Articles Posted in Financial Firms

JPMorgan Chase Had No Treasurer When Chief Investment Office Made Trades Resulting In More than $2B Loss, Reports WSJ

Published on: May 19, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to the Wall Street Journal, during five of the months when JPMorgan Chase’s (JPM) Chief Investment Office made the trades that has led to over $2 billion in losses, the financial firm lacked a treasurer. Also, the executive appointed to head up department’s risk management might not have had the necessary experience to do the job. A few ex- and current employees of the financial firm have alluded to poor decisions in staffing as a reason that bad positions were allowed to go unchecked.

Apparently, until the appointment of Sandie O’Connor as treasurer was announced in March, the last person to hold that position was Joseph Bonocore. He left the financial firm in October 2011, which was before trading losses soared. Prior to leaving, he expressed general worries about risks that were being made by the JPMorgan’s London office, which is where many of the questionable trades originated. (He also had previously served as the investment unit’s chief financial officer for about 11 years.) Now, questions are being raised by those on the outside as to how a bank as big as JPMorgan could go so long without a treasurer.

As for its chief risk officer, Irving Goldman, he is related by marriage to JPMorgan executive Barry Zubrow. Goldman was moved into the post this February, one month after Zubrow was made the bank’s chief of corporate regulatory affairs. Goldman’s background in trading is extensive. He previously worked for Salomon Brothers, Credit Suisse First Boston, and Cantor Fitzgerald (CANTRP), where he also was president of its asset management and debt capital markets divisions. A JPMorgan spokesperson defended Goldman’s professional background, saying it wasn’t uncommon for a risk manager to be heavy on trading experience.

JPMorgan Chase Shareholders File Securities Lawsuits Over $2B Trading Loss

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

Two securities lawsuits have been filed on behalf of shareholders and investors of JPMorgan Chase & Co. (JPM) over the financial firm’s $2 billion trading loss from synthetic credit products. According to CEO Jamie Dimon, the massive loss is a result of “egregious” failures made by the financial firm’s chief investment officer and a hedging strategy that failed. Both complaints were filed on Tuesday in federal court.

One securities case was brought by Saratoga Advantage Trust — Financial Services Portfolio. The Arizona trust is seeking to represent everyone who suffered losses on the stock that it contends were a result of alleged misstatements the investment bank had made. Affected investors would have bought the stock on April 13 (or later), which is the day that Dimon had minimized any concerns about the financial firm’s trading risk during a conference call.

Per Saratoga Advantage Trust v JPMorgan Chase & Co., the week after the call, losses from the trades went up to about $200 million a day. The Arizona Trust is accusing Dimon and CFO Douglas Braunstein of issuing statements during that conversation that were misleading and “materially false,” as well as misrepresenting not just the losses but also the risks from major bets placed on “derivative contracts involving credit indexes reflecting corporate bonds interest rates.”

Charles Schwab Corp.’s Lawsuit Against FINRA to Stop Enforcement Case is Dismissed by Federal Judge

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

A federal judge has thrown out a lawsuit filed by Charles Schwab Corp. (SCHW) against the Financial Industry Regulatory Authority Inc. The financial firm had sought to stop the SRO’s enforcement case against it over an allegedly illegal arbitration agreement.

Schwab had added a new provision to over 6.8 million customer account agreement that would prevent clients from beginning or joining a class action lawsuit against the broker-dealer. Customers would also have to agree that industry arbitrators wouldn’t be able to consolidate securities claims from different investors. (Both kinds of cases typically involve investors with smaller claims that are usually less than $10,000. Lawyers who oppose Schwab’s arbitration provision have said that it leaves many of these investors without a legal process to be able to recover any financial losses.) By February, more than 50,000 clients had opened accounts with Schwab since it had implemented its new arbitration provision.

However, FINRA does not let class actions go through its arbitration system and it prevents broker-dealers from limiting the ways in which customers can file claims in court that are not allowed in arbitration. In its enforcement case against Schwab, the SRO accused the brokerage firm of violating its rules by making clients waive their right to file a class action complaint against it. Schwab immediately responded with a lawsuit against FINRA.

JPMorgan Chase $2B Trading Loss Leads to Probes by the SEC, Federal Reserve, and FBI

Published on: May 15, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In the wake of JPMorgan Chase’s (JPM) announcement that it lost $2 billion in a trading portfolio that is supposed to hedge against the risks that it takes against its own money, the Securities and Exchange Commission, the Federal Bureau of Investigation, the Federal Reserve and other regulators are launching their respective investigations to find out exactly what happened. JPMorgan is the largest bank in the US.

As the financial firm’s stock plummeted nearly 7% in after-hours trading after the announcement, its CEO, Jamie Dimon, attributed the losses to “many errors, sloppiness and bad judgment.” He also said that the portfolio, which consisted of derivatives, ended up being “riskier” and not as effective as an economic hedge as the financial firm had previously thought.

Also seeing drops in their stocks following JPMorgan’s announcement of its massive trading loss were other banks, including Bank of America (BAC), Morgan Stanley (MS), Citigroup (C) and Goldman Sachs (GS).

Now, the SEC and other regulators are looking into whether possible civil violations were involved in JPMorgan’s massive loss. The Commission had recently opened a preliminary probe into the financial firm’s public disclosures about its trades and accounting practices.

According to The New York Times, questions regarding JP Morgan’s chief investment office, which is in charge of its hedging activities, were raised in April following reports that a trader in London was taking large bets that were “distorting the market.” Dimon, at the time, dismissed worries about the bank’s trading activities.

The FBI is also looking into potential wrongdoing related to the $2 trading loss.

Known for its excellence in trading until now and earning up to $5.4 billion of securities gains last year, JPMorgan’s chief investment officer has now seen a reversal of fortune. Per The New York Times, the financial firm’s problems may have begun with its bond portfolio, which was valued at $379 billion in March.

Just 30% of the portfolio had been invested in securities that the federal government had guaranteed—a change from 2010 when government guaranteed bonds made up 42% of the portfolio.

Signs of trouble with JPMorgan’s trading strategy started to brew at the end of March when the market went against corporate bonds. Yet during its first-quarter earnings call in mid-April, Dimon did not give any indication that there were problems with the bank’s trading.

Last week, however, Dimon told a different story by announcing the $2 billion trading loss. He said the investment bank’s problems were caused in part by its value-at-risk measure, which underestimated the losses on hedge funds that depended on credit derivatives. Yet were the trades even actual hedges? Banks have been known to perform elaborate trades that at first seemed to be a hedge but eventually become a bad bet.

SEC Opens Review of JP Morgan, The Wall Street Journal, May 11, 2012

F.B.I. Begins Preliminary Inquiry Into JPMorgan, The New York Times, May 15, 2012

More Blog Posts:

Washington Mutual Bank Bondholders’ Securities Fraud Lawsuit Against J.P. Morgan Chase & Co. is Revived by Appeals Court, Institutional Investor Securities Blog, June 29, 2011

Stockbroker Fraud News Roundup: UBS Puerto Rico Settles SEC Action for $26M, Morgan Keegan’s Bid to Get $40K Award Over Marketing of RMK Advantage Income Fund Vacated is Denied, and SEC Settles with Attorney Involved in $1B Viaticals Scam

Published on: May 11, 2012 | by Shepherd Smith Edwards & Kantas, LLP

UBS Financial Services Inc. of Puerto Rico (UBS) has agreed to pay $26.6 million to settle the Securities and Exchange Commission administrative action accusing the financial firm of misleading investors about its control and liquidity over the secondary market for nearly two dozen proprietary closed-end mutual funds. By settling, UBS Puerto Rico is not denying or admitting to the allegations.

Per the SEC, not only did UBS Puerto Rico fail to disclose to clients that it was in control of the secondary market, but also when investor demand became less in 2008, the financial firm bought millions of dollars of the fund shares from shareholders that were exiting to make it appear as if the funds’ market was stable and liquid. The Commission also contends that when UBS Puerto Rico’s parent firm told it to lower the risks by reducing its closed-end fund inventory, the Latin America-based financial firm carried through with a strategy to liquidate its inventory at prices that undercut a number of customer sell orders that were pending. As a result, closed-end fund clients were allegedly denied the liquidity information and price that they are entitled to under the law. UBS Puerto Rico must now pay a $14 million penalty, $11.5 million in disgorgement, and $1.1 million in prejudgment interest.

The SEC has also filed an administrative action against Miguel A. Ferrer, the company’s ex-CEO and vice chairman, and Carlos Ortiz, the firm’s capital markets head. Ferrer allegedly made misrepresentations, did not disclose certain facts about the closed-end funds, and falsely represented the funds’ market price and trading premiums. The Commission is accusing Ortiz of falsely representing the basis of the fund share prices.

In other stockbroker fraud news, the U.S. District Court for the District of Colorado has denied Morgan Keegan & Co. Inc.’s bid to vacate the over $40,000 arbitration award it has been ordered to pay over the way it marketed its RMK Advantage Income Fund (RMA). Judge Richard Matsch instead granted the investors’ motion to have the award confirmed, noting that there were “many factual allegations” in the statement of claim supporting the contention that the firm was liable.

Per the court, Morgan Keegan had argued that the arbitration panel wasn’t authorized to issue a ruling on the claimants’ bid for damages related to the marketing of the fund, which they had invested in through Fidelity Investment. Morgan Keegan contended that seeing as it had no business relationship with the claimants, it couldn’t be held liable for their losses, and therefore, the FINRA arbitration panel had disregarded applicable law and went outside its authority. The district court, however, disagreed with the financial firm.

In other stockbroker fraud news, the SEC has reached a settlement with a Florida attorney accused of being involved in a financial scam run by a viaticals company that defrauded investors of over $1 billion. The securities action, which restrains Michael McNerney from future securities violations, is SEC v. McNerney. He is the ex-outside counsel for now defunct Mutual Benefits Corp.

The MBC sales agent and the company’s marketing materials allegedly falsely claimed that viatical settlements were “secure” and “safe” investments as part of the strategy to get clients to invest. The viaticals company also is accused of improperly obtaining polices that couldn’t be sold or bought, improperly managing escrow premium funds in a Ponzi scam, and pressuring doctors to approve bogus false life expectancy figures.

McNerney, who was sentenced to time in prison for conspiracy to commit securities fraud, must pay $826 million in restitution (jointly and severally with other defendants convicted over the MBC offering fraud).

UBS Puerto Rico unit to pay $26.6 mln in SEC pact, Reuters, May 1, 2012

Morgan Keegan & Co. Inc. v. Pessel (PDF)

SEC Files Charges Against Former Attorney for Mutual Benefits, SEC, April 30, 2012

More Blog Posts:
Stockbroker Fraud Roundup: SEC Issues Alert for Broker-Dealers and Investors Over Municipal Bonds, Man Who Posed As Investment Adviser Pleads Guilty to Securities Fraud, and Citigroup Settles FINRA Claims of Excessive Markups/Markdowns, Stockbroker Fraud Blog, April 10, 2012

Commodities/Futures Round Up: CFTC Cracks Down on Perpetrators of Securities Violations and Considers New Swap Market Definitions and Rules, Stockbroker Fraud Blog, April 20, 2012

Institutional Investor Fraud Roundup: SEC Seeks Approval of Settlement with Ex-Bear Stearns Portfolio Managers, Credits Ex-AXA Rosenberg Executive for Help in Quantitative Investment Case; IOSCO Gets Ready for Global Hedge Fund Survey, Institutional Investor Securities Blog, March 29, 2012 Continue Reading ›

The 11th Circuit Revives SEC Fraud Lawsuit Against Morgan Keegan Over Auction-Rate Securities

Published on: May 8, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The 11th U.S. Circuit Court of Appeals has revived the US Securities and Exchange Commission’s fraud lawsuit against Morgan Keegan & Co. accusing the financial firm of allegedly misleading investors about auction-rate securities. The federal appeals court said that a district judge was in error when he found that alleged misrepresentations made by the financial firm’s brokers were immaterial. The case will now go back to district court. Morgan Keegan is a Raymond James Financial Inc. (RJF) unit.

The SEC had sued Morgan Keegan in 2009. In its complaint, the Commission accused the financial firm of leaving investors with $2.2M of illiquid ARS. The agency said that Morgan Keegan failed to tell clients about the risks involved and that it instead promoted the securities as having “zero risk” or being “fully liquid” or “just like a money market.” The SEC demanded that Morgan Keegan buy back the debt sold to these clients.

In 2011, U.S. District Judge William Duffey ruled on the securities fraud lawsuit and found that Morgan Keegan did adequately disclose the risks involved. He said that even if some brokers did make misrepresentations, the SEC had failed to present any evidence demonstrating that the financial firm had put into place a policy encouraging its brokers-dealers to mislead investors about ARS liquidity. Duffey pointed to Morgan Keegan’s Web site, which disclosed the ARS risks. He said this demonstrated that there was no institutional intent to fool investors. He also noted that a “failure to predict the market” did not constitute securities fraud and that the Commission would need to show examples of alleged broker misconduct before Morgan Keegan could be held liable.

Morgan Stanley, Citigroup, Wells Fargo, and UBS to Pay $9.1M Over Leveraged and Inverse ETFs

Published on: May 3, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Wells Fargo & Co. (WFC), UBS AG (UBSN), Morgan Stanley (MS), and Citigroup Inc. (C) have consented to pay a combined $9.1 million to settle Financial Industry Regulatory Authority claims that they did not adequately supervise the sale of leveraged and inverse exchange-traded funds in 2008 and 2009. $7.3 million of this is fines. The remaining $1.8 million will go to affected customers. The SRO says that the four financial firms had no reasonable grounds for recommending these securities to the investors, yet they each sold billions of dollars of ETFs to clients. Some of these investors ended up holding them for extended periods while the markets were exhibiting volatility.

It was in June 2009 that FINRA cautioned brokers that long-term investors and leveraged and inverse ETFs were not a good match. While UBS suspended its sale of these ETFs after the SRO issued its warning, it eventually resumed selling them but doesn’t recommend them to clients anymore. Morgan Stanley also had announced that it would place restrictions on ETF sales. Meantime, Wells Fargo continues to sell leveraged and inverse ETF. However, a spokesperson for the financial firm says that it has implemented enhanced procedures and policies to ensure that it meets its regulatory responsibilities. Citigroup also has enhanced its policies, procedures, and training related to the sale of these ETFs. (FINRA began looking into how leveraged and inverse ETFs are being marketed to clients in March after one ETN, VelocityShares Daily 2x VIX Short-Term (TVIX), which is managed by Credit Suisse (CS), lost half its worth in two days.)

The Securities and Exchange Commission describes ETFs as (usually) registered investment companies with shares that represent an interest in a portfolio with securities that track an underlying index or benchmark. While leveraged ETFs look to deliver multiples of the performance of the benchmark or index they are tracking, inverse ETFs seek to do the opposite. Both types of ETFs seek to do this with the help of different investment strategies involving future contracts, swaps, and other derivative instruments. The majority of leveraged and inverse ETFs “reset” daily. How they perform over extend time periods can differ from how well their benchmark or underlying index does during the same duration. Per Bloomberg, leveraged and inverse ETFs hold $29.3 billion in the US.

“These highly leveraged investments were – and still are – being bought into the accounts of unsophisticated investors at these and other firms,” said Leveraged and Inverse ETF Attorney William Shepherd. “Although most firms do not allow margin investing in retirement accounts, many did not screen accounts to flag these leveraged investments which can operate on the same principle as margin accounts.”

For investors, it is important that they understand the risks involved in leveraged and inverse ETFs. Depending on what investment strategies the ETF employs, the risks may vary. Long-term investors should be especially careful about their decision to invest in leveraged and inverse ETFs.

Finra Sanctions Citi, Morgan Stanley, UBS, Wells Fargo $9.1M For Leveraged ETFs, The Wall Street Journal, May 1, 2012
Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors, SEC
FINRA investigating exchange-traded notes: spokesperson, Reuters, March 29, 2012

More Blog Posts:
SEC to Investigate Seesawing Credit Suisse TVIX Note, Stockbroker Fraud Blog, March 30, 2012

Principals of Global Arena Capital Corp. and Berthel, Fisher & Company Financial Services, Inc. Settle FINRA Securities Allegations, Stockbroker Fraud Blog, April 6, 2012

Goldman Sachs to Pay $22M For Alleged Lack of Proper Internal Controls That Allowed Analysts to Attend Trading Huddles and Tip Favored Clients, Institutional Investor Securities Blog, April 12, 2012 Continue Reading ›

Schwab Subsidiary OptionsXpress Accused of Naked Short Selling Scam by SEC

Published on: May 1, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is accusing optionsXpress, a Charles Schwab Corp. (SCHW) subsidiary, of being involved in a naked short selling scheme between 2008 and 2010. The SEC filed an administrative order against the online futures and options brokerage and clearing agency, its CEO, and a client while settling with three other company officials. OptionsXpress didn’t come under Schwab’s ownership until 18 months after the alleged securities fraud occurred.

According to the Commission’s Division of Enforcement, the Chicago-based online futures and options brokerage and clearing agency did not meet its obligations under Regulation SHO because it repeatedly took part in a number of fake “reset” transactions that were created to make it appear as if the financial firm had bought securities of “like kind and quality.” CEO/CFO Thomas Stern, who is also named in the order, is accused of taking part in these transactions that resulted in a “continuous failures to deliver” securities to a clearing agency. Such alleged actions violate Commission rules because the SEC mandates that in most cases securities reach a clearinghouse within three days after a trade happens. Otherwise, the brokerage must borrow or buy the security so that the position is closed out by the start of the next trading day at the latest.

The alleged naked short-selling scam occurred when optionsXpress facilitated its customers’ buying of shares while at the same time selling deep-in-the-money call options that were pretty much the economic equivalent of selling shares short. Buying the shares made it appear as if the financial firm had fulfilled its close-out duty when, in fact, the shares that were purportedly bought in the reset transactions were never sent to the buyers because on the day that they were “purchased,” the deep-in-the money calls that occurred caused the shares to be effectively resold. Also, the reset transactions were not actual purchases because they were for perpetuating an open short position while making it appear as if Reg. SHO’s delivery and close out requirements were being met. As a result, optionsXpress and its clients were able to take part in a stock-kiting scheme that kept true stock purchasers from experiencing the benefits of ownership.

One optionsXpress customer, Jonathan I. Feldman, is also named in the SEC’s administrative order. He is accused of taking part in a number of these fake transactions involving several securities. For example, in 2009, he purchased $2.9 billion in securities while selling short at least $1.7 billion of options using his optionsXpress account.

OptionsXpress and Feldman intend to fight the SEC’s administrative order.

Meantime, optionsXpress trading and customer service head Peter Bottini and compliance officers Kevin Strine and Phillip Hoeh have settled the SEC’s allegations against them over the alleged naked short selling scheme. They are accused of knowing (or if they didn’t that they should have known) that the omissions or actions they committed contributed to optionsXpress violating Reg SHO. By settling, they are not denying or admitting to any wrongdoing.

Read the SEC’s administrative order (PDF)

SEC Charges OptionsXpress in Naked Short Selling Scheme, AdvisorOne, April 16, 2012

More Blog Posts:
FINRA Says Charles Schwab Corp. is Making Customers Waive Right to Pursue Class Action Lawsuits, Stockbroker Fraud Blog, February 8, 2012

Fontana Capital LLC Founder Violated Short-Selling Rule, Says SEC, Stockbroker Fraud Blog, February 2, 2011

Morgan Stanley Sued by MetLife for Securities Fraud Over $757 Million in Residential Mortgage-Backed Securities

Published on: April 28, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Metlife (MET) is suing Morgan Stanley (MS) for securities fraud. According to Bloomberg, the insurance company bought over $757 million in residential mortgage-backed securities from the financial firm in 2006 and 2007. In the institutional investment fraud lawsuit, Morgan Stanley had vouched that the properties behind the loans were “accurately appraised” and that the loans met underwriting guidelines. The insurer, however, contends that the loans’ originators were actually some of the subprime lending industry’s “worst culprits.”

The RMBS lawsuit comes right after MetLife agreed to pay half a billion dollars to settle a probe by a number of states over its payment practices. The investigation involves the Social Security “Death Master” file, which includes a list of names of people who have recently passed away. Insurance companies are accused of using the list to stop issuing to dead clients their annuity payments and not using the list to confirm that life insurance policyholders had died.

MetLife announced on Thursday that it was leaving the reverse mortgage industry. Nationstar Mortgage LLC (NSM) will buy its portfolio. The move is a big change for the insurance company, which had been the market leader.

Meantime, Morgan Stanley has been battling other residential mortgage-backed securities lawsuits. Earlier this year, Sealink Funding Ltd. filed a case against it over more than $556 million in RMBS that it purchased. Sealink Funding, a European fund, was set up to manage Landesbank Sachsen AG’s most high-risk assets.

The fund bought the securities from Morgan Stanley after the financial firm said it had done its due diligence on the lenders of the investments and that the loans satisfied underwriting standards and merited their AAA ratings. Sealink called the loans’ originators among the subprime lending industry’s “worst culprits.”

Last year, Allstate Insurance Co. (ALL) filed its RMBS lawsuit against Morgan Stanley over more than $104 million in RMBS it bought in several offerings. The insurer’s contention over reassurances the financial firm made about the securities is similar to the allegations made by Sealink and Metlife. Allstate has also filed RMBS lawsuits against other financial firms, including Merrill Lynch (MER) units, Citigroup Inc. (C), and Bank of America Corp.’s (BAC) Countrywide.

As previously noted by SEC Enforcement director Robert Khuzami, mortgage products played a crucial role in the financial crisis that began a few years ago. Unprecedented losses resulted when mortgage-backed securities failed. Many institutional investors are still trying to recover. They claim they were misled about the risks involved and they want their money back.

MetLife Pays $500 Million To Settle Probe Into Unpaid Claims For Dead Policy Holders, Huffington Post, April 23, 2012

MetLife to pay $500 million in multi-state death benefits probe, Los Angeles Times, April 23, 2012

Morgan Stanley Sued by Allstate on Mortgage Claims, Bloomberg, August 18, 2011

More Blog Posts:
H & R Block Subsidiary Option One Mortgage Corporation to Pay $28.2M to Residential Mortgage-Backed Securities Investors, Institutional Investor Securities Blog, April 25, 2012

Bank of New York Mellon Corp. Must Contend with Pension Fund Claims Over Countrywide Mortgage-Backed Securities, Institutional Investor Securities Blog, April 10, 2012

FINRA Bars Former Wells Fargo Advisors Broker that Bilked Child with Cerebral Palsy

Published on: April 26, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Ralph Edward Thomas Jr., a former broker has been permanently barred from the Financial Industry Regulatory Authority. Thomas, who misappropriated money from three clients, including a child suffering from cerebral palsy, has been sentenced to a prison term of four years. He also must pay $836,000 in restitution.

According to prosecutors, the former broker stole the money over several years. More than $750,000 came from the child’s trust fund, which held the proceeds from a medical malpractice settlement he received for $3 million. During this time, he worked for Invest Financial Corporation, Harbor Financial Services, and Wells Fargo Advisors, which terminated him as their broker in 2010.

This case of securities fraud started after the child’s mom moved the trust to the bank in 2001. This gave Thomas control over the money. He would give out up to $1,500 of the child’s almost $6,300 in monthly annuity payments. He would then use withdrawal slips with the mother’s signature already written on it to buy cashier’s checks and take out money. He would deposit the checks in his personal accounts at other banks. In addition to the over $750,000 that he converted from the child’s account, Thomas converted $12,500 of the mother’s money.