Financial Firms

Juno Mother Earth Asset Management LLC and Its Founders Face SEC Securities Fraud Lawsuit Over Alleged $1.8M Looting of Hedge Fund Assets

Published on: March 23, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission has filed a securities fraud complaint accusing Juno Mother Earth Asset Management LLC and its founders Arturo Rodriguez and Eugenio Verzilli of looting over $1.8 million in assets from a hedge fund.

The two hedge fund managers allegedly used the assets to cover Juno’s operating expenses, including rent, payroll, entertainment, and travel. They also are accused of submitting false SEC filings, including telling the SEC that it managed $40 million more than what it in fact did.

The SEC says that Juno’s partners falsely claimed that they had placed $3 million of their own capital in a client fund, when in fact, they never used their own money. In addition to selling securities in client brokerage and commodity accounts, Juno allegedly directed 41 separate transfers of cash to Juno’s bank account and made false claims that they were expense reimbursements for costs incurred on the client fund’s behalf. Rodriguez and Verzilli then issued false promissory notes to cover up the fraud and make it seem as if the fund had invested money in Juno.

The SEC further contends that the three defendants marketed investments in the Juno fund but did not reveal that the hedge fund advisor was having financial problems. When offering and selling the securities, Juno would misrepresent and inflate its assets, even claiming at one point that it was managing up to $200 million.

The government is trying to crack down on hedge fund managers who make it appear as if they’ve invested more personal money than what they’ve actually put in. The agency is seeking disgorgement plus prejudgment interests, permanent injunctions, and civil monetary penalties.

Related Web Resources:
SEC Charges Two Hedge-Fund Managers, The Wall Street Journal, March 16, 2011

Read the SEC Complaint (PDF)

More Blog Posts:

3 Hedge Funds Raided by FBI in Insider Trading Case, Stockbroker Fraud Blog, November 3, 2010

Dallas-Based Southwest Securities Settles for $500,000 FINRA Charges It Improperly Used Paid Consultants

Published on: March 17, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Southwest Securities Inc., a Dallas-based financial firm, has consented to a $500,000 fine imposed by Financial Industry Regulatory Authority. The SRO claims that the broker-dealer paid consultants to solicit municipal securities business-a violation Municipal Securities Rulemaking Board Rule G-38-and did not comply with a number of the board’s other requirements. FINRA says that the Texas broker-dealer’s alleged misconduct threatened the municipal securities market’s integrity.

Under Rule G-38, municipal securities dealers are not allowed to pay persons not affiliated with the company for the purposes of soliciting business for it. Southwest Securities, however, allegedly worked with these consultants to obtain 24 municipal securities underwritings and roles as financial adviser to Texas municipalities. The consultants were paid over $200,000 and promised a percent of earnings from any municipal securities business solicited. The broker-dealer also allegedly issued $26,000 in one-time payments to three individuals for their involvement in obtaining this type of business for the firm.

Other violations, allegedly included:

• Failing to properly submit MSRB forms.
• Inaccurate reporting to over 300 municipal securities transactions.
• Inadequate supervisory systems and procedure, which should have been revised to meet an MSRB Rule G-38 amendment that doesn’t allow unaffiliated individuals to receive payment soliciting municipal securities business.
• Engaging in prohibited municipal securities business-a violation of MSRB Rule G-37
By settling, the Southwest Securities is not denying or admitting the Texas securities charges.

Related Web Resources:
Dallas broker pays $500,000 to settle bond query, Dallas News, March 7, 2011
FFINRA Fines Southwest Securities $500,000 for Paying Former Texas Municipal Issuer Officials and Others to Solicit Municipal Securities Business on its Behalf, FINRA, March 7, 2011 Continue Reading ›

Michael Kenwood Capital Management, LLC Principal Pleads Guilty to Securities Fraud Involving Ponzi Scam

Published on: March 17, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Last month, our stockbroker fraud lawyers reported on a Securities and Exchange Commission order to freeze the assets of Michael Kenwood Capital Management, LLC and its principal Francisco Illarramendi for their alleged misappropriation of $53 million in investor funds. This month, Illarramendi pleaded guilty to securities fraud, wire fraud, conspiracy to obstruct justice, and investment adviser fraud.

Per the US Department of Justice’s release, a hedge fund that Illarramendi was advising sustained losses in the millions. He had been tasked with investing the money. However, instead of telling clients about their failed investments, the DOJ says that Illarramendi decided to cover up this information by taking part in a securities fraud scam. The hedge funds and other entities that he advised ended up with “outstanding liabilities” far beyond their assets’ values. U.S. Attorney David B. Fein says this securities case this is the largest white-collar prosecution that the office has ever pursued.

Two other men have been detained and criminally charged over their alleged involvement in the hedge fund scam and of aiding Illaramendi. Juan Carlos Horna Napolitano and Juan Carlos Guillen Zerpa are charged with investment adviser fraud and conspiracy to obstruct justice.

Meantime, the SEC says it has amended its civil complaint against Illaramendi and MK Capital Management, LLC. The agency is now alleging that the “breadth” of the securities fraud may be in the “hundreds of millions.”

Our institutional investment fraud law firm represents clients in arbitration and litigation with claims against investment advisers, broker-dealers, brokers, and others in the financial industry. We are dedicated to recovering investor losses.

Related Web Resources:

Order to Freeze Assets in $53M Fund Fraud Allegedly Involving Michael Kenwood Asset Management LLC Obtained by SEC, Stockbroker Fraud Blog, February 21, 2011

SEC adds new charges Connecticut-based hedge fund manager in Ponzi scheme, SEC, March 7, 2011

Morgan Keegan & Co. Inc. Must Pay $250K to Couple that Lost Investments in Hedge Fund with Ties to Bernard L. Madoff Investment Securities

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

Financial Industry Regulatory Authority says that Morgan Keegan & Co, Inc. must pay over $250,000 in punitive and compensatory damages to Jeffrey and Marisel Lieberman. The couple suffered financial losses after investing in Greenwich Sentry LLP, a hedge fund whose assets were funneled to Bernard L. Madoff Investment Securities. FINRA contends that the brokerage firm failed to due enough due diligence on the Madoff feeder fund, and was “grossly negligent.”

The Lieberman, who are accusing the Regions Financial unit of fraudulent misrepresentation, negligence breach of fiduciary duty, and violations of Florida and Tennessee statutes, claim that Morgan Keegan and Julio Almeyda, one of its registered representatives, invested $200,000 of their money with Greenwich Sentry. The fund ended up filing for bankruptcy last November.

Per Morgan Keegan’s internal compliance rules, investors should only be allowed to place money in hedge funds if “speculation” is one among their main objectives when opening an account. “Speculation” was the last objective on the couple’s list. FINRA says that not only must the broker-dealer repay the couple’s entire loss of $200,000, but also they must also give them 6% annual interest from when the investment was made, $50,000 in punitive damages, and $14,000 in expert witness fees.

Meantime, the FINRA panel cleared Almeyda of wrongdoing, finding that he did not know that Morgan Keegan had not provided sufficient due diligence nor was he aware that he had given the Lieberman’s false and misleading information about their investments’ risks.

Over the last year, Morgan Keegan has found itself dealing with hundreds of arbitration cases nvolving mutual fund investors alleging securities fraud related to the significant losses they sustained during the subprime mortgage crisis.

Related Web Resources:
Morgan Keegan Fined $250,000 Over Madoff Fund, Reuters, March 7, 2011

More Blog Posts:
Morgan Keegan to Pay $9.2M to Investors in Texas Securities Fraud Case Involving Risky Bond Funds, Stockbroker Fraud Blog, October 6, 2010
Morgan Keegan & Co., Inc., Morgan Asset Management, and Two Employees Face Subprime Mortgage Securities Fraud Charges by SEC, Stockbroker Fraud Blog, April 8, 2010
Morgan Keegan Ordered by FINRA Panel to Pay Investor $2.5 Million for Bond Fund Losses, Stockbroker Fraud Blog, February 23, 2010 Continue Reading ›

FINRA Orders Charles Schwab to Pay $18M to Fair Fund for YieldPlus Investors

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

The Financial Industry Regulation Authority wants Charles Schwab & Company, Inc. to pay $18 million to a Fair Fund set up by the SEC to payback investors of the Schwab YieldPlus Funds. FINRA found that even after changes to the fund’s portfolio resulted in it being affected by the mortgage-backed securities market crisis, Schwab did not change its marketing of the fund and instead provided inaccurate material.

The FINRA order was announced just as the Securities and Exchange Commission revealed that $119 million settlement was reached with Charles Schwab & Co., Inc. and Charles Schwab Investment Management for their alleged misleading of Schwab YieldPlus Fund investors and failure prevent nonpublic information from being misused. According to the SEC, investors were not adequately told about the risks associated with the Schwab fund. Instead, they were provide with allegedly misleading statements, such as those claiming that investing in the ultra-short bond funds was only slightly riskier than investing in a money market fund. Read our earlier stockbroker fraud blog post for more information.

Schwab has said that it is still facing about 20 individual securities arbitration claims asking for $3 million in damages related to the YieldPlus Fund. Last year, it resolved federal and California state law claims-for $200 million and $35 million, respectively, over the fund.

In other recent Charles Schwab Corp. news, FINRA has announced that it isn’t going to recommend disciplinary action over the firm’s auction-rate securities sales to clients. Charles Schwab had received two Wells notices in 2009 indicating that regulators were recommending enforcement actions.

Related Web Resources:
UPDATE: Finra Won’t Discipline Schwab For Auction-Rate Securities-Filing, The Wall Street Journal, February 25, 2011
SEC Reaches $119 Million Settlement with Charles Schwab, The Blog of Legal Times, January 11, 2011
FINRA Orders Schwab to Pay $18 Million to Investors for Improper Marketing of YieldPlus Bond Fund, FINRA, January 11, 2011

More Blog Posts:
Schwab Settles for $119M SEC Charges It Allegedly Misled YieldPlus Fund Investors, Stockbroker Fraud Blog, January 17, 2011
Class Members of Charles Schwab Corporation Securities Litigation Can Still Opt Out to File Individual Securities Claim, Stockbroker Fraud Blog, December 6, 2010
Charles Schwab & Co. Defendant in Class-Action Securities Fraud Lawsuit Filed on Behalf of Schwab Total Bond Market Fund Investors Over CMOs and Mortgage-Backed Securities, Stockbroker Fraud Blog, September 7, 2010 Continue Reading ›

Countrywide Finance. Corp, UBS Securities LLC, and JPMorgan Securities LLC Settle Mortgage-Backed Securities Lawsuit Filed by New Mexico Institutional Investors for $162M

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

New Mexico’s State Investment Council and Public Employees Retirement Association have settled their securities lawsuit with Countrywide Finance Corp. and two underwriters for $162 million. These details, from the confidential settlement agreement, were was obtained by the Albuquerque Journal through an Inspection of Public Records request.

The Countrywide investments were made up of mortgage-backed securities that the company had written. JPMorgan Securities and UBS Securities LLC were the two underwriters.

The securities were obtained through securities lending, which involved the SIC lending one batch of securities in return for another batch that paid a slightly higher interest rate. Although securities lending is generally considered safe for institutional investors like the SIC and PERA, mortgage-backed securities played a key role in the recent financial collapse. Even now, since the market has rebounded, the Countrywide securities are still worth less than what the state got.

In their institutional investment fraud lawsuit, the SIC and PERA accuse the defendants of disregarding their own underwriting guidelines and dumping the securities on investors, including the state of New Mexico, “to generate high volume loan business regardless of credit risk.” The New Mexico agencies opted to file their complaint in state court instead of taking part in a class-action lawsuit with other US states.

Of the $162 million, $149 million goes to SIC, PERA gets $6 million, the Educational Retirement Board receives $100,000, and the lawyers hired by the state are to receive $7 million. Bank of America bought out Countrywide in 2008.

Related Web Resources:

Countrywide sued by 3 New Mexico funds, Pensions & Investments, Pension and Investments, August 20, 2008

New Mexico State Investment Council

New Mexico Educational Retirement Board

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

Countrywide Financial, Merrill Lynch, and Citigroup Executives Defend Their Hefty Compensations Following Subprime Mortgage Crisis, Stockbroker Fraud Blog, March 12, 2008

Securities Lawsuit Accusing Merrill Lynch of Facilitating Sale of Mortgage-Backed Securities to King County, Washington Can Proceed, Says Court

Published on: March 8, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Western District of Washington says that King County, Washington has pleaded sufficient facts to continue with its securities fraud lawsuit accusing Merrill Lynch, Merrill Lynch, Pierce, Fenner and Smith Inc. and Merrill Lynch Money Markets Inc. of facilitating its purchase of allegedly toxic mortgage-backed securities and violating the Washington State Securities Act. The defendants had sought to dismiss the securities fraud complaint.

Per the plaintiff, the defendants sold more than $100 million of the toxic assets to King County through the entities Mansail II and Victoria Finance in 2007. At the time, the county had wanted to make conservative investments. Not long after, Mansail failed and Victoria was downgraded to “junk” and placed on negative credit watch.

The county, claiming $60 million in losses, contends that the defendants played the role of seller or dealer of the commercial paper but did not fulfill its responsibility of ensuring there were sufficient procedures in place so that unwise investments were avoided and adequate warning of investment risks were provided. The county also contends that Merrill Lynch and its subsidiaries knew that the securities it was selling were toxic and had even made efforts to get rid of its MBS.

SROs Immune from Broker-Dealer’s Lawsuit Over Bylaw Changes Related to Creation of FINRA, Says Appeals Court

Published on: March 7, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Recently, the U.S. Court of Appeals for the Second Circuit dismissed Standard Investment Chartered Inc.’s lawsuit against the Financial Industry Regulatory Authority, New York Stock Exchange Group Inc., and NASD over alleged misstatements in a proxy to obtain member approval for bylaw changes that ultimately resulted in the creation of FINRA. In a per curiam decision, the court held that self-regulatory organizations and their officers are immune from lawsuits over bylaw amendments because these are “inextricable” from the SRO’s regulatory roles.

The plaintiff, broker-dealer and former NASD member Standard Investment Chartered Inc., claims that NASD and certain officials issued material misrepresentations in the proxy statement that solicited approval of bylaw amendments so that the merger between NASD and parts of NYSE Regulation Inc. that became FINRA would take place. The broker-dealer contends that the proxy statement misrepresented that $35,000 was the most that the Internal Revenue Service had authorized NASD to pay members over the union.

Last March, the U.S. District Court for the Southern District of New York dismissed Standard Investment Chartered Inc.’s lawsuit, as well as a similar claim submitted by NASD member Benchmark Financial Services Inc. The court said that the union between the SROs was “entitled to absolute immunity” because it was part of their delegated regulatory functions. Standard Investment Chartered appealed the ruling.

Now, the Second Circuit has affirmed the district court’s ruling. The court also noted that NASD can’t change its bylaws without Securities and Exchange Commission approval.

Other defendants in the lawsuit include Securities and Exchange Commission chairman Mary Schapiro, who was NASD’s CEO when the regulatory body merged with NYSE, Pershing LLC Chairman Richard Brueckner, and FINRA senior vice president Howard Schloss.

Related Web Resources:
Appeals Court Upholds Lower Court Ruling on Finra Damage Suits, Bloomberg, February 23, 2011
Court Finds SROs Immune From Lawsuit Over Bylaw Changes to Effect FINRA Creation, BNA – Securities Law Daily, February 23, 2011
Continue Reading ›

Ameriprise Financial Inc. to Pay $27M to Settle Securities Fraud Lawsuits of Securities America Clients Bilked in Ponzi Scams

Published on: March 4, 2011 | by Shepherd Smith Edwards & Kantas, LLP

To settle securities fraud complaints by investors that bought private placements in Provident Royalties and Medical Capital through its independent-brokerage unit Securities America, Ameriprise Financial Inc. will pay $27 million. It was just two weeks ago that Securities America agreed to pay $21 million to settle the same class of approximately 2,000 investors who lost about $300 million through Ponzi scams. Unfortunately, private placements, which should be restricted to rich “accredited ” investors, were offered to a wider range of investors that likely did not fully understand the risks involved.

In its annual report, Ameriprise revealed that Securities America clients sustained nearly $400 million in financial losses from the private placements. The financial planning and wealth management firm has about $40 million in reserves. Aside from the class action lawsuits, Securities America and Ameriprise face lawsuits in Massachusetts and a “significant” number of individual securities claims in arbitration.

To avail of the class-action settlements, an investor would have to drop his/her arbitration case. However, as the proposed settlements are greater than Securities America’s “net worth,” claimants may not get all of the money that they are owed. According to Shepherd Smith Edwards and Kantas Founder and Securities Fraud Lawyer William Shepherd, “With the class legal fees and expenses not yet revealed, this is-at best-nine cents on the dollar for the victims. This would actually be a bit better than most securities class action cases, in which the average paid to victims is closer to seven percent of their losses. Our firm represents securities fraud victims one at a time. These are investors who have losses substantial enough to support their own case. While they have to ‘opt-out’ of the class action in order to file their individual claims, gambling 7% of losses to seek a far higher recovery is often a wise decision.”

Related Web Resources:
Ameriprise settles investor suit for $27 million: lawyer, Reuters, March 3, 2011
Lawsuits suck air out of Securities America’s cash cushion, Investment News, March 1, 2011
Texas Securities Fraud: Three FINRA Cases Against Securities America Over Sale of Private Placements Halted, Stockbroker Fraud Blog, February 22, 2011
Securities America Inc. to Pay $1.2M in Compensatory and Punitive Damages Over Allegedly Fraudulent Medical Capital Notes, Stockbroker Fraud Blog, January 6, 2011 Continue Reading ›

Akamai Technologies Inc’s ARS Lawsuit Against Deutsche Bank Can Proceed

Published on: March 4, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the District of Massachusetts says that, under the 1934 Securities Exchange Act and the Massachusetts’ Uniform Securities Act, Akamai Technologies Inc.’s (AKAM) auction-rate securities lawsuit that seeks to hold Deutsche Bank AG liable for $200 million in losses can proceed. The judge ruled that the Internet content delivery firm had properly pleaded a material misrepresentation or omission in violation of Section 10(b) of the ’34 Securities Exchange Act, which is necessary for a control person claim under Section 20(a). The court also held that Akamai clearly pleaded Deutsche Bank’s control over Deutsche Bank Securities Inc., the subsidiary that allegedly advised the company to buy the toxic ARS.

Per the court, DBS was the broker and investment adviser for Akamai Securities Corp. and Akamai Technologies Inc. Akamai told the investment adviser that it wanted to put money in securities that were liquid and safe so it could access the funds when needed. DBS told Akamai that ARS were safe, liquid, and never failed even though the financial firm allegedly knew that they had done so before and, in fact, posed a higher level of risk than what it led Akamai to believe. Even in August 2007, when Deutsche Bank knew that the demand for ARS was going down and the risk of ARS auctions failing was rising, the investment adviser still allegedly did not notify Akamai that the market was changing.

When the ARS market did fall in 2008, Akamai was left with over $200 million in illiquid securities. Its securities fraud lawsuit also claims that even as DBS continued to claim that the securities were liquid and safe, resulting in Akamai increasing its ARS investments, the investment bank was decreasing its own exposure to the market.