Investor Lawyers Blog

A Warning on Risk in Securities backed by Commercial Mortgages

Published on: May 7, 2007 | by Shepherd Smith Edwards & Kantas, LLP

In the wake of the collapse of the subprime residential mortgage market, the leading bond rating agencies are beginning to crack down on what they see as risky lending practices in commercial real estate as well.

Like residential loans, commercial mortgages are pooled and packaged into bonds that are sliced up into portions carrying different degrees of risk. According to Moody’s, there were $769.6 billion in commercial mortgage-backed securities at the end of last year, representing 26.1 percent of all outstanding commercial mortgages, including apartment buildings.

The agencies that rate these securities have issued warnings in the past, but last month they sounded a new note of urgency, saying that for the first time they would adjust their ratings to reflect their concerns.

Ex-Morgan Stanley Client Services Representative Stole Proprietary Information About Hedge Funds, Says U.S. Attorney Michael Garcia

Published on: May 7, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Ronald Peteka, a former Morgan Stanley & Co. client services representative, was arrested last month. According to Michael Garcia, the U.S. Attorney for the Southern District of New York, Peteka allegedly stole proprietary information about hedge funds from Morgan Stanley while working with one of the brokerage firm’s consultants for the information technology department. The consultant, named Ira Chilowitz, who was in charge of establishing secure computer connections between prime brokerage clients and Morgan Stanley, pled guilty early this year to four felony counts connected to the allegations against Peteka.

Among the list of allegedly stolen items is the names of all of Morgan Stanley’s major brokerage hedge fund clients, as well as the formulas that were used to figure out the rates paid by them for specific services. This list, according to Garcia, could be of great value to Morgan Stanley’s competition. Garcia said both Chilowitz and Peteka conspired to misappropriate this list.

The U.S. Attorney said that when Chilowitz pled guilty, he confessed that the reason he stole the list was because he anticipated that it could possibly help both him and Peteka gather new business for a consulting company they had planned on setting up together.

Securities and Exchange Commission Charges Ex-Portfolio Manager With Failing To Disclose Personal Stock Transactions

Published on: May 4, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Geoffrey Brod, a former Aeltus Investment Management LLC portfolio manager has been charged by the SEC with concealing personal stock trades held by mutual funds that he was overseeing. The SEC is also charging him with falsifying internal reports. According to the SEC, Brod’s wrongful activities are in violation of his company’s ethics, as well as the antifraud and reporting provisions of the 1940 Investment Company Act.

SEC rules mandate that Brod turn in quarterly and yearly reports of personal securities transactions to Aeltus, which mandates pre-clearance of all portfolio managers’ securities trades, prohibits short-term trades, allows no more than 30 securities trades in a quarter, and requires both a 60-day holding period and a yearly certification of code compliance.

Brod is said to have actively taken part in personal, short-term trading in public company stocks. He had access on a regular basis to mutual fund holdings and their transactions in securities that were traded publicly. His method of trading, says the commission, required a very short-term trading pattern, and his holding period lasted about two to seven days. He engaged in about 3,5000 personal trades.

URGENT UPDATE: Edward Jones Seeks to Settle All Claims “Known and Unknown” for $18.00 per Current and Former Client Unless They Take Action Before June 11

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

As earlier reported, the securities firm of Edward Jones was ordered by the SEC to pay a total of $79 million to its clients and former clients. According to the SEC, the company failed to disclose kickbacks the firm received from various mutual fund companies, known as the “Preferred Fund Families.” The Preferred Families mutual funds are: American Funds; Federated Investors; Goldman Sachs Group; Hartford Mutual Funds; Lord Abbott Funds; Putnam Investments; and Van Kampen Investments.

Now, Edward Jones may be attempting to settle all potential civil claims against it “KNOWN OR UNKNOWN”, by its current or former clients FOR $18.00 PER CLIENT! The proposed settlement is as a result of a class action suit brought against the firm on behalf of millions of its current and former clients in the firm’s hometown of St. Louis, Missouri.

Language in the proposed settlement indicates the Edward Jones firm may be seeking to exempt itself from ANY AND ALL CLAIMS which could have been asserted by over 5 million of its current and former clients. Although, none of these clients would have actually signed such an agreement themself, any pending or future lawsuit, arbitration action or other legal claim could potentially be prejudiced by the final language in the settlement agreement.

Securities and Exchange Commission Looks At Arbitration

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

The SEC is considering a new policy that could let companies resolve shareholder complaints via arbitration. If adopted, this policy could limit a shareholder’s ability to sue the company in court.

A move toward arbitration could shift the balance of power between corporate managements and shareholders during a time when the balance has been more and more in favor of shareholders. The change could also restrict shareholders’ ability to recover financial, as well as other kinds of compensation from corporations.

The SEC is also examining whether corporations should be allowed to change their bylaws to make room for arbitration. This type of amendment will, in some cases, require the approval of shareholders.

Edward Jones Issues Settlement Checks To Customers as Ordered by SEC for Kickback Scheme

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

Edward Jones is now sending checks and making electronic payments to its current and former customers as part of its settlement of revenue sharing claims. The Securities and Exchange Commission announced the distribution of $79 million from the “Fair Fund” (also known as the “Edward Jones & Co., L.P. Qualified Settlement Fund”) as compensation to victims of Edward Jones’ practices according to the settlement reached. These payments do not compensate Jones’ clients for any losses caused by any other unfair sales practices.

According to the SEC, Edward Jones failed to adequately disclose kickbacks the firm received from various mutual fund companies, known as the “Preferred Fund Families.” The Preferred Families mutual funds are American Funds; Federated Investors; Goldman Sachs Group; Hartford Mutual Funds; Lord Abbott Funds; Putnam Investments; and Van Kampen Investments. The SEC’s order is available on the SEC website.

Edward Jones’ kickback scheme impacted approximately 2.1 million of its customers who purchased shares of the Preferred Fund Families between January 1, 1999 and December 31, 2004. The firm told the public and its customers it was promoting the sale of the Preferred Families’ mutual funds because of the funds’ long-term investment objectives and performance. However, Edward Jones failed to disclose that it received tens of millions of dollars of undisclosed revenue sharing payments from the Preferred Families each year for selling their mutual funds.

Examining SEC Chairman Christopher Cox’s Leadership

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

Christopher Cox brought a sense of calm to the Securities and Exchange Commission after he became chairman. Rather than the split, partisan votes that had become the standard under the previous chairman, Mr. Cox has appeared to look for the widest support possible. Under Mr. Cox, every vote made on a proposed rule has led to a 5-0 decision.

Now, however, critics say that they are frustrated with Cox’s approach. They say that because Mr. Cox is constantly working toward consensus, the SEC may be progressing too slowly on certain key issues and that investors and Wall Street have ended up having no guidance on these topics.

This debate regarding Mr. Cox touches the core of some big questions regarding the role of an SEC chairman. A large question to consider is whether Mr. Cox should aim for changes that are contentious, even though they put off interest groups and colleagues, or whether he should generate less decisions that are unanimous but lasting.

Study by NASD Foundation Looks At Why Elderly Are Vulnerable To Investment Fraud

Published on: April 26, 2007 | by Shepherd Smith Edwards & Kantas, LLP

A study released by the NASD Investor Education Foundation, in cooperation with AARP Foundation and WISE Senior Services, looks at why certain senior investors are more likely to become victims of investment fraud. The report is called “Off the Hook Again: Understanding Why the Elderly Are Victimized by Economic Fraud Crimes.”

Among the key findings:

*Investment fraud victims tend to be more financially literate than non-victims.

All Sides Want SEC Support In Case Involving Liability Of Second Parties

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

William S. Lerach, a prominent plaintiffs’ attorney, met with SEC staff members last week to try to convince the agency to support investor lawsuits filed against banks accused of helping corporate executives engage in fraud.

Recently, the U.S. Supreme Court agreed to hear a case that will look at the liability of secondary parties, including lawyers, bankers, and accountants, who did not say anything even though they knew that corporate officials were misleading shareholders. The case involves Charter Communications, a cable television provider, and is said to be the most important securities law case to reach the Supreme Court in twenty years. The decision could have major consequences and will affect investors’ ability to recover losses from companies that have engaged in fraud.

Trade groups that want to limit banks’ liability and consumer advocates that want to expand it are working to garner support for their sides. Both sides are also courting federal and state regulators.

The 10 Leading SEC Enforcement Developments Of 2006 (Part II)

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

6. The Continuation of Market Timing Cases

Market timing cases involving the SEC affected both sides of the trading desks. Those in charge of approving or facilitating market timing trades and as persons directly involved in market timing trades were singled out by the SEC, and significant monetary penalties were sometimes involved.

A. Bear, Stearns & Co, Inc. and Bear, Stearns, Securities Corp.