money managers directed a billion in dollars of their clients’ funds in hidden commissions to Wall Street investment firms, says SEC Chairman Christopher Cox. These “soft”dollars” are purportedly for research and other services. Instead, the funds are made available to the money managers who often use these for “lavish trips, theater tickets, and fancy meals,” Cox added.

In these “soft dollar” transactions, clients of investment advisers pay an extra five cents or so per share which is credited to cover costs of research and other services of the firm handling the transaction. A nickel per share may seem small, but on tens of billions of total shares traded becomes a huge amount. Those paying these costs include investors into mutual funds, pension funds, and 401(k) plans.

Laws impose a “fiduciary duty” on money managers to protect their clients’ interests, even over their own. Yet, a “safe harbor” was enacted in 1975 which allows the managers and brokerage firms to “bundle” research and other services with executions and not be liable for violating duties to their clients, including the duty to shop for the best execution price.

Lawyers Speak Out Against Dry Cleaner “Lost Pants” Suit

Published on: June 15, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The American Association for Justice (formerly the American Trial Lawyers Association) has called for a disciplinary investigation of District of Columbia Administrative Law Judge Roy Pearson Jr., who brought a $65 million lawsuit against a family-owned dry cleaning business for losing his pants.

The Association’s members are U. S. lawyers who file lawsuits on behalf of clients. Its President, Lewis S. “Mike” Eidson, stated: “Our court system has no place for those who abuse the instruments of justice for personal gain or the intimidation of others.”

In addition to the call for investigation, Eidson added: “As attorneys who are committed to helping Americans receive justice throughout courts, we are outraged by the very idea of a $65 million claim over a pair of pants. It is not only ridiculous – it is offensive to our values.”

Putnam and Its Former Portfolio Managers Settle SEC Charges Over Short-Term Trading of Mutual Fund Shares

Published on: June 14, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The SEC says that former Putnam Investment advisers Omid Kamshad and Justin Scott have settled charges that they improperly traded mutual fund shares. The SEC says that they did so without denying or admitting wrongdoing and are barred from future violations of the 1940 Investment Advisers Act.

In addition, Scott agreed to disgorging $489,439 plus prejudgment interest of $159,475, while Kamshad will disgorge $57,157 and a $13,709 prejudgment interest. They also agreed to being suspended from the advisory industry for one year and to each paying $400,000 civil penalties.

The SEC had accused both men of making short-term trades in their Putnam-administered compensation and retirement accounts, potentially causing harm to other shareholders. In this case, the SEC has alleged that by taking part in personal trading while being in charge in other investors’ funds, both men did not appear to have their investors interests in mind.

HSBC Brokerage Ordered by NASD to Pay $250K to Settle Best Execution Charges

Published on: June 11, 2007 | by Shepherd Smith Edwards & Kantas, LLP

HSBC Brokerage, a New York firm which allegedly directed all government securities orders to an affiliated broker-dealer, agreed to pay $250,000 to settle NASD charges it failed to have adequate systems in place to ensure the best execution for its clients.

Allegedly the firm routed orders to affiliate, HSBC Securities (HSI), without taking adequate steps to ensure that its customers could not get better prices through other sources. The NASD said in a news release that “HBI’s inability to provide documentary evidence of its supervisory review for best execution of trades inhibited NASD’s ability to review transactions for best execution.” HBI settled this action without admitting or denying the charges.

Prior to a merger of the two related firms, HBI’s retail brokerage business was primarily located in HSBC bank branches, the NASD said. To support the retail business, HBI operated a trading desk to handle orders placed by brokers.

Janus Avoids Responsibility to Mutual Fund Shareholders for Alleged Role in Widespread Market Timing Scandal

Published on: June 11, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Shareholders of mutual funds Janus Capital Group may not pursue a class action claim that the company violated federal securities laws by permitting hedge funds to engage in market timing with the shares of mutual funds operated by Janus, the U.S. District Court for the District of Maryland ruled.

In recent years, the U.S. Congress has been persuaded to limit class actions involving securities only to claims under federal securities laws. Meanwhile, federal securities claims are limited to misrepresentations and omissions in the purchase and sale of securities and do not, for example, include claims for actions which are simply fraudulent or negligent. Furthermore, courts have decided that no one can be held liable for assisting, or “aiding or abetting”, others in violating federal securities law. Such limitations enabled Janus avoid its responsibility and have the class action against it dismissed.

In their complaint, the plaintiffs, purchasers of Janus Group stock, alleged that the Janus Funds misstated in their fund prospectuses their policies regarding market timing and late trading.

Fees on 12 B-1 Mutual Funds (or “B Shares”) Under Renewed SEC Scrutiny

Published on: June 11, 2007 | by Shepherd Smith Edwards & Kantas, LLP

“B Share”, or “back-end load”, mutual fund issues are being reconsidered by The Securities and Exchange Commission. The “B share” nick-name is derived from Rule 12 b-1 of the Investment Company Act of 1949, amended a quarter century ago to allow for the creation of such shares.

To combat a huge growth in “no load” mutual funds in the 1980’s, commission based investment firms lobbied for the creation of a product to compete. In response, the U. S. Congress agreed to amend the Investment Company Act to provide for a new class of mutual funds. On such funds, mutual fund companies can, instead of charging the investor an up-front commission, pay commissions to investment firms and their brokers right away, then charge the investor fees over time to recoup those commissions.

Since that time regulators have been besieged with complaints regarding B Shares. Deception, omission and out-and-out misrepresentations have often been made to lure investors into believing such funds are “no load”. Most observers acknowledge the potential for such abuse, yet little has been done to address the issue.

AOL Time Warner Shareholders May be Able to File Late Fraud Claims if Class Certification is Denied.

Published on: June 11, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Following the 2001 merger of AOL and Time Warner the stock price of the combined company, AOLTW, went into a year-and-a-half decline, and numerous shareholder class action securities fraud suits were filed. The various class actions were consolidated in a federal court in New York.

If the case is soon dismissed AOL Time Warner Inc. shareholders may be able to bring otherwise expired individual securities fraud claims against the company, but they must first wait for a decision on class certification in a pending lawsuit, a federal court in New York ruled.

When a class action is on file, the statute of limitations for an investor to file an individual claim will be “tolled” (extended while the class action is pending) but such tolling can not be used until “class certification” is approved by the court. The “standby suit”–anticipating the denial of certification– was filed by the investor, but the court determined that, because the limitations periods had expired on the investor’s individual claims his case, and the class action was still pending, tolling during the class action could not be employed and the case was dismissed.

Securities America Fined $15 Million for Luring Retirees Using Exaggerated Promises

Published on: June 11, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The NASD fined Omaha, Neb.-based Securities America Inc. a total of over $15 million for luring 32 long-term employees of Exxon Corporation into early retirement using false promises of high returns. The NASD stated that supervisors at Securities America largely ignored such actions by its registered representative who has been charged with violating securities regulations.

The NASD is focusing much of its enforcement resources on brokers and investment firms specializing in retirement planning services. The NASD’s chief counsel of the New Orleans region said retirement-age workers are extremely vulnerable to retirement planning investment scams. In many cases, the workers have little financial sophistication, but huge portfolios of assets that must be invested for post-employment purposes.

Employees of large companies such as Exxon are tempting targets for unscrupulous brokers touting inflated predictions of earnings to generate huge fees for the brokers. The target employees are able to “rollover” their retirement accounts, sometimes worth over a million dollars, to banks or brokerage firms. Often these workers hive little or no experience in investing and must rely entirely upon an investment advisor. This problem will grow as the baby boom generation retires.