Investor Lawyers Blog

Putnam Retail Management, Scudder Distributors, and AllianceBernstein Investments Say They Will Pay $700,000 Settlement Over NASD Allegations That They Violated Non-Cash Compensation Rules

Published on: March 5, 2007 | by Shepherd Smith Edwards & Kantas, LLP

While neither admitting or denying the charges by NASD, AllianceBernstein Investments Inc. of New York, Scudder Distributors Inc. of Chicago, and Putnam Retail Management Limited Partnership of Boston says they will collectively pay $700,000 to settle allegations that they violated the NASD’s non-cash compensation rules. Charges included the accusations that they improperly provided entertainment at education and training meetings and paid for guest expenses at these events.

Scudder, the distributor of Scudder investment products, said it would pay $425,000 in fines. AllianceBernstein, the distributor of AllianceBernstein LP’s investment products, agreed to pay $100,000, and Putnam, which distributes its own products, said it would pay $175,000.

NASD limits compensations so that point-of-sale incentives won’t affect a broker’s objectivity to find the appropriate investment product for each investor. Non-cash compensations are also limited by NASD, including reimbursements for meals, lodging, and travel expenses related to education and training meetings.

The NASD Charges Two Former Prudential Brokers And A Branch Manager With Helping A Hedge Fund Manager Engage In Market Timing Through Variable Annuities

Published on: March 1, 2007 | by Shepherd Smith Edwards & Kantas, LLP

On February 15, the NASD announced that it was charging two former prudential brokers with helping a hedge fund manager to time the market through variable annuities. The former broker’s supervisor was also charged with failure to properly supervise them. Both brokers were registered with Prudential Securities Inc., now called Prudential Equity Group, during this time.

David Corn and Jeffrey Doerr allegedly helped Paul Saunders, a client, by opening 20 accounts for him under the names of a number of limited partnerships that had been created by Saunders. The limited partnerships had the same beneficial owners as James River Capital Corp., which was Saunders’s market timing hedge fund. The NASD says that the two brokers should have known their client would use the accounts for the purpose of market timing variable annuities and that the limited partnership had the same beneficial owners.

The SRO says that, between October 2001 and September 2003, Saunders executed about 900 variable annuity sub-account transactions with the brokers’ help. These transactions earned about $5.2 million, while violating the restrictions set up by insurance companies that offered annuities. The two brokers made about $45,000 each from these trades and their commissions.

U.S. Bankruptcy Court Says Bear Stearns Must Pay More Than $125 Million for Collapsed Hedge Fund Fiasco

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

Bear Stearns Securities Corp. is being ordered to pay over $125 million to a bankruptcy trustee because of Manhattan Investment Fund, a collapsed hedge fund used by hedge fund principal Michael Berger to run a large scale fraudulent investment scam. The ruling was issued on February 15 by the U.S. Bankruptcy Court for the Southern District of New York.

Berger, who was a fugitive and a convicted felon, had created and used the fund through his company, Manhattan Capital Management Inc., to engage in fraud-an action that led to a number of regulatory and criminal actions. The SEC had even filed a securities fraud complaint against MCM, Berger, and Manhattan Investment Fund in January 2000, even obtaining an asset freeze. Two months later, Helen Gredd, the fund’s receiver, filed for Chapter 11 bankruptcy on the fund’s behalf.

According to the court, the fund made 18 transfers, worth approximately $141.4 million in total, in the year before filing for bankruptcy. Funds were transferred from Bank of Bermuda to a Bear Stearns-maintained account with Citibank. The funds were then transferred to a Bear Stearns account and used for securities trading.

Former Prudential and E.F. Hutton Exec. Weighing Problems at Current Firm.

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

Apparently unscathed by scandals at his former firms, 67 year old George Ball serves as Chairman of Sanders Morris Harris Group, Inc., a Houston based investment bank and wealth management firm.

Ball served as the No. 2 executive at E.F. Hutton & Co. Inc. from 1980 to 1982. Three years after he left, the now-defunct New York firm pleaded guilty to 2,000 counts of mail and wire fraud in a check-kiting scheme that occurred during Ball’s tenure.

Ball left Hutton to become chairman of Prudential Bache Securities. That firm thereafter became involved with what some have called “the biggest swindle in Wall Street History.” Regulators charged the company with defrauding hundreds of thousands of customers by misstating risks involved in investment partnerships. Prudential paid restitution and penalties totaling $2 billion – the costliest settlement ever for a brokerage firm – and was forced to resolve thousands of civil claims by investors for its role in these investments.

Morgan Stanley and LVMH Settle Analyst Defamation Suit

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

The international financial services firm of Morgan Stanley and French luxury goods leader LVMH announced an out-of-court settlement of a lengthy legal dispute over allegations that Morgan Stanley issued financial analysis reports which were biased against LVMH.

The settlement, with terms not disclosed, ends nearly five years of legal proceedings in French courts over the potential conflicts of interest between equity analysts and investment banking activities of financial services firms. The case marked the first time the French judiciary was asked to decide potential conflicts of interest of financial analysts at investment banking firms.

The dispute began in 2002, when LVMH accused Morgan Stanley of publishing biased analyst reports and sought 100 million euros ($131.4 million) in damages. In 2004, the Paris Commercial Court heard arguments that the Morgan Stanley analyst report had skewed its analysis of LVMH in order to aid an investment banking client of Morgan Stanley, the Italian luxury goods holding company Gucci. The Court then ordered damages of 30 million euros ($39.4 million) to be paid to LVMH by Morgan Stanley.

Why Regulators Have A Hard Time Charging Executives At Prominent Securities Firms

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

A recent investigation by the Senate regarding the handling of Morgan Stanley CEO John Mack in regards to an insider trading investigation sheds light on why regulators are never able to “nail” senior level executives at major securities firms.

Former SEC attorney Gary Aguirre alleges that he was let go after insisting that he interview John Mack in 2005. Mack, at the time, was about to become Morgan Stanley’s chief executive. According to Aguirre, his superiors were hesitant to challenge the soon-to-be head honcho, and the SEC dropped the insider trading case, which also involved Pequot Capital Management Inc., due to insufficient evidence last year.

SEC branch chief Robert Hanson, Aguirre’s former boss, has told the Senate that he knew that lawyers representing Mack would likely contact Hanson’s superiors. Hanson says he would not have minded going up against Mack, but that more preparation and work had been needed to keep Hanson’s superiors in the loop-although, apparently, SEC officials already knew what was going on.

Few Brokerages Disclose “Shelf Space” Agreement Details

Published on: February 23, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The SEC is considering whether to change a rule that could require brokers to reveal whether they have “shelf-space” programs, which treats certain fund companies preferentially in exchange for payment by the fund. Its first point-of-sale disclosure rule had pushed for brokerage firms to reveal the actual amount that they received from fund companies that take part in shelf-space programs. Most brokerage firms, however, are still not abiding by this standard, usually only disclosing the amount that they receive from an agreement without naming the fund company involved.

Even though many brokerage firms are informing investors about any “shelf space” agreements they have with specific mutual funds, most of them are still not disclosing the terms of these agreements. Although brokers are not directly paid by the agreement, a shelf space deal can indirectly influence the sale. For example, according to Merrill Lynch & Co. Inc., funds that do “not enter into [shelf space] arrangements … are generally not offered to clients.”

Shelf space agreements can vary, although most of the bigger firms receive anywhere from 0.05% to 0.25% of sales or assets. Brokerage firms claim this money supports education, sales, and technology.

Raymond James Financial Services Is Fined $2.75 million By NASD

Published on: February 22, 2007 | by Shepherd Smith Edwards & Kantas, LLP

NASD says that it is fining Raymond James Financial Services $2.75 million for not adequately supervising more than 1,000 producing sales managers across the U.S between 2002 to 2004. NASD also permanently barred one of RJFS’s branch managers, Donna Vogt, for making unsuitable recommendations to retirement age and elderly customers regarding variable annuity purchases and mutual funds. Some of these transactions were deemed unsuitable because of their over-concentration in aggressive growth funds. She is also accused of making misleading statements when corresponding with customers, treating them as if they belonged to the same group regardless of financial status, age, objectives, and investment experience.

NASD says the St. Petersburg firm neglected to notice sales practice abuses because of its deficient supervisory system. Producing branch managers had to be their own supervisors-opening and approving new accounts, approving their own sales transactions, and checking their correspondence. Because of this, RJFS’s system for supervision was not in compliance with securities regulations and rules.

NASD also claims that RJFS does not have a proper system set up to properly oversee variable annuity sales. Only three exception reports have been used to screen variable annuity purchases, and transactions were not screened for suitability based on yearly income, net worth of the customer, concentration of variable annuity holdings as part of net worth, or investment experience. As a result, unsuitable recommendations by Vogt went unnoticed.

Recent Actions By The SEC Brings Up The Question: Is It On The Side of Individual Shareholders Or Does It Protect Accountants And Corporate Executives?

Published on: February 20, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Committee Chairman Christopher Cox could lose the confidence of investors, and quite possibly, Congress, if he and the other appointed commissioners continue to pursue their chosen path of action.

The SEC has taken steps to reduce the chances of lawsuits being filed against auditing firms, corporations, and their executives, says the New York Times. The commission filed an amicus brief with the Supreme Court last week. In the brief, the SEC argued for an interpretation of the Private Securities Litigation Reform Act of 1995 that would make it more difficult for shareholder fraud suits to be successfully litigated.

While an appeals court has said that investors only have to show that “a reasonable person” could infer from the accusations (if proven true) that the executives named in a fraud suit acted with the intent to commit fraud, the SEC’s interpretation wants there to be evidence that there was a “high likelihood” of a defendant meaning to break the law.

Merrill Lynch Settles Class Action Lawsuits With Mutual Fund Investors Regarding Analyst Research And Internet Companies

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

Financial management and advisory company Merrill Lynch has settled three class action lawsuits involving 400 investors who claim that the company gave them misleading analyst information regarding Internet companies. The investors are buyers of mutual funds, and they will get about $40 million-6.25% of the original $645 million they had first requested in 2002. The damage amount that will be paid, however, is at the “higher end of the range of reasonableness of recovery in class actions securities litigation,” according to Southern District of New York Judge John F. Keenan who approved the settlement agreement He also says that the class has had an “overwhelmingly positive reaction” to the settlement that was reached.

The three lawsuits are among several class actions that Merrill Lynch has had to deal with since 2002, ever since New York’s then-Attorney General Eliot Spitzer investigated an alleged scheme by Merrill Lynch’s research division to publish misleading or bogus analysis regarding Internet stocks to increase investment banking business. The class action settlements reached earlier this month are the first ones to be approved in connection with the alleged wrongdoing.

Merrill Lynch paid the government $100 million over its alleged actions in 2002. Back then, the company also said it would immediately enact important reforms to further protect its securities research analysts from being influenced unnecessarily by investment banking.