Articles Posted in Financial Firms

UBS ‘Rogue Trader’ Convicted of Fraud that Caused $2.3B Loss

Published on: November 22, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Kweku Adoboli, an ex-UBS (UBS) trader, has been convicted of fraud over bad deals he made at the Swiss Bank that resulted in $2.2 billion in losses. He has been sentenced to 7 years behind bars.

Adoboli, who had pled not guilty to the criminal charges, is accused of booking bogus hedges and storing profits in a secret account to hide the risks related to his trades and dealings involving exchange-traded funds, commodities, bonds, and complex financial products that track stocks. Not only did he go beyond his trading limits but also he did not cover his losses.

Meantime, the ex-UBS trader had argued in his defence that the trading losses happened not because of fraudulent or dishonest conduct on his part but because he and other traders were asked to accomplish too much without sufficient resources and in a very volatile market.

Regulators Also At Fault in MF Global Debacle, Says House Report

Published on: November 16, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to a report from Republican oversight panel members of the House Financial Services Committee, as MF Global teetered on the brink of failure, regulators were confused about how to deal with the crisis. The findings come from a number of Congressional hearings with MF Global executive and other officials during a yearlong probe, including interviews with numerous ex-MF Global employees and over 240,000 documents. The Republicans released the report without the backing of House Democrats.

E-mails that went back and forth between the regulators in the hours leading up to the financial derivatives broker’s bankruptcy exhibited what the Republicans describe as a “disorganized and haphazard” approach to oversight, as well as communication issues.
Some of the Republicans behind this 100-page report believe that regulators gave former MF Global chief executive John S. Corzine a lot of leeway. Meantime, Democrats have said that the report is a way for Republicans to embarrass Obama administrative watchdogs.

Representative Randy Neugebauer, who is the oversight panel’s chairman and led the investigation, commented that it wasn’t that more regulation was necessary in the handling of the MF Global crisis but that the regulators needed to actually do their job and work together better. For example, per the report, after the Commodity Futures Trading Commission had instructed MF Global to transfer $220M to stop up a hole in customer accounts, which the firm agreed to do, the Securities and Exchange Commission and other regulators complained that the order was given without first consulting them. The report also cites other incidents of missed communications and frustration among the different agencies toward each other.

Some Republicans are suggesting that SEC and CFTC would better serve investors and customers if they streamlined themselves or merged into one agency. However, this is not the first time that lawmakers have tried to combine the two regulators. Such efforts in the past have always hit a wall of opposition.

The report on MF Global is the most significant attempt by the government to address errors made by the broker and the bulk of the blame continues to be pointed toward Corzine, who fought back against attempts to limit his authority over European trades, including the demands of auditor PriceWaterhouseCoopers (PWC) that MF Global account for sovereign debt holdings in a manner that would have lowered profitability. However, authorities continue to remain wary of filing criminal charges against MF Global’s top executives because they believe that loose controls and chaos and not criminal actions, are why over a billion dollars in customer money disappeared. (The report also names the Federal Reserve Bank of New York, contending that it should have been more careful when deciding to approve MF Global’s application to sell securities on the New York Fed’s behalf.)

House Report Faults MF Global Regulators, New York Times, November 15, 2012

Financial Services Subcommittee Report Finds Decisions by Corzine, Lack of Communication Between Regulators Led to MF Global Bankruptcy and Loss of Customer Funds, Financial Services, November 15, 2012
Read the Report (PDF)

More Blog Posts:
$1.2 Billion of MF Global Inc.’s Clients Money Still Missing, Stockbroker fraud Blog, December 10, 2011

MF Global Holdings Ltd. Files for Bankruptcy While Its Broker Faces Liquidation and Securities Lawsuit by SIPC, Institutional Investor Securities Blog, October 31, 2011
Ex-MF Global CEO John Corzine Says Bankruptcy Trustee’s Bid to Join Investors’ Class Action Securities Litigation is Hurting His Defense, Institutional Investor Securities Blog, September 5, 2012 Continue Reading ›

Citigroup to Pay $2M Massachusetts Over Allegedly Improper Disclosure About Facebook Before IPO & SEC Wants Additional Comments on Nasdaq’s Proposed $62M Fund For Those that Experienced Technical Glitches After Trading Began

Published on: November 7, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup Global markets Inc. (C) has consented to pay $2M to settle claims by the state of Massachusetts that a research analyst improperly disclosed information about Facebook (FB) before the company’s initial public offering. According to Secretary of the Commonwealth William F. Galvin, the financial firm neglected to supervise this person, who allegedly gave research information to a media technology site. Galvin says that this disclosure violated state securities laws, a nondisclosure arrangement between Facebook and Citigroup, and FINRA and NASD rules. While Citigroup has admitted to the statement of facts, it has not denied or admitted violating SRO rules and securities laws.

Per the allegations In re Citigroup Global Markets Inc., Mass. Sec. Div., the junior analyst emailed the information to AOL Inc.-owned media site TechCrunch. The data contained projections by a senior analyst about the IPO. Citigroup is accused of not detecting or preventing the disclosure until responded to a subpoena issued by Massachusetts. Also implicated in the order was a senior Citigroup analyst accused of giving data about YouTube Inc. revenue estimates to a French magazine without getting the communication approved first.

The Facebook IPO in May has attracted a lot of attention from regulators and lawmakers. One reason for this is allegations that analysts gave certain investors select data about the offering. There was also the problem of technical glitches that arose when trading began. Securities lawsuits and congressional and regulatory probes ensued.

To compensate investors that suffered losses from the technical snafus, Nasdaq Stock Market LLC is proposing a $62 million reimbursement fund. Now, the Securities and Exchange Commission is asking for more comment about this proposed fund. As of October 26, most of the 11 letters it had received had voiced objections. For example, some took issue with the $40.527 benchmark price that was used to figure out how much members are owed, while others didn’t like how only a limited number/kinds of orders are eligible for compensation: sells that were priced at $42 or under that failed to execute, sales in this price range that were executed at a lower price, purchases priced at $42 that went through but weren’t confirmed right away, and purchases at the same price that not only went through and weren’t confirmed but also efforts were made to cancel them. Qualified market participants wanting to take part in the compensation program would have to relinquish other related claims that might also be valid.

Citi fined $2 million over Facebook IPO, fires two analysts, Reuters, October 26, 2012

Read the Consent Order resolving the proceedings between Massachusetts and Citigroup(PDF)

More Blog Posts:
Citigroup Inc. CEO Vikram Pandit Resigns, Institutional Investor Securities Blog, October 16, 2012

Citigroup Inc.’s $590M CDO Putative Class Action Settlement Gets Preliminary Approval from District Court, Stockbroker Fraud Blog, September 13, 2012

Massachusetts Commonwealth Secretary William Galvin Sues UBS for Fraud, Stockbroker Fraud Blog, June 30, 2012 Continue Reading ›

Court Upholds Ex-NBA Star Horace Grant’s $1.46M FINRA Arbitration Award from Morgan Keegan & Co. Over Mortgage-Backed Bond Losses

Published on: October 30, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Three years after the Financial Industry Regulatory Authority awarded former Chicago Bulls forward Horace Grant a $1.46 million arbitration award in his securities claim against Morgan Keegan & Co., the U.S. Court of Appeals for the Ninth Circuit has upheld that ruling. Grant, who had suffered mortgage-backed bond losses, accused the brokerage firm of not disclosing to him that his investments were not suitable for him, withholding information about the actual risks involved, and failing to supervise the fund manager. Morgan Keegan is now part of Raymond James Financial Inc. (RJF).

Grant bought the majority of the funds through his account with Morgan Keegan in 2004 when the brokerage firm owned the sports agency that represented him. The mortgage-backed bond funds were among a group of investment products that took huge losses in value in 2007 and 2008 when the subprime market failed.

Hundreds of investors proceeded to file similar mortgage-backed bond losses claims against Morgan Keegan, which finally agreed to settle with regulators for $200 million the allegations that it had inflated the value of the high-risk subprime securities that the funds held. James Kelsoe, a fund manager who is accused of purposely inflating the subprime securities’ value, would later to agree to an industry bar by the SEC and consent to pay a $500,000 penalty.

Bank of America Corp. Sued for Over $1B By US Government For Mortgage Fraud Against Freddie Mac and Fannie Mae

Published on: October 24, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The United States is suing Bank of America Corporation (BAC) for more than $1 billion over alleged mortgage fraud involving the sale of defective loans to Freddie Mac and Fannie Mae. The federal government contends that Countrywide, and then later Bank of America, following its acquisition of the former, executed the “Hustle,” a loan origination process intended to swiftly process loans without the use of quality checkpoints.

This allegedly resulted in thousands of defective and fraudulent residential mortgage loans, which were sold to Fannie Mae and Freddie Mac, that later defaulted, leading to innumerable foreclosures and over $1 billion in losses.

The US claims that between 2007 and 2009, mortgage company Countrywide Financial Corp. got rid of checks and quality control on loans, including opting not to use underwriters, giving unqualified personnel incentives to cut corners, and hiding defects, and then proceeded to falsely keep claiming that these loans were qualified to be insured by Freddie Mac and Fannie Mae. The result, says U.S. Attorney for the Southern District of New York Preet Bharara, was that taxpayers were left to foot the bill from these “disastrously bad loans.”

David Lerner Associates Must Pay $14M Over Apple REIT Ten Sales and Allegedly Excessive Markups Involving CMOs and Municipal Bonds—$12M to Go to Investors

Published on: October 22, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is ordering David Lerner Associates, Inc. to pay $14M for allegedly engaging in unfair sales practices involving its Apple REIT Ten and charging clients excessive markups. $12 million of this will be restitution to the investors that bought shares in the $2 billion non-traded real estate investment trust, as well as to clients that were overcharged. $2.3 million is FINRA’s fine against the brokerage firm for charging unfair prices on collateralized mortgage obligations (CMOs) and municipal bonds.

According to the SRO, David Lerner Associates solicited thousands of clients to get them to buy shares in the Apple REIT TEN, of which it is the sole distributor. Elderly and unsophisticated investors were among its sales targets, even as it failed to do enough due diligence to make sure these investments were appropriate for these clients. Instead, the financial allegedly used marketing collateral that was misleading and showed customers performance results for closed Apple REITs without revealing that their incomes were not enough to support distributions to unit owners.

As part of the settlement, the financial firm has agreed to modify its advertising procedures. For example, for three years it will video record sales seminars involving 50 or more participants. It will also prefile its sales literature and ads with FINRA at least 10 days before they are made available for use. Additionally, per FINRA mandate, the brokerage firm will bring in independent consultants to look at proposed modifications to its supervisory system, as well as the training involving the pricing of municipal bonds and CMOs and the sale of non-traded REITs.

FINRA Arbitration Panel Tells Merrill Lynch to Pay $1.34M to Florida Couple Over Allegedly Misrepresenting Fannie Mae Preferred Shares’ Risks

Published on: October 17, 2012 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority panel says that Merrill Lynch (MER) has to pay Michele and Robert Billings $1.34 million for allegedly misrepresenting the risks involved in preferred shares of Fannie Mae. The couple, who used to own a pest control business, placed $2.3 million in the shares in 2008 on the recommendation of their broker, Miles Pure.

The Billings claim that Pure told them them that their investment was “safe,” backed by the government, and came with an attractive yield, when, actually, contends the couple, at the time Fannie Mae’s exposure to the residential real estate market that was failing was causing Fannie Mae to lose billions of dollars. Even as the stock’s price went down, they say that Pure discouraged them from selling. They also claim that he didn’t let them know that the financial firm’s own research showed that Fannie Mae was becoming more beleaguered. Not long after, the Billings’ shares lost their value when Fannie Mae went into government conservatorship.

They filed their FINRA arbitration claim contending civil fraud, negligent supervision, and other alleged wrongdoing. The couple, who are now retired, sought $1 million from Merrill Lynch, in addition to other relief. The $1.34 million award includes punitive damages.

While a spokesman for Merrill says that the brokerage firm doesn’t agree with the panel’s ruling, the Billings’ securities attorney expressed approval of the outcome. Meantime, the FINRA panel has denied Pure’s request to have the disclosure about this arbitration taken out of public record. Although he was not involved in this case, per the securities industry, all securities brokers who are license must have their connection to any arbitration claim noted in their public records regardless of whether/not if he/she was party to it. (The panel, however, did remove the arbitration disclosure from the record of a brokerage manager who didn’t deal directly/daily with the Billings.)

Pure is now a Morgan Keegan broker. Morgan Keegan is a Raymond James Financial Inc. (RJF) unit. Merrill Lynch is a Bank of America (BAC) subsidiary.

This securities case is an example of some of the repercussions that are still happening for investors and brokers in the wake of the economic crisis. The Billings are just two of many investors that have sustained financial losses because a brokerage firm allegedly misrepresented the risks involved in an investment. Meantime, more arbitration claims over such losses are still pending.

Merrill Lynch ordered to pay couple $1.34 million over Fannie Mae Preferred Shares, Reuters/Chicago Tribune, October 16, 2012

Bank of America Merrill Lynch hit with $1.3 million arbitration order, Investment News, October 17, 2012

More Blog Posts:
Ex-Fannie Mae Executives Have to Defend Against SEC Lawsuit Over Their Alleged Involvement in Understating Mortgage Company’s Exposure Risk, Institutional Investor Securities Blog, August 25, 2012

Merrill Lynch Told to Pay $3.6M to Brazilian Heiress for Brother’s Alleged $389M in Unauthorized Trading, Stockbroker Fraud Blog, September 22, 2012

Freddie Mac and Fannie May Drop After They Delist Their Shares from New York Stock Exchange, Stockbroker Fraud Blog, June 25, 2010 Continue Reading ›

Citigroup Inc. CEO Vikram Pandit Resigns

Published on: October 16, 2012 | by Shepherd Smith Edwards & Kantas, LLP

After months of tensions with Citigroup’s (C) board of directors, Chief Executive Officer Vikram Pandit has turned in his resignation. Taking his place as CEO will be Michael Corbat.

According to several sources, Pandit’s decision to leave comes after months of tension with Chairman Michael O’Neill over numerous issues, including the role of Chief Operating Officer John Havens and regarding compensation. Havens stepped down on the same day as Pandit. (Reuters reports that one person familiar with the investment bank says that this means that O’Neill is now in full control.) During a conference call with analysts and investors, O’Neill offered reassurances while noting that outside candidates had been considered before Corbat’s appointment.

With Pandit’s departure, Citigroup shares rose up to 2%, with some investors expressing relief that he is gone. Pandit was at the helm when the financial firm took a loss when it had to sell the stake it had left in its retail brokerage business to Morgan Stanley (MS). He also opposed breaking up the bank in any way, which some believed could have raised shareholder value. Proposals for these changes could come back onto the table now that he is gone.

Pandit’s relationship with the board wasn’t helped after shareholders recently turned down the CEO pay package. While he was awarded over $15 million in compensation last year, 55% of shareholders did not approve it.

According to Reuters, Pandit, who says he is leaving of his own accord, believes he has accomplished his aims since becoming Citigroup CEO in December 2007 and that putting his successor in place now makes sense because plans are in development for 2013 when a new strategy will be executed.

Meantime, Havens’ departure also isn’t a surprise to many, as he and Pandit have close career ties. They worked together at Morgan Stanley and Old Lane Partners LP. Some inside Citigroup considered their relationship to be an obstacle. Pandit moved to Citigroup after Old Lane Partners, which was his private equity firm and hedge fund, was acquired by the bank for $800 million.

Since the mortgage crisis, banks are under pressure regarding their profits, which haven’t been helped by unimpressive investment returns and unspectacular capital market activities. The Wall Street Journal reports that according to private equity firm JC Flowers & Co., the return on equity among financials should “normalize to historic levels” even though the economic crisis has resulted in a “major long-term evolution.”

In the firm’s mid-year report to investors, Chairman J. Christopher Flowers said this normalization would occur because financial service companies are needed if the economy is to work properly. He stressed that with economic growth, financial service companies will periodically need more capital to stimulate this, and, as a result, they won’t be able to attract new capital unless ROEs and valuations adjust accordingly. Flowers said that this would occur via price changes and business mix shifts. Also per the WSJ, his view is in contrast to that of KKR & Co. global macro and asset allocation head Henry McVey, who recently reported that while the financial services industry is experiencing changes, more intense regulation will likely cause the firms’ performance and returns to keep lagging.

Citi’s CEO Pandit exits abruptly after board clash, Reuters, October 16, 2012

Pandit Is Forced Out at Citi, The Wall Street Journal, October 17, 2012

More Blog Posts:
Texas Securities Roundup: Morgan Stanley Smith Barney Sued Over Financial Adviser’s Ponzi Scam, Judge Dismisses Ex-GE Executive Whistleblower’s Lawsuit Over His Firing, & Ex-Stanford Financial Group CIO Pleads Guilty to Obstructing the SEC’s Probe, Stockbroker Fraud Blog, July 3, 2012

Citigroup Inc.’s $590M CDO Putative Class Action Settlement Gets Preliminary Approval from District Court, Stockbroker Fraud Blog, September 13, 2012

Institutional Investor Securities Roundup: FHFA Can Start Discovery in MBS Litigation Against Banks, SEC Sues Puerto Rico Man Over Alleged $7M Scam, and Assets of Two Colorado Men are Temporarily Frozen Over Alleged Promissory Note Ponzi Scheme, Institutional Investor Securities Blog, August 31, 2012

JPMorgan Chase Must Pay Oil Heiress’s Trust $18M For Derivatives Investments, Account Mismanagement, and Unsuitable Investment Advice

Published on: October 12, 2012 | by Shepherd Smith Edwards & Kantas, LLP

JPMorgan Chase (JPM) must pay the trust of oil heiress Carolyn S. Burford $18 million for the “grossly negligent and reckless” way that the financial firm handled the account. In Tulsa County District Court in Oklahoma, Judge Linda G. Morrissey said that beneficiary Ann Fletcher was persuaded to invest in derivatives that were unsuitable for the trust, causing it to sustain significant losses. The judge is also ordering punitive damages to be determined at a later date, as well as repayment of the trust’s legal expenses.

Fletcher, now 75, is the daughter of Burford, who passed away in 1996. The trust was set up in 1955 by Burford’s parents. Burford’s dad is the founder of Kelly Oil and her mother had connections to another oil company.

Between 2000 and 2005, the trust and JPMorgan, which gained management over the trust after a number of bank mergers and oversaw it until 2006, got into a number of variable prepaid forward contracts. These derivatives were pitched to the trust as way for it to make more income. However, according to the court, Fletcher was cognitively impaired and experiencing medical problems when the bank recommended that the trust buy the derivatives. A year before, she even expressed in a written letter to the bank that she was scared about getting involved in “puts & calls.” She eventually chose to trust their recommendation that she buy them.

Judge Morrisey believes that the bank failed to properly explain the product to its client while neglecting to reveal that it stood to benefit from the transaction. She also says that when JPMorgan invested the contracts’ proceeds in its own investment products, which she described as “double dipping,” it was in breach of fiduciary duty. JPMorgan also billed the trust transaction investment fees and corporate trustee fees.

Morrisey said that because the bank gives employees incentives to make it revenue, this creates a conflict of interest for those that are advising and managing fiduciary accounts. She said that the financial misconduct that occurred in this securities case exhibits JPMorgan’s disregard of its clients, especially when it knew, or if it didn’t then was reckless in not knowing, that such conduct was occurring.

Investors that purchase variable prepaid contracts generally consent to give a number of the stock shares to the brokerage firm in the future. Such a deal can protect investors from certain losses and can be accompanied by tax benefits. However, they can also lead to additional fees. With Burford’s trust, however, the trustee is not allowed to sell its original stocks. The court said that JPMorgan failed to tell Fletcher that getting involved in the contracts could lead to the sale of that stock.
JPMorgan says it disagrees with the court’s ruling and it may appeal.

JPMorgan Must Pay $18 Million to Heiress Over Derivatives, Bloomberg, October 10, 2012

JP Morgan Ordered to Pay $18 Million to Oil Heiress’s Trust, New York Times, October 10, 2012

More Blog Posts:
New York’s Attorney General Sues JP Morgan Chase & Co. Over Alleged MBS Financial Fraud by Its Bear Stearns Unit, Stockbroker Fraud Blog, October 4, 2012
Ex-Employee Accuses Bank of America of Securities Fraud Involving Complex Derivatives Products, Stockbroker Fraud Blog, October 29, 2010

Barclays LIBOR Manipulation Scam Places Citigroup, Credit Suisse, Deutsche Bank, JP Morgan Chase, and UBS Under The Investigation Microscope, Institutional Investor Securities Blog, July 16, 2012 Continue Reading ›

FINRA Securities Fraud Roundup: Guggenheim Securities Fined $800K For Failure to Supervise CDO Traders, Brokerage Firm Managing TIC Securities Doesn’t Have to Arbitrate Investor Claims, & Investor Award in Morgan Keegan Funds is Upheld

Published on: October 12, 2012 | by Shepherd Smith Edwards & Kantas, LLP

FINRA is fining Guggenheim Securities, LLC $800,000 for allegedly not supervising two collateralized debt obligation traders accused of hiding a trading loss. The traders are Alexander Rekeda and Timothy Day. Rekeda, who is the financial firm’s ex-CDO Desk head, has to pay $50,000 and is suspended for a year. Day’s fine is $20,000 and he received a four month suspension. By settling, none of the parties are denying or admitting to the FINRA securities charges.

Due to a failed trade, the CDO Desk at Guggenheim acquired a €5,000,000 junk-rated tranche of a CLO in October 2008. When the desk was unable to sell the position, Rekeda and Day convinced a hedged fund client to buy the collateralized loan obligation for $950,000 more than it had initially agreed to pay by misrepresenting the CLA. FINRA said that to conceal the CLO position’s trading loss, the two traders gave the customer order tickets that upped the CLO position’s price and lowered the price of other positions. Day, allegedly at Rekeda’s order, is accused of lying to the client when the latter asked about the price modifications by saying that the CLO position had a third-party seller that had settled the trade at a higher price and wanted the customer to pay this rate. The client agreed, and, in exchange, Day and Rekeda said that they would compensate the customer via other transactions, including waiving the fees owed related to resecuritization transactions, adjusting the prices on several other CLO trades, and providing a payment in cash. No records, however, indicate that these transactions were related to the CLO overpayment.

In other FINRA securities news, the U.S. Court of Appeals for the Eighth Circuit has affirmed a district court’s ruling that a broker-dealer that acted as the managing broker-dealer in a Tenant in Common securities cannot be compelled to arbitrate claims filed by investors of the failed enterprise. In Berthel Fisher & Co. Financial Services Inc. v. Larmon, Judge Michael Melloy agreed that for the SRO’s purposes, the investors are not the financial firm’s “customers.”