Articles Posted in Financial Firms

FINRA Says Charles Schwab Corp. is Making Customers Waive Right to Pursue Class Action Lawsuits

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

The Financial Industry Regulatory Authority has filed a complaint against Charles Schwab Corp. The SRO says the online brokerage is in violation of FINRA rules because it makes clients waive their rights to pursue class actions against it.

Per a new provision added to over 6.8 million customer account agreements, Charles Schwab clients are now not allowed to begin or join class-action complaints against the financial firm. Customers must also agree that arbitrators won’t be given authority to consolidate claims from different parties, as this would set up a class-action situation.

Over 50,000 clients have opened accounts with the financial firm since it implemented this new limitation. Now, FINRA wants an expedited hearing. The SRO is concerned that the class action waiver will cause millions of Schwab clients to mistakenly think they cannot bring or take part in an already existing class action complaint against the brokerage firm. Also, FINRA has specific rules about the conditions that financial firms can place on clients, and the SRO says this provision is a definite violation.

Two Ex-Credit Suisse Executives Plead Guilty to Mortgage-Backed Securities Fraud

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

Salmaan Siddiqui and David Higgs have pled guilty to conspiracy to commit wire fraud and conspiracy to falsify books in the mortgage-backed securities fraud case against them. Higgs was former a Credit Suisse managing director while Siddiqui had been vice president.

The US Securities and Exchange Commission and the Justice Department have been conducting coordinated enforcement efforts against Higgs, Siddiqui, and Kareen Serageldin. They are charged with fraudulently inflating asset-backed bonds’ prices during late 2007 and early 2008. The bonds consisted of commercial mortgage-backed securities and subprime residential mortgage-backed securities in Credit Suisse’s trading books. Their alleged manipulation of the bond prices resulted in the financial firm getting a $2.65B write-down of its end of the year financial results for 2007. Meantime, seeing as trading book profitability determines bonuses, the three defendants obtained hefty ones.

In addition to the three men, the SEC is also suing Faisal Siddiqui as a fourth defendant. In its securities fraud complaint, the Commission accused the men of being involved in a scam to fraudulently overstate the prices of over $3B of subprime bonds. Recorded phone calls document their fraudulent actions.

Serageldin, who was Credit Suisse’s Structured Credit Trading global head, reportedly initiated the MBS fraud while Higgs, who was with the financial firm’s Hedge Trading, oversaw the operation. The Siddiquis, who are not related to each other, were brokers that allegedly falsely processed the bonds’ prices.

In August 2007, the defendants reportedly started pricing the bonds in a way that would benefit them, rather than recording the fair value. The MBS scam would continue to accelerate as the credit markets faltered. By the end of the year, they were pricing the bonds at falsely high levels. Higgs would later on get the bond prices raised beyond their year-end levels to gain favorable P & L results at the end of January.

In February, Credit Suisse reported having a 2007 net income of $7.12 billion and fourth quarter earnings of $1.16B. Seeing as these figures incorporated the false gains, the information was materially misleading and false. Their scam fell apart when Credit Suisse senior management realized that specific bonds that the defendants’ controlled had been priced abnormally high.

MBS Pricing by Credit Suisse Traders
Credit Suisse traders must price the securities that they hold at fair value, which is determined by current market price or the current price for a similar liability or asset. When there is no liquid market, the traders have to refer to other indicia to determine their assets’ fair value. Credit Suisse brokers know that the ABX indices are the benchmark for specific securities backed by home loans and that they must refer to it when placing a price on RMBS bonds and related products.

Ex-Credit Suisse bond players plead guilty to MBS fraud, Housing Wire, February 2, 2012

Manhattan U.S. Attorney and FBI Assistant Director in Charge Announce Charges Against Two Former Credit Suisse Managing Directors and Vice President for Fraudulently Inflating Subprime Mortgage-Related Bond Prices in Trading Book, FBI, February 2012

SEC Charges Former Credit Suisse Investment Bankers in Subprime Bond Pricing Scheme, SEC, February 1, 2012

More Blog Posts:
District Court in Texas Decides that Credit Suisse Securities Doesn’t Have to pay Additional $186,000 Arbitration Award to Luby’s Restaurant Over ARS, Stockbroker Fraud Blog, June 2, 2011

Credit Suisse Group AG Must Pay ST Microelectronics NV $431 Million Auction-Rate Securities Arbitration Award, Stockbroker Fraud Blog, April 5, 2012

Citigroup to Pay $285M to Settle SEC Lawsuit Alleging Securities Fraud in $1B Derivatives Deal, Institutional Investor Securities Blog, October 20, 2011

SEC and SIPC Go to Court Over Whether SIPA Protects Stanford Ponzi Fraud Investors

Published on: February 6, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission is asking District Judge Robert Wilkins to make the federal Securities Investor Protection Corp. set up a claims process for the Ponzi fraud victims of R. Allen Stanford. These investors had purchased $7.2B in certificates of deposit that allegedly ended up being bogus. The SEC is suing SIPC in an attempt to get it to pay Stanford’s investors for their losses.

SIPC is a nonprofit corporation that gets its funding from the brokerage industry. It is supposed to insure clients against losses resulting from broker theft.

The Commission contends that per the Security Investor Protection Act’s Section 16(b), these investors are protected because the money they deposited at Stanford International Bank Ltd. in Antigua to buy the CD’s was considered to have been deposited with Stanford Group Co., which is a SIPC member. The Commission wants the nonprofit corporation, to begin liquidation proceedings in federal court in Texas.

More than $1B in securities fraud claims from thousands of claimants related to the Stanford Ponzi fraud would likely be filed if the judge were to approve the SEC’s request.

The issue here is whether the clients who were victimized by the Stanford Ponzi scam are eligible to have SIPC cover the losses they sustained. SIPC says no. The group doesn’t believe that the Stanford Investments meets the criteria set up by federal law over who can qualify for payouts from such losses.

Attorneys for SIPC claims that the SEC is trying to set up a liquidation proceeding without there having to be a judicial review regarding whether the law would consider Stanford’s investors “customers.” SIPC wants the judge to order the SEC to refile its complaint, allow for discovery, and then determine this point.

Meantime, Stanford’s criminal trial is underway in Texas. Prosecutors are accusing him of bilking investors by getting them to invest in $7B in fake CDs while he used their funds to support his business and pay for an extravagant lifestyle. Stanford has denied any wrongdoing.

At his trial last week, former Stanford Financial Group Co. CFO James M. Davis testified against Stanford. Davis’s testimony against Stanford is part of the plea deal that he struck. Not only was Stanford Davis’s former boss, but also the two were once roommates at Baylor University.

According to Davis, Stanford told executives to falsify investment returns and that his boss threatened to terminate their employment if they ever reported that he borrowed over $2B from his Antigua bank to pay for his extravagant quality of life. Davis, who pleaded guilty to helping Stanford defraud investors, is facing up to three decades behind bars.

SEC Asks Federal Judge to Order SIPC Payout Plan for Stanford Investors, Bloomberg, January 24, 2012
SEC Suit Pursues Payouts by SIPC, Wall Street Journal, December 13, 2011
Allen Stanford Was ‘Chief Faker,’ Ex-Finance Chief Testifies, Bloomberg, February 6, 2012

More Blog Posts:
Jury Trial Begins in Ponzi Scammer Allen Stanford’s Criminal Case, Stockbroker Fraud Blog, January 23, 2012

SEC Sues SIPC Over R. Allen Stanford Ponzi Payouts, Stockbroker Fraud Blog, December 20, 2011
SEC Issues Emergency Order to Stop $26M “Green” Ponzi Scam, Institutional Investor Securities Blog, October 13, 2011 Continue Reading ›

SEC Charges First Resource Group LLC in Alleged Florida Penny Stock Boiler Room Scam

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

The SEC is accusing First Resource Group LLC and its founder David H. Stern of violating sections of the Securities Act of 1933 and the Securities Exchange Act of 1934. The Commission contends that they ran a boiler room scam involving penny stock companies while selling the same stocks to make illegal earnings.

First Resource and Stern allegedly hired telemarketers to make fraudulent solicitations to brokers to buy Cytta Corporation and TrinityCare Senior Living Inc. stocks. Meantime, Stern was also selling Cytta stock and TrinityCare shares to investors while buying small quantities to make it look as if actual trading activity was taking place so that investors would buy the shares.

The SEC claims that Stern and First Resources used a telephone sales boiler room to defraud investors and make inflated claims while manipulating the stocks’ price and making a profit. The Commission says they acted as unregistered brokers.

Citigroup Woes Continue With FINRA Order to Pay Financial Adviser Team $24M Over Inadequate Compensation

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

A Financial Industry Regulatory Authority panel wants Citigroup to pay financial advisor siblings Robert Vincent Minchello and James Bryan Minchello, as well as administrator Martha Jane Sullivan, $24 million. The claimants, who were formerly employed by the financial firm, contend that they did not receive fair compensation for transactions involving an institutional investor client.

Prior to working for Citigroup they were with Banc of America Securities. When they landed at Citi, they brought a number of institutional investors with them. Transactions that the brothers conducted with one the clients, a technology incubator that at the time they already had a 10-year working relationship with, is at the center of the dispute with Citigroup.

The Claimants contend that Citi only partially paid them on a few of the initial transactions and then removed them from relationship with the client while refusing to compensate them for subsequent transactions. After leaving the financial firm in 2009 they submitted an arbitration claim with Citigroup. They had wanted $156.1 million in punitive damages and interest, as well as $78 million in compensatory damages ( and attorneys’ fees and other costs).

The FINRA panel awarded the team about $24 million for compensatory damages and 6% yearly interest for the period of December 15, 2004 through January 13, 2012. Citi must also pay the advisors $1M in sanctions. The Claimants’ securities fraud attorney says the award seem to be a “rebuke” of the practice that some investment banks engage in of not paying advisors that connect them with lucrative transactions or clients. The brothers and Sullivan are now with JP Morgan Securities LLC.

As you can read about in some of our recent blog posts, Citigroup has come under fire a lot recently over alleged violations. FINRA just fined Citigroup Global Markets $725,000 for allegedly failing to disclose certain conflicts of interest in its research reports and during research analyst public appearances. In December 2011, a judge turned down Citigroup’s request to have a $54.1M arbitration award against it overturned. That FINRA award was over Citigroup’s alleged failure to disclose to investors the risks involved in putting their money in municipal bonds.

Of course, there is also the $285 million settlement reached between Citigroup and the Securities and Exchange Commission that US District Judge Jed S. Rakoff has refused to approve. Instead, he ordered both parties to court to resolve this matter. The SEC as the housing market was collapsing in 2007, Citigroup sold Class V Funding III and then betting against the $1B mortgage-linked CDO. Clients were not told about this conflict and investors eventually lost almost $700 million. Meantime, the financial firm made approximately $160 million.

Boston financial advisors and assistant win $24 million in arbitration, Boston, January 23, 2012

Citigroup Ordered To Pay Advisor Team $24M in Arbitration Dispute, OnWallStreet, January 24, 2012

More Blog Posts:
Citigroup Request to Overturn $54.1M Municipal Bond Arbitration Ruling Denied by Judge, Institutional Investor Securities Blog, December 27, 2011

Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rakoff, Institutional Investor Securities Blog, November 9, 2011

Unsealed Documents in $54.4M FINRA Arbitration Case Reveal that Citigroup Did Not Disclose Municipal Bond Risks to Investors, Stockbroker Fraud Blog, January 21, 2012

Merrill Lynch, Pierce, Fenner & Smith Ordered to Pay $1M FINRA Fine for Not Arbitrating Employee Disputes Over Retention Bonuses

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

FINRA says that Merrill Lynch, Pierce, Fenner & Smith must pay a $1M fine because it didn’t arbitrate employee disputes about retention bonuses. Registered representatives that took part in the bonus plan had signed promissory notes stating that should such disagreements arise, they would go to New York state court and not through arbitration to resolve them. FINRA says this agreement violated its rules, which requires that financial firms and associated individuals go through arbitration if the disagreement is a result of the business activities of the associated person or the firm.

It was after merging with Bank of America that Merrill Lynch set up a bonus plan to keep high-producing registered reps. The financial firm gave over 5,000 registered representatives $2.8B in retention bonuses that were structured as loans in 2009. By agreeing that they would go to state court, the representatives were greatly hindering their ability to make counterclaims. FINRA also says that because Merrill Lynch designed the bonus program so that it would seem as if the money for it came from MLIFI, which is a non-registered affiliate, the financial firm was able to go after recovery amounts on MLIFI’s behalf in court, which allowed Merrill Lynch to circumvent the arbitration requirement. After a number of registered representatives did leave the financial firm without paying back the amounts due on the promissory notes in 2009, Merrill Lynch filed more than 90 actions in state court to collect these payments.

Since September 14, 2009, FINRA has been expediting cases involving claims made by brokerage firm over associated persons accused of not paying money owed on a promissory note. Such disputes are supposed to be resolved through arbitration.

The SRO has also been known to get involved in other types of financial firm-employee disputes. For example, in another recent FINRA proceeding, an arbitration panel ordered Citigroup to pay a former investment advisor team and their administrator $24M for not fairly compensating them for transactions involving an institutional client that they brought with them when they moved from Banc of America Securities. Robert Vincent Minchello, his brother James Bryan Minchello, and Martha Jane Sullivan claimed that Citigroup only partially compensated them for a few of the transactions before cutting them out of that business relationship.

Merrill fined $1 mln for failure to arbitrate, Reuters, January 25, 2012

SEC Approves Rule Establishing Expedited Procedures for Arbitrating Promissory Note Cases, FINRA, September 14, 2009

More Blog Posts:
Securities Claims Accusing Merrill Lynch of Concealing Its Auction-Rate Securities Practices Are Dismissed by Appeals Court, Stockbroker Fraud Blog, November 30, 2011

Merrill Lynch Faces $1M FINRA Fine Over Texas Ponzi Scam by Former Registered Representative, Stockbroker Fraud Blog, October 10, 2011

Bank of America’s Merrill Lynch Settles for $315 million Class Action Lawsuit Over Mortgage-Backed Securities, Institutional Investor Securities Blog, December 6, 2011

Texas Securities Fraud: BNY Mellon Capital Markets LLC Settles Allegations of Rigged Bond Bidding for $1.3M

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

BNY Mellon Capital Markets LLC has agreed to pay the states of Texas, Florida, and New York $1.3M to settle allegations that it was involved in a bond bidding scam to reduce Citizens Property Insurance Corp. of Florida’s borrowing expenses. The Texas portion of the securities fraud settlement is $500,000, which will go toward its general revenue fund.

Per the Texas Securities Commissioner’s Consent Order, which it submitted last month, Mellon Financial Markets is accused of helping Citizens manipulate its ARS interest rate. Reducing these rates allowed Citizens to save money while costing investors that held the ARS when they ended up making $6.7M less in interest.

The Consent Order comes from a separate probe that the Texas State Securities Board had been involved in. The board found out that Citizens had sought the assistance of MFM in both the bidding on its own auctions and the concealment of this activity.

Per the Order, although an MFM broker reported the trading situation to a supervisor, the latter did not bring it to the financial firm’s compliance department or talk about it with legal counsel. As ARS interest rates went up, MFM placed bids for the debt at interest rates that were lower than going rates for similar ARS issues. The Order accuses MFM traders of understanding the consequences that would result from the way they were bidding.

Even after the ARS market failed in 2008, MFM traders continued to choose lower rates for Citizens until BNY’s compliance and legal departments stepped in to halt the process. The Texas State Securities Board determined that BNY Mellon Capital Markets’ actions involved “inequitable practices” related to securities sales. It also said that the financial firm violated regulations by not setting up, maintaining, and enforcing supervisory procedures that were reasonably designed.

Auction-Rate Securities
ARS are long-term debt issues with interest rates that are reset at auctions, which usually occur at set interval periods. The yield is a result of bidding that takes place at the auction, where investors are given an opportunity to get their funds without waiting for the debt to reach maturity. The ARS market let Citizen and other entities obtain long-term financing at interest rates that are usually connected with shorter-term investments.

Unfortunately, when the ARS market failed, investors found out that their money had become illiquid and inaccessible despite claims by financial firms that auction rate securities were safe, liquid investments.

BNY Mellon Settles with Texas Over Probe Into Rigged Bond Biddinghttps://www.ssb.state.tx.us/News/Press_Release/12-22-11_press.php, December 22, 2011
Texas State Securities Board

Texas Securities Fraud: SEC Moves to Freeze Assets of Stewardship Fund LP, Stockbroker Fraud Blog, November 5, 2011
More Blog Posts:
TD Bank Ordered to Pay Texas-Based Coquina Investments $67M Over $1.2 Billion Ponzi Scheme, Stockbroker Fraud Blog, January 19, 2012
Texas Securities Fraud: SEC Charges Life Partners Holdings Inc. in Life Settlement Scam, Stockbroker Fraud Blog, January 4, 2012

SEC Sues SIPC Over R. Allen Stanford Ponzi Payouts, Stockbroker Fraud Blog, December 20, 2011 Continue Reading ›

Jury Trial Begins in Ponzi Scammer Allen Stanford’s Criminal Case

Published on: January 23, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Two-and-a-half years after he was arrested for allegedly running a $7 billion Ponzi scam, the criminal trial of Allen Stanford has begun. The Texas financier is charged with 14 counts of fraud, conspiracy to commit money laundering, and conspiracy. He denies any wrongdoing.

Stanford is accused of issuing $7 billion in fraudulent CDs through his Antigua-based Stanford International Bank to investors in over a hundred nations. He then allegedly defrauded them.

Even since his arrest these investors have not recovered any of their money. According to Reuters, a guilty conviction won’t necessarily help his Ponzi victims recoup their losses. Hopefully, however, the Securities and Exchange Commission’s lawsuit against the Securities Investor Protection Corp. will remedy this.

Unsealed Documents in $54.4M FINRA Arbitration Case Reveal that Citigroup Did Not Disclose Municipal Bond Risks to Investors

Published on: January 21, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Last month, a US judge refused Citigroup‘s request to overturn a $54.1M arbitration award that a Financial Industry Regulatory Authority arbitration panel had ordered the financial firm to pay investors Gerald D. Hosier, Jerry Murdock Jr. and Brush Creek Capital. The award was the largest amount ever granted to individuals in a securities arbitration proceeding.

Following Citigroup’s request that a United States district court toss out the award, details from what were confidential proceedings have been unsealed. According to the New York Times, documents viewed by the arbitrators show that on a scale of 1 to 5, with 5 signifying the highest risk (usually only assigned to products that potentially carried the risk of an investor losing everything), Citigroup rated these investments as having a 5 rating for risk. Is it no wonder then that investors could and would go on to lose 80% of what they had investments.

The investments, which were municipal arbitrage portfolios, are known as ASTA/MAT. Citigroup Global Markets sold them through MAT Finance LLC.

Per internal e-mails, after the investments began declining in value in early 2008, when Citigroup wealth management head Sallie Krawcheck asked for the MAT’s risk rating,” She was told that it was “3-5.” Also, customers were never told about the 5 rating that their investments were previously given. The Times also reported that during a conference call involving brokers whose clients had sustained losses, the portfolio manager was directed to not discuss internal guidelines, which contained different information than what was in the prospectus that investors had received.

Citigroup eventually would offer to buy back the investments at a discount price but only if investors agreed to not file a securities fraud lawsuit against the financial firm. (Brokers have said they felt pressured by Citigroup to get investors on board with this. For example, a memo with the heading “Fund Rescue Options “noted that if the broker’s client let Citigroup repurchase the instruments, this would not be noted in his/her U-5 regulatory record. If, however, the client chose to sue, then this would appear in the broker’s U-5.)

In their securities fraud case, Claimants accused Citigroup of failure to supervise, fraud, and unsuitability. After the FINRA arbitration panel ordered them to pay the investors, Citigroup argued that panel members had ignored the law and contended that despite verbal statements made to investors, the latter had signed agreements acknowledging that the risk of losing everything was a possibility. Judge Christine Arguello would go on to affirm the FINRA panel’s decision. While the majority of the award was compensation for the claimants’ investment losses, about $17 million was for punitive damages.

Secrets of a Sales Machine, NY Times, January 14, 2012
Citigroup Slammed With $54 Million Award by FINRA Arbitrators in MAT/ASTA Case, Forbes, April 12, 2011

More Blog Posts:
Citigroup Request to Overturn $54.1M Municipal Bond Arbitration Ruling Denied by Judge, Institutional Investor Securities Blog, December 27, 2011
Citigroup Global Markets Settles for $725,000 FINRA Fine Over Failure to Disclose Conflicts of Interest, Stockbroker Fraud Blog, January 20, 2012
Citigroup Global Markets Inc. Sues Two Saudi Investors in an Attempt to Block Their FINRA Arbitration Claim Over $383M in Losses, Stockbroker Fraud Blog, October 22, 2012 Continue Reading ›

Citigroup Global Markets Settles for $725,000 FINRA Fine Over Failure to Disclose Conflicts of Interest

Published on: January 20, 2012 | by Shepherd Smith Edwards & Kantas, LLP

FINRA says that Citigroup Global Markets will pay a fine of $725K for not disclosing specific conflicts of interest during public appearances made by research analysts and in research reports. By settling, Citigroup is not denying or admitting to the charges although it has, however, consented to an entry of the findings.

According to the SRO, in research reports published between 1/07 and 3/10, the financial firm did not disclose possible conflicts of interest that existed in certain business connections, including the facts that the financial firm and its affiliates:
• Received revenue or investment banking from certain companies • Had an at least 1% or more ownership in companies that were covered • Managed public securities offerings • Made a market in certain covered companies’ securities
Also, FINRA says that Citigroup research analysts did not reveal these same conflicts when bringing up the covered companies during public appearances.

As a result of these alleged failures to disclose, FINRA contends that Citigroup kept investors from knowing of possible biases in the research recommendations that it made. FINRA says that such disclosures are essential in order to make sure that investors are given all of the information they need when making decisions about investments.

The SRO said that the reason Citigroup did not provide the required information is that the database for identifying and creating disclosures experienced technical difficulties and/or was inaccurate. FINRA also cites a lack of proper supervisory procedures that could have prevented such inaccuracies and disclosure failures. However, Citigroup did self-report a number of the deficiencies and has taken remedial steps to remedy them.

A financial firm can be held liable when failure to disclose key facts about an investment leads to an investor sustaining financial losses. In many instances, such omissions are made to hide or diminish the risk involved in the investment. While some omissions are intentional, others can occur due to inadequate supervision or the lack of proper systems and procedures to make sure such failures to disclose don’t happen.

It is a broker’s obligation to fairly disclose all the risks involved in a potential investment. (Misrepresenting material facts is another way that risks are concealed and investors end up losing money.

It doesn’t matter whether malicious intent was involved. If a broker-dealer concealed OR failed to disclose key information related to your investment and you suffered financial losses on your investment, you may have a securities fraud case on your hands that could allow you to recover your losses.

Citi settles with Finra over alleged conflicts at its brokerage, Investment News, January 20, 2012
Finra Fines Citigroup $725,000 For Alleged Research Violations, The Wall Street Journal, January 18, 2012
Financial Industry Regulatory Authority

More Blog Posts:
Citigroup’s $285M Settlement With the SEC Is Turned Down by Judge Rakoff, Stockbroker Fraud Blog, November 28, 2011
Citigroup Global Markets Inc. Sues Two Saudi Investors in an Attempt to Block Their FINRA Arbitration Claim Over $383M in Losses, Stockbroker Fraud Blog, October 22, 2011
Securities Fraud Lawsuit Against Citigroup Involving Mortgage-Related Risk Results in Mixed Ruling, Institutional Investor Securities Blog, November 30, 2010 Continue Reading ›