Articles Posted in Financial Firms

Ex-Goldman Sachs Director Rajat Gupta Pleads Not Guilty to Insider Trading Charges

Published on: October 26, 2011 | by Shepherd Smith Edwards & Kantas, LLP

After surrendering to federal authorities today, Rajat Gupta has entered a not guilty plea to the criminal charges against him involving insider trading. Gupta, who was a former Proctor and Gamble and Goldman Sachs director, is accused of multiple counts of securities fraud and one count of conspiracy to commit securities fraud. He allegedly gave Galleon Group cofounder Raj Rajaratnam corporate secrets about Goldman. Our stockbroker fraud law firm has been following Rajaratnam’s criminal case on our blog site. (See below.) Earlier this month, he was sentenced to 11 years in prison over an insider trading scam that illegally garnered $63.8 million.

Gupta, who also once was a global head at McKinsey & Co., came under close scrutiny during Rajaratnam’s trial when he was brought up in testimony and phone conversations that were recorded in secret. He is also now facing civil charges with the Securities and Exchange Commission, which contends that he provided Rajaratnam with illegal tips about both Proctor and Gamble and Goldman Sachs’ quarterly earnings and an approximately $5 billion investment that Berkshire Hathaway was planning to make in the financial firm. Based on Gupta’s tips, Rajaratnam avoided losses of/made illegal profits of over $23 million. Rajaratnam made over 800,000 in illegal profits from the Berkshire Hathaway tip when, after first having Galleon funds buy over 215,000 Goldman shares, he ordered the liquidation of the Goldman holdings a day after the information and Goldman’s public equity offering became public.

Rajaratnam also made over $18.5 million in illegal profits for Galleon funds after Gupta allegedly told him that Goldman had positive 2008 second quarter financial results. Rajaratnam then had the hedge fund buy Goldman securities but liquidated them when Goldman made news of its earnings for that quarter public. Other charges stem from Gupta allegedly notifying Rajaratnam that fourth quarter results for that same year were negative. The Goldman holdings were sold off, allowing Rajaratnam to avoid over $3 million in losses. When Gupta allegedly tipped him about P & G’s 2008 4th quarter earnings, Rajaratnam had Galleon funds sell short about 180,000 P & G shares, generating over $570,000 in illicit profits.

According to the SEC, Gupta got his confidential information from board conversations while serving as director at both companies. At the time, Gupta had numerous business ties with Rajaratnam and was seeking to strengthen that relationship. Not only had Gupta invested in Rajaratnam’s hedge funds, but they also began a number of financial ventures together.

The SEC had recently dropped its previous administrative action against Gupta over the insider trading allegations. Following that move, he vowed to drop his lawsuit claiming that the regulatory proceeding had violated his constitutional rights.

Of the 56 people that the government has charged with its crackdown on insider trading, 51 either were convicted or pleaded guilty.

With Gupta’s Arrest, Insider Inquiry Goes Beyond Wall St., Dealbook, October 26, 2011
SEC Files Insider Trading Charges against Rajat Gupta, SEC, October 26, 2011
Rajat Gupta, SEC Agree to Drop Galleon-Related Suit, Administrative Action, Bloomberg, August 5, 2011

More Blog Posts:
Galleon Group LLC Co-Founder Raj Rajaratnam Sentenced to 11 Years in Prison Over Insider Trading Scam, Stockbroker Fraud Blog, October 13, 2011
Ex-Goldman Sachs Board Member Accused of Insider Trading with Galleon Group Co-Founder Seeks to Have SEC Administrative Case Against Him Dropped, Institutional Investor Securities Blog, April 19, 2011
Dallas Mavericks Owner Mark Cuban’s Allegations of Misconduct Against the SEC Enforcement Staff are Without Merit, Says Inspector General’s Report, Stockbroker Fraud Blog, October 18, 2011 Continue Reading ›

UBS Fined $12M for Supervisory Failures and Regulation SHO Violations in Securities Short Sales

Published on: October 25, 2011 | by Shepherd Smith Edwards & Kantas, LLP

UBS Securities has agreed to pay FINRA a $12 million fine over violations that led to millions of short sale orders of securities being mismarked or entered into the market even though there was no reasonable basis for thinking that they could be delivered or borrowed. FINRA says that UBS did not properly supervise the short sales and violated Regulation SHO. In settling, the financial firm is not denying or admitting to the charges. UBS has, however, agreed to an entry of FINRA’s findings.

Per Reg SHO, a broker must have reason to believe that a security can be delivered or borrowed before allowing a short sale order. Financial firms have to document this “locate information” prior to the sale happening so as to decrease the amount of potential failed deliveries. Broker-dealers also are supposed to designate an equity securities sale as either short or long.

Short sales involve sellers that don’t own the security that they are selling. To deliver the security, the short seller has to either borrow or buy it.

FINRA says that UBS had a flawed Reg SHO supervisory system when it came to locates and marking sale orders and that this resulted in supervisory failure, which played a role in serious regulation failures showing up throughout the investment bank’s equities trading business. In addition to putting into the marketplace millions of short order sales without locates (involving supervisory and trading systems, accounts, desks, strategies, the financial firm’s technology operations, and procedures), millions of sale orders were also mismarked—many of them as “long” —which led to more Reg SHO violations. FINRA also claims that “significant deficiencies” involving UBS’s aggregation units could have played a role in more locate violations and significant order-marking.

Because of UBS’s alleged supervisory failures, many of the violations weren’t fixed or detected until after the FINRA probe prompted the financial firm to evaluate its systems and procedures. UBS has since taken steps to upgrade these in an effort to have stricter Reg SHO controls.

Per FINRA Chief of Enforcement Brad Bennett, financial firms are responsible for making sure that they have the proper supervisory and trading systems so that naked short selling that is “potentially abusive” doesn’t happen. He noted that the violations committed by UBS could have hurt the market’s integrity.

Supervisory failures is a type of broker misconduct. It is a brokerage firm’s responsibility to create and execute written procedure that do the job of monitoring its employees’ activities so securities fraud and mistakes don’t happen that can cause investors to suffer losses and/or the market to go into chaos.

FINRA Fines UBS Securities $12 Million for Regulation SHO Violations and Supervisory Failures, FINRA, October 25, 2011

More Blog Posts:
UBS Trader Charged with Fraud Related to $2B Trading Loss, Stockbroker Fraud Blog, September 23, 2011

Citigroup Global Markets Inc. Sues Two Saudi Investors in an Attempt to Block Their FINRA Arbitration Claim Over $383M in Losses

Published on: October 22, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup Global Markets Inc. (C) is suing Abdullah and Ghazi Abbar. The Saudi investors have filed a FINRA arbitration claim against the Citigroup unit seeking to recover the $383 million that they say the bank lost their family’s money. The Abbars, who are father and son, are accusing Citigroup Global Markets of mismanaging their family’s savings.

Citigroup, which wants injunctive relief, says that the entities that took care of the the Abbars’ private-equity loan and leveraged option transactions are located abroad and therefore not under FINRA’s jurisdiction for arbitration. The financial firm also says that father, son, and their investment entities are not CGMI clients and their claims are not activities related it. The investment bank has noted that the Abbars chose to pursue it rather than the non-U.S. parties that they actually had agreements with that completed the transactions. The Abbars, however, say that those overseeing the Citigroup entities that took party in the daily management of their credit deal are personnel that are registered with FINRA.

Says Shepherd Smith Edwards and Kantas Founder and Stockbroker Fraud Lawyer William Shepherd, “The financial industry has created its own securities arbitration forum to resolve disputes and claims between and against its members. It is ironic when claims are filed that they often go to court to beg to get out of arbitration, their self-imposed fate. While courts in New York seem to operate to accommodate Wall Street’s wishes, the law for decades has held that decisions regarding the liability of securities firms are for the arbitrators, not the courts. If these investors have properly alleged any wrongdoing by the U.S. securities firm, the court has no business intervening. Such wrongdoing can be simply ‘control person liability,’ which is the failure to control or properly supervise the behavior or operations of a subordinate or subsidiary.”

CGMI placed $343 million of the Abbars money in hedge funds that were included in a leveraged option swap transaction. In their FINRA arbitration claim, the Abbars argue that leading CGMI officers, including ex- global wealth management chief Sallie Krawcheck and Chief Executive Officer Vikram Pandit, pursued them.

Father and son contend that because of alleged “gross misconduct” by CGMI, their wealth was lost. They say that the bank’s failure to monitor the investments properly led to their total collapse during the height of the economic collapse in 2008. The Abbars also believe that lendings related to the Citigroup investments played a role in the losses. The Abbars says that Citigroup, which then started managing the positions that remained in the portfolio while implementing a program to redeem it, will “unjustly benefit” by about $70 million from the redemption of these investments.

Citigroup Sues to Block Arbitration of Saudi Investors’ Claim, Bloomberg/Businessweek, October 6, 2011
Citigroup Aims to Stop Arbitration From Proceeding, OnWallStreet, October 7, 2011

More Blog Posts:
Citigroup Global Markets Fined $500,000 by FINRA for Inadequate Supervision of Broker Accused of Bilking Sick and Elderly Investors, Stockbroker Fraud Blog, August 16, 2011
Citigroup Ordered by FINRA to Pay $54.1M to Two Investors Over Municipal Bond Fund Losses, Stockbroker Fraud Blog, April 13, 2011
Citigroup to Pay $285M to Settle SEC Lawsuit Alleging SecuritiesFraud in $1B Derivatives Deal, Institutional Investors Securities Blog, October 20, 2011 Continue Reading ›

California Investigating Whether Bank of America & Countrywide Financial Used False Pretenses to Sell Mortgage-Backed Securities to Investors

Published on: October 22, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Not long after bowing out of talks over a possible $25 billion dollar settlement between state and federal officials and the country’s largest banks (including Bank of America Corp, Citigroup, and JP Morgan Chase & Co.) over alleged foreclosure abuses, California’s Attorney General’s office has subpoenaed BofA as part of its investigation into whether it and subsidiary Countrywide Financial employed false pretenses to get private and institutional investors to purchase risky mortgage-backed securities. By walking out of the negotiations on the grounds that the banks weren’t offering a big enough settlement, the state of California has given itself the option of arriving at a larger settlement.

California Attorney General Kamala D. Harris has called the proposed settlement “inadequate” for the homeowners in her state. She has also has set up a mortgage fraud strike force tasked with investigating all areas of mortgage fraud.

Countrywide is credited with playing a role in the housing boom and its later collapse because of subprime loans it gave clients with poor/no credit histories, mortgages that let borrowers pay such a small amount that their loan balances went up instead of down, and “liar” loans that were issued without assets and income being confirmed. Also, a lot of the most high-risk loans were bundled up to support private-label securities that became highly toxic for investors and banks.

Meantime, Federal and state officials are trying to get California to rejoin the larger talks. Just this week, they presented the possibility of helping troubled creditworthy owners refinance their loans. California’s involvement is key for any deal because the state so many borrowers that owe more than the value of their homes, are in foreclosure, or are running behind on mortgages.

New York, too, has backed out of the group—a move that proved to be another blow for negotiations, as well as for the Obama Administration. Officials from other states, such as Nevada, Delaware, Minnesota, Massachusetts, and Kentucky, have also expressed worry about the breadth of the settlement and whether all potential misconduct has been investigated.

With its acquisition of Countrywide in 2008, BofA has sustained high losses over settlements as a result of its subsidiary’s loans. According to the Los Angeles Times, these settlements include:

• A promise to forgive up to $3 billion in principal for Massachusetts Countrywide borrowers
• $600 million to former Countrywide shareholders
• Billions of dollars to Freddie Mac and Fannie Mae over buybacks of bad home loans
• $8.5 billion to institutional investors over the repurchase of Countrywide mortgage-backed bonds
• $5.5 billion reserved for mortgage bond investors with similar claims

California reportedly subpoenas BofA over toxic securities, Los Angeles Times, October 20, 2011

California Pulls Out of Foreclosure Talks, Wall Street Journal, October 1, 2011

More Blog Posts:
$63 Million Mortgage-Backed Securities Lawsuit Against Bank of America is Second One Filed by Western and Southern Life Insurance Co. Against the Financial Firm, Institutional Investor Securities Blog, August 29, 2011

Federal Home Loan Banks Say Countrywide Financial Corp Mortgage Bond Investors May Be Owed Way More than What $8.5B Securities Settlement with Bank of America Corp. is Offering, Institutional Investor Securities Blog, July 22, 2011

Bank of America and Countrywide Financial Sued by Allstate over $700M in Bad Mortgaged-Backed Securities, Stockbroker Fraud Blog, December 29, 2010

Citigroup to Pay $285M to Settle SEC Lawsuit Alleging Securities Fraud in $1B Derivatives Deal

Published on: October 20, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup has consented to pay $285 million to settle a Securities and Exchange Commission complaint accusing the bank of misleading investors in a $1 billion derivatives deal—a collateralized debt obligation called Class V Funding III. It was Citigroup that chose the assets for the portfolio that it then bet against. Investors were not told that Citigroup’s interests were contrary to theirs. The $285 million will go to the deal’s investors.

According to the SEC, Citigroup had significant influence over the $500 million of portfolio assets that were selected. It then took a short position against the assets, standing to profit if they dropped in value. All 15 investors were not made aware of any of this and practically all of their investments (in the hundreds of millions of dollars) were lost when the CDO defaulted in under 9 months after it closed on February 28, 2007. Credit ratings agencies had downgraded over 80% of the portfolio.

Financial instrument insurer Ambac, which was the deal’s biggest investor and had taken on the role of assuming the credit risk, was forced to pay those who bet against the bonds. In 2009, Ambac sought bankruptcy protection.

Meantime, Citigroup made about $126 million in profits from the short position and earned about $34 million in fees. S.E.C.’s division of enforcement director Robert Khuzami says that under the law, Citigroup was required to give these CDO investors “more care and candor.”

Per the SEC’s civil action, Citigroup employee Brian Stoker is the one that mainly put the deal together, while Credit Suisse portfolio manager Samir H. Bhatt was primarily in charge of the transaction. Credit Suisse was the CDO transaction’s collateral manager.

Stoker is fighting the SEC’s case against him. Meantime, Bhatt has settled the SEC’s charges by agreeing to pay $50,000. He has also been suspended from associating with any investment adviser for six months. Credit Suisse Group AG settled for $2.5 million.

As part of this settlement, Citigroup will pay a $95 million fine. It was just last year that the financial firm agreed to pay $75 million over federal claims that it purposely didn’t let investor know that their subprime mortgage investments were losing value during the financial crisis. Citigroup has said that since then, it has revamped its risk management function and gone back to banking basics.

Last year, Goldman Sachs Group Inc. agreed to settle for $550 million allegations that it did tell investors that the hedge fund that helped choose a CDO’s assets also was betting against it. JPMorgan Chase & Co. settled similar allegations earlier this year for $153.6 million.

Citigroup to Pay Millions to Close Fraud Complaint, NY Times, October 19, 2011

Related Blog Resources:
Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million, Stockbroker Fraud Blog, July 30, 2010

JPMorgan Chase to Pay $211M to Settle Charges It Rigged Municipal Bond Transaction Bidding Competitions, Stockbroker Fraud Blog, July 9, 2011

Ex-Lehman Brothers Holdings Chief Executive Defends Request that Insurance Fund Pay Legal Bills

Published on: October 19, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Once again, former Lehman Brothers Holdings Inc. executives want an insurance fund to cover their expenses stemming from securities-related misconduct they are accused of committing. This time, they want to use the money to cover their legal bills. On Monday, former Lehman Chief Executive Richard Fuld and other ex-executives submitted a filing in US Bankruptcy Court to responded to an objection made by the former owners of Maher Terminal Holdings Corp. objecting to this fund use.

Basil Maher and M. Brian Maher claim that the paperwork submitted by the former executives doesn’t support use of the insurance monies. The brothers have been in opposition with Lehman since the investment bank filed for bankruptcy in 2008. The Mahers contend that in 2007 when they wired $600 million for their sale of Maher Terminal Holdings Corp. to Lehman, the financial firm allegedly placed their money in investments that were riskier than what they had wanted. The Mahers are still trying to recoup their losses form Lehman.

The former Lehman executives want the court to give them access to a diminishing $250 million insurance fund. They say that not only would this prevent a protracted court battle with local governments that they’ve already settled with, but also, they don’t believe this will impact the investment bank’s creditors. The ex-executives had settled for $1.05 million a dispute with six California municipalities that had invested $35 million into Lehman in the two years before it failed. The municipalities later filed their securities case accusing Lehman of making misrepresentation and omissions in their offering documents, which is what the governments used as reference when making the decision to invest in the financial firm.

The former Lehman executives just recently made another request to use $90 million from the insurance fund to settle a securities lawsuit filed by Lehman shareholders. They also have asked the bankruptcy court for $8.25 million in insurance money to settle a securities case filed by the state of New Jersey.

Should the bankruptcy judge grant the ex-Lehman officials’ requests, then Fuld and the others won’t have to put out any out-of-pocket expenses for their alleged misconduct. Apparently, it is not unusual for insurance money to cover corporate officers and directors that are the target of shareholder lawsuits.

Says Shepherd Smith Edwards & Kantas LTD LLP founder and securities fraud attorney William Shepherd, “Amazing that those who put Lehman into bankruptcy can now use the first dollars available to pay their own legal bills rather than to pay their victims, including investors and the subordinates they led down the garden path to disaster. Apparently, it is again nice to be part of the ‘one-percent’ on Wall Street.”

Fuld Leads Ex-Lehman Officials in Defending Insurance Use, The Wall Street Journal, October 17, 2011
Ex-Lehman Officials to Pay $90 Million to Settle Suit, NY Times, August 25, 2011
Fuld, Lehman Executives Settle Lawsuit by California Cities, Businessweek, September 28, 2011

More Blog Posts:
Lehman Brothers’ “Structured Products” Investigated by Stockbroker Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LLP, Stockbroker Fraud Blog, September 30, 2008
FINRA Orders UBS Financial Services to Pay $8.25M for Misleading Investors About Security of Lehman Brothers Principal Protected Notes, Stockbroker Fraud Blog, April 15, 2011
European Leaders Work to Get a Grip on Debt Crisis, Institutional Investors Securities Blog, October 19, 2011 Continue Reading ›

SIFMA Offers Up Best Practices for How Financial Firms Can Interact with Expert Networks

Published on: October 16, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Securities Industry and Financial Markets Association is recommending a number of best practices for financial firms that work with Expert Networks and their Consultants.
According to SIFMA, expert networks are entities that receive a fee to refer industry professionals, known as consultants, to third parties. Although the acknowledges how helpful these networks can be in helping broker-dealers implement and design investment strategies while offering advice, information, market expertise, analysis, or other expertise in making investment decisions, SIFMA General Counsel Ira Hammerman said in a release that these best practices should help with compliance while helping avoid what could like “impropriety.” The government has recently targeted them when investigating insider trading.

Among the recommendations:
1) Establishing policies and procedures for how to use Expert Networks and Consultants. SIFMA is recommending a risk-based approach for figuring out what controls should be put in place.

2) Providing training for associated persons that deal with Expert Networks and Consultants on matters such as insider training, information barriers, confidential information, conflicts of interest, or material, non-public information (MNPI).

3) Ensuring that supervisory oversight is integrated into a financial firm’s use of Expert Networks and associated consultants.

4) Setting up policies and procedure that mandate that financial firms act quickly on “red flags” that may indicate there is a possibility of disclosure of confidential information of conflicts of interest or MNPI.

5) Establishing written agreements with Expert Networks over arrangements that are substantial or repeating in nature, such as those involving making sure that Consultants are checked for securities law violations, preventing Consultants from revealing MNPI or Confidential Information, requiring that Consultants undergo periodic training or communication about certain restrictions, and requiring that Consultants are periodically certified as to the adherence of these limits.

6) Setting up procedures on how to advice Expert Networks-affiliated Consultants about Confidential Information and MNPI.

7) Establishing procedures for getting non-confidential, relevant information from an Expert Network or one of its Consultants about employment and arrangements where a Consultant may have access to Confidential Information or MNPI, as well as setting up appropriate controls for assessing risks of dealing with Consultants that work with Expert Networks that have Confidential Information or MNPI.

In providing these best practices, however, SIFMA wants to make clear that these are only intended as guidance and are not mandates for how financial firms must work with Expert Networks and Consultants.

If you are an investor that has suffered losses you believe were caused by broker misconduct, you should talk to a securities fraud attorney right away.

Galleon Group LLC Co-Founder Raj Rajaratnam Sentenced to 11 Years in Prison Over Insider Trading Scam

Published on: October 13, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Raj Rajaratnam, a billionaire investor and co-founder of Galleon Group LLC, has been ordered to pay a $10 million fine and serve 11 years in jail for his key role in an insider trading scam that resulted in $63.8M in illegal profits. He must now forfeit $53.8M.

A jury had found the hedge fund tycoon guilty of nine counts of securities fraud and five counts of conspiracy. Rajaratnam would obtain illegal tips from bankers, executives, traders, consultants, and directors of public companies (Goldman Sachs is one). He would then use that insider information to make trades prior to public announcements about mergers, forecasts, earnings, and spinoffs involving a number of companies, including Hilton Hotels, Integrated Circuit, Akamai, and Xilinix)

Rajaratnam’s attorneys are planning to appeal. For now, however, they are requesting that he be confined at the Butner Federal Correctional Complex, which is where Bernard Madoff is in jail. Madoff was sentenced to 150 years behind bars for his multibillion-dollar Ponzi scam.

Rajaratnam, who is originally from Sri Lanka was educated in England and the US. He established the Galleon hedge fund in the 1990’s and it became one of the biggest in the world. In 2008, Galleon was managing about $7 billion.

Federal securities investigators began to suspect trouble when, in the Rajaratnam gave the SEC documents for another investigation into the activities of his younger brother-no charges were ever brought t here-a text message was included from an ex-Intel Corp. employee warning to hold off on purchasing Polycom’s stock. The former employee, Rommy Khan, was already suspected of giving out insider information.

In 2007, Khan consented to help the authorities with their probe. He and several others served as cooperating witnesses that helped the government convict Rajaratnam, who was arrested in 2009.

The 11-year sentence against him is shorter than the 24 years and five months that prosecutors wanted. That said, it is still the longest prison sentence ever issued for insider trading.

Still under investigation in connection with the scam is Rajat Gupta, who used to work as a Goldman Sachs director. According to the Wall Street Journal and Bloomberg, criminal charges against him seem likely. Prosecutors consider him a “co-conspirator” in the insider trading case against Rajaratnam.

The SEC, which dropped its civil administrative proceeding against Gupta, plans to refile its charges in federal court. Meantime, Kamal Ahmed, who was also linked to the insider trading scam, has been fired by Morgan Stanley because he had disclosed confidential information. The government has not accused him of wrongdoing.

The SEC also filed a number of securities lawsuits against at least two dozen individuals and businesses in light of the Galleon investigation.

Trader Draws Record Sentence, The Wall Street Journal, October 14, 2011
U.S. Prosecutors ‘Close to Charging’ Rajat Gupta, Bloomberg, September 20, 2011
Accused Rajaratnam Tipster Fired By Morgan Stanley, FIN Alternatives, October 7, 2011

More Blog Posts:
Ex-Goldman Sachs Board Member Accused of Insider Trading with Galleon Group Co-Founder Seeks to Have SEC Administrative Case Against Him Dropped, Institutional Investor Securities Blog, April 19, 2011
A Texan is Among Those Arrested in Insider Trading Crackdown Involving Apple Inc., Dell, and Advanced Micro Devices’ Confidential Data, Stockbroker Fraud Blog, December 16, 2010
3 Hedge Funds Raided by FBI in Insider Trading Case, Stockbroker Fraud Blog, November 23, 2010 Continue Reading ›

SEC Says Former United Commercial Bank Executives Concealed Millions of Dollars in Losses that Caused Bank’s Failure

Published on: October 12, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed securities fraud charges against former United Commercial Bank executives accusing them of concealing loss from assets and loans from auditors that resulted in UCBH Holdings Inc., its public holding company, to understate its operating losses in 2008 by at least $65 million. As the bank’s loans continued to go down in value, the financial firm went on to fail and the California Department of Financial Institutions was forced to shut it down. This resulted in a $2.5 billion loss to the Federal Deposit Insurance Corporation’s insurance fund.

Per the SEC’s complaint, former chief operating officer Ebrahim Shabudi, chief executive officer Thomas Wu, and senior officer Thomas Yu were the ones that hid the bank’s losses. All three men are accused of delaying the proper recording of the loan losses and making misleading and false statements to independent auditors and investors and concealing from them that there had been the major losses on a number of large loans, property appraisals had gone down, property appraisals had been reduced, and loans were secured by worthless collateral.

Also accused of securities fraud by the SEC is former United Commercial Bank chief financial officer Craig On. The Commission said that he aided in the filing of false financial statements and misled outside auditors. To settle the SEC charges, On has agreed to pay a $150,000 penalty. He also agreed to an order suspending him from working before the SEC as an accountant for five years. He is permanently enjoined from future violations of specific recordkeeping, reporting, anti-fraud, and internal controls provisions of federal securities laws.

Criminal charges have also been filed against Shabudi and Wu. A grand jury indicted both men of conspiring to conceal loan losses, misleading regulators and investors, and lying to external auditors. Wu and Shabudi allegedly used accounting techniques and financial maneuvers, including concealing information that would have shown its decline, understating loan risks, and falsifying books, to hide the fact that that the bank was in trouble.

This is the first time such charges have been made against executives who worked at a bank that obtained government money—$298 million from TARP—to keep it running during the economic collapse.

Prior to its demise, United Commercial Bank, which was the first US bank to acquire a bank in China was considered a leader in the industry. It amassed assets of up to $13.5 billion in 2008. However, it also soon $67.7 million—way down from its $102.3 million profit in 2007. East West Bank acquired United Commercial Banks after regulators took it over in 2009.

Meantime, the FDIC is taking steps to bar 10 former United Commercial Bank officers from ever taking part in the banking industry.

SEC Charges Bank Executives With Hiding Millions of Dollars in Losses During 2008 Financial Crisis, SEC, October 11, 2011

Read the SEC Complaint (PDF)

Feds file charges against execs of failed United Commercial Bank, Mercury News, October 11, 2011

More Blog Posts:

Merrill Lynch Faces $1M FINRA Fine Over Texas Ponzi Scam by Former Registered Representative

Published on: October 10, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Two years after San Antonio broker was sentenced to prison for Texas securities fraud, FINRA has fined Merrill Lynch $1M for not properly supervising its former employer. These failures allegedly allowed Bruce Hammonds to run a Ponzi scam that defrauded investors of $1.4M.

Hammonds persuaded 11 people to invest in the Texas Ponzi scam, which he operated under the name B&J Partnership. It was supervisors at Merrill Lynch that gave the green light for him to open an account for B & J. The supervisors also are accused of not monitoring the funds that moved between customers and Hammonds.

Rather than putting investors’ money in a Merrill Lynch fund, he put $1.4 million of their funds in his working capital account. He even gave clients charts showing how the B & J fund was performing even though the fund wasn’t real. Hammonds used the money to pay for his personal spending, including a supposed house-flipping business.

He later pleaded guilty to federal securities charges. In addition to five years behind bars and three year supervised release. Hammond has been barred from the securities industry. All investors have been paid back in full for their losses.

In deciding to fine Merrill Lynch, FINRA found that the financial firm did not have a supervisory system that did a satisfactory enough job of monitoring accounts of employees for signs of possible misconduct. The system was only able to immediately capture accounts opened by an employee if he/she used his/her social security number as the main tax identification number. The SRO also said that between 1/06 and 6/10 Merrill Lynch did not monitor another 40,000 employee/employee-interested accounts.

By agreeing to settle, Merrill is not denying or admitting to the charges.

Failure to Supervise
It is a brokerage firm’s responsibility to establish written procedures for how to properly supervise its employees’ activities. These procedures must then be implemented to prevent broker fraud. When misconduct does arise and failure to supervise played a role in allowing the incident to happen, the financial firm can be held liable for securities fraud.

Brokerage companies have to supervise every broker that they license to work for them. Even if an accused broker is later found not liable, there is still a possibility that the brokerage firm or supervisor can be held liable for failure to supervise and be ordered to pay damages. For example, a broker may not have received the proper training or was given the wrong information by the financial firm, and this resulted in Texas securities fraud that caused an investor to suffer losses.

FINRA Fines Merrill Lynch $1 Million for Supervisory Failures That Allowed a Registered Representative to Operate a Ponzi Scheme, FINRA, October 4, 2011
Shepherd Smith Edwards & Kantas LTD LLP is Investigating Merrill Lynch in Light of Recent FINRA Fines Against the Firm for Failure to Supervise, MarketWatch, October 5, 2011
More Blog Posts:
Former Merrill Lynch Employee, Guilty of $1.4 Million Texas Securities Fraud Scheme, Receives Prison Term, Stock Broker Fraud Blog, October 5, 2009
Wedbush Securities Ordered by FINRA to Pay $2.8M in Senior Financial Fraud Case Over Variable Annuities, Stock Broker Fraud Blog, August 31, 2011
Actions of Former Ferris, Baker Watts, Inc. General Counsel Accused of Supervising Rogue Broker to be Reviewed by SEC, Institutional Investors Securities Blog, December 9, 2010 Continue Reading ›