Financial Firms

Goldman Sachs Reports $3.4 Billion in “Reasonably Possible” Losses from Legal Claims

Published on: March 2, 2011 | by Shepherd Smith Edwards & Kantas, LLP

In its latest 10-K filing with the US Securities and Exchange Commission, Goldman Sachs Group Inc. says that its “reasonably possible” losses from legal claims may be as high as $3.4 billion. The investment bank’s admission comes after the SEC told corporate finance chiefs that the should disclose losses “when there is at least a reasonable possibility” they may be incurred regardless of whether the risk is so low that reserves are not required.

Goldman admits that it hasn’t put side a “significant” amount of funds against such possible losses and its estimate doesn’t factor in possible losses for cases that are in their beginning stages. The $3.4 billion figure comes from a calculation of three categories of possible liability. Also factored in were the number of securities sold in cases where purchasers of a deal underwritten by Goldman Sachs are now suing the financial firm and cases involving parties calling for Goldman Sachs to repurchase securities.

Between 2009 and 2010, the financial firm reported a 38% decline in net income from $13.4 billion to $8.35 billion. Trading revenue dropped while non-compensation expenses, which were affected by regulatory proceedings and litigation, went up 14%. It was just last year that the investment bank paid $550 million to settle SEC charges that it misled investors when selling a mortgage-linked investment in 2007. Goldman Sachs is still contending with state and federal securities complaints alleging improper disclosure related to mortgage-related products. As of the end of 2010, estimated plaintiffs’ aggregate cumulative losses in active cases against Goldman Sachs was at approximately $457 million.

Related Web Resources:
Goldman Sachs Puts ‘Possible’ Legal Losses at $3.4 Billion, Bloomberg Businessweek, March 1, 2011

Form 10-K, SEC

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

Ex-Wextrust Capital COO Pleads Guilty to Role in $255M Affinity Fraud Scam

Published on: February 27, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Joseph Shereshevsky, the ex-COO of Wextrust Capital LLC (Wextrust), has pled guilty to securities fraud, conspiracy and mail fraud charges over his involvement in a $255 million dollar affinity fraud scam. Shereshevsky entered his guilty plea in the U.S. District Court for the Southern District of New York.

He and codefendant Steven Byers, the private equity concern’s ex-CEO and president, diverted millions in investor funds in a Ponzi scam that took place between 2003 and 2008. Many of the approximately 1,200 investment fraud victims belong to the Orthodox Jewish Community.

Shereshevsky and Byers allegedly made misrepresentations by making it appear as if the investors’ money would go toward the purchase and operation of several commercial properties that the federal government had leased. In fact, the properties were never bought and investors’ funds were put to other uses. Byers and Shereshevsky, who are accused of using about $3 million and $9 million raised in a private placement for purposes that weren’t articulated to investors, also allegedly conspired together to “fabricate a story” about why the deal failed.

Byers pleaded guilty to the securities fraud and conspiracy charges against him last year. The two men, Wextrust, and a number of Wextrust entities, including Wextrust Development Group, LLC (WDG), Wextrust Equity Partners, LLC (WEP), Axela Hospitality, LLC (Axela), and Wextrust Securities, LLC (Wextrust Securities), face SEC civil charges over their alleged misconduct related to the affinity fraud scam.

Related Web Resources:
Ex-WexTrust Exec Shereshevsky Pleads Guilty to Fraud, Conspiracy, The Wall Street Journal, February 3, 2011

More Stockbroker Fraud Blog Posts:
Ex-Triton Financial CEO Accused of Using NFL Contacts to Commit $50M Texas Securities Fraud, Stockbroker Fraud Blog, February 17, 2011
Even as Ponzi Schemers Serve Time Behind Bars, Investors Are Left Coping with Millions in Financial Losses, Stockbroker Fraud Blog, January 25, 2011
CFTC Files Charges in Alleged California Ponzi Scam Involving the Fraudulent Solicitation of $14 million in Commodity Futures, Stockbroker Fraud Blog, January 18, 2011 Continue Reading ›

FINRA Fines Bank of America Corp.’s Merrill Lynch $500,000 Over Alleged Oversight Failures of 529 Plans

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

The Financial Industry Regulatory Authority is ordering Merrill Lynch, a Bank of America Corp. unit, to pay a $500,000 fine over alleged oversight failures involving 529 plans, a college-savings product. Merrill Lynch has also been censured by FINRA in a disciplinary action.

According to the SRO, Merrill Lynch lacked the adequate supervisory procedures necessary to make sure representatives were taking into account clients’ state income-tax benefits when determining whether they should invest in a 529 plan within their state of residence or in one outside the state. Merrill Lynch sold more than $3 billion in 529 plans between June 2002 and February 2007.

With 529 plans, which are considered municipal securities, money can be withdrawn to pay for college expenses without the imposition of federal taxes. Many states offer credits or state tax deductions for residents that invest in a 529 plans in the state. That said, depending on where the investor resides, investing in a plan outside the state can be more beneficial than the benefits received from a 529 plan in the investor’s home state.

However, FINRA contends that the only 529 plan that the financial firm offered and sold nationally was Maine’s NextGen College Investing Plan. Merrill Lynch must now send letters to clients who lived in states that offered 529-related tax benefits but ended up opening accounts with Maine’s NextGen College Investing Plan through Merrill Lynch. These customers will be given instructions on how to contact the financial firm. If they want to move their funds to a home-state 529 plan, Merrill Lynch has to help, as well as waive a number of fees.

By agreeing to settle with FINRA, Merrill Lynch is not denying or admitting to the SRO’s findings.

Related Web Resources:
Merrill fined $500,000 over college-savings plans, Bloomberg, January 19, 2011
FINRA Censures, Fines Merrill Over Colleges Saving Plans, OnWallStreet, January 19, 2011

More Blog Posts:
Bank of America Merrill Lynch to Settle UIT Sales-Related FINRA Charges for $2.5 Million, Stockbroker Fraud Blog, August 22, 2010
Bank of America To Settle SEC Charges Regarding Merrill Lynch Acquisition Proxy-Related Disclosures for $150 Million, Stockbroker Fraud Blog, February 15, 2010
SEC Submits Amended Complaint Against Bank of America Over Merrill Lynch Merger and Executive Bonuses, Stockbroker Fraud Blog, December 3, 2009 Continue Reading ›

Kentucky Workers’ Compensation Funding Commission Paid Morgan Stanley Smith Barney $510,000 for Financial Advice, Says Auditor

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

State auditor Crit Luallen is accusing the Kentucky Workers’ Compensation Funding Commission of breaking the law when, rather than seeking financial advice from the Kentucky Finance and Administration Cabinet’s Office of Fiscal Management, it paid Morgan Stanley Smith Barney for private financial advice. Luallen contends that the workers’ compensation agency has paid the broker-dealer about $510,000 for help received in making investments since 1999. The funding commission’s board has accepted the audit’s findings and it will only work with state-employed advisers from now on.

The Kentucky Workers’ Compensation Funding Commission oversees over $350 million in assets. It collects over $70 million annually from assessments on employers’ workers’ compensation premiums. The funding commission’s investments suffered $71 million in lost investments during the fiscal years of 2009 and 2008.

There has been no evidence that there were any conflicts of interest between Morgan Stanley and the funding commission. The broker-dealer is defending its handling of the agency’s investments. Morgan Stanley senior vice president Frank Thompson says the firm did an “outstanding job” and that it strongly recommended that the funding commission not work with the state’s OFM, which it said proposed poor investments.

Related Web Resources:

Kentucky Workers’ Compensation Panel Criticized Over Outside Adviser, Insurance Journal, February 22, 2011 Continue Reading ›

Texas Securities Fraud: Three FINRA Cases Against Securities America Over Sale of Private Placements Halted

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

In what Investment News is describing as a legal victory for Securities America, a federal judge in Dallas has placed a restraining order on three upcoming FINRA arbitration claims against the broker-dealer and its brokers. The cases will be combined with two class action. This will likely limit Securities America’s liability. Ameriprise Financial Inc. owns this brokerage firm.

In the U.S. District Court for the Northern District of Texas, Judge W. Royal Furgeson, Jr. ordered the broker-dealer to set up a $21 million settlement fund for investors. The Texas securities fraud claims involve the allegedly bogus sale of private placement notes from Provident Royalties LLC and Medical Capital Holdings Inc.

A number of plaintiff’s attorneys have expressed dismay at Furgeson’s decision because they are worried that their clients won’t get as much from a class action case. Furgeson, however, says that combining the cases protects the financial recovery for all investors and not just those with FINRA arbitration claims.

Per court documents, Securities America sold approximately $18 million of Provident shares and $700 million of Medical Capital notes. Some 20,000 investors purchased the Medical Capital notes from independent broker-dealers and approximately $2.2 billion was raised from the private placements. Unfortunately, many of the medical receivables believed to be underlying the notes never existed.

Dozens of claimants, including the securities divisions of Massachusetts and Montana, have filed securities claims against Securities America. The financial firm, however, maintains that it did not engage in any wrongdoing when it sold the MediCap notes.

Related Web Resources:

Securities America scores huge victory in Reg D case, Investment News, February 18, 2011

More Stockbroker Fraud Blog Posts:

Securities America Inc. to Pay $1.2M in Compensatory and Punitive Damages Over Allegedly Fraudulent Medical Capital Notes, January 6, 2011

FINRA Fines H & R Block Financial Advisors (Now Ameriprise Advisor Services) over Sales of Reverse Convertible Notes (RCN), February 17, 2010

Securities America & Ameriprise Financial Inc. Sued For Selling Allegedly Faulty Private Settlements, November 10, 2009 Continue Reading ›

Order to Freeze Assets in $53M Fund Fraud Allegedly Involving Michael Kenwood Asset Management LLC Obtained by SEC

Published on: February 21, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has obtained an order to freeze the assets of investment adviser Michael Kenwood Capital Management LLC and firm principal Francisco Illarramendi, who is accused of taking at least $53M from a hedge fund and fraudulently transferring investor money from several funds to bank accounts he controlled. Illarramendi then allegedly took that money and placed it in private-equity investments.

The SEC’s securities fraud complaint charges the investment adviser and Illarramendi with violating the 1940 Investment Advisers Act. Rather than using the money to benefit investors, Illarramendi allegedly used the money to his benefit and for the benefit of the entities under his control. The SEC says that it sought emergency relief because it was afraid that Illarramendi was going to make additional, unauthorized investments.

The largest private equity investment Illarramendi made was in an unnamed West Coast nuclear energy company. The SEC says he used $23 million in investor funds. A foreign company pension fund that was his biggest investor contributed 90% of the money in his funds.

In December 2009, Illarramendi allegedly authorized for $3.5 million to be transferred from an account to a Spanish company that makes rolled steel. In May 2010, he approved the transfer of $20 million from the financial firm’s $540 million Short Term Liquidity Fund to pay for shares in a clean-tech manufacturing company. He transferred another $4 million from the short-term fund to purchase shares in a development stage energy company. Another $3.1 million was transferred from different funds to the Spanish steel company.

The SEC is accusing Illarramendi of using clients’ money as if they were his and diverting millions of the investors’ funds. The commission says he breached his responsibilities as an investment adviser and abused clients’ trust. The SEC is seeking disgorgement of ill-gotten gains, permanent injunction, plus prejudgment interest.

Named as relief defendants that received investor money that they weren’t entitled are Michael Kenwood Asset Management LLC, MKEI Solar LP., and Kenwood Energy and Infrastructure LLC. Illarramendi, who is the majority owner of Michael Kenwood Group LLC, managed several hedge funds. One of the hedge funds has held up to $540 million in assets.

Related Web Resources:
SEC Charges Connecticut-Based Hedge Fund Manager for Fraudulent Misuse of Investor Assets, SEC, January 28, 2011
Read the SEC Complaint (PDF)

1940 Investment Advisers Act

Related Blog Posts:
Fontana Capital LLC Founder Violated Short-Selling Rule, Says SEC, Stockbroker Fraud Blog, February 2, 2011
3 Hedge Funds Raided by FBI in Insider Trading Case, Stockbroker Fraud Blog, November 23, 2010
$2.6M Texas Securities Fraud Settlement: Hedge Fund Adviser Settles SEC Allegations Involving Violations Related to Improper Public Stock Offering Participation After Short Selling, Stockbroker Fraud Blog, October 5, 2010 Continue Reading ›

$18M Credit Default Swap Case Against Merrill Lynch International Reinstated

Published on: February 18, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The securities case accusing Merrill Lynch International alleging breach of contract related to the $18 million credit default swap purchased by DKR Soundshore Oasis Holding Fund Ltd has been reinstated. The Appellate Division (First Department) of the New York Supreme Court rejected the financial firm’s efforts to get the case tossed on the grounds that DKR did not give enough notice of a credit event. The judges were in unanimous agreement that notifying Merrill the event happened was enough and it didn’t matter that the date hadn’t been specified.

DKR bought for ¥1.5 billion (that’s $18 million) the swap from Merrill for insurance against a certain debt obligation of Urban Corp. Per the contract, a credit event would constitute a restructuring of at least ¥1 billion of Urban’s subordinate debt.

In June 2008, DKR told Merrill that Urban had restructured its debt, but the credit default seller said the notice was not valid and refused to issue payment. DKR filed a lawsuit against Merrill claiming breach of contract and other claims. The defendant filed a motion to dismiss on the grounds that DKR did not give the exact date of when the restructuring happened. The lower court agreed.

Now the appellate court, in reversing the ruling, has determined that CDS buys are entitled to “the benefit of every possible favorable inference” and that the contract under dispute did not ask that the notice have the same precision as to how a credit event was defined.

CDS buyers are required to make periodic payments to sellers in return for credit protection against a third party. If that party defaults on its obligation, the buyer tells the seller there has been a credit event and this is supposed to result in payment of the credit protection.

More Blog Posts:
France and Germany Press EU to Ban Naked Short Selling of Stocks and Limit Credit Default Swaps, Stockbroker Fraud Blog, July 8, 2010

The Financial Regulation Reform Act of 2008 Seeks to Regulate Investment-Bank Holding Companies and Credit Default Swaps, Stockbroker Fraud Blog, November 24, 2008

Wisconsin School Districts Sue Royal Bank of Canada and Stifel Nicolaus and Co. in Lawsuit Over Credit Default Swaps, Stockbroker Fraud Blog, October 7, 2008

Ex-Triton Financial CEO Accused of Using NFL Contacts to Commit $50M Texas Securities Fraud

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

Kurt Branham Barton, the former CEO of Triton Financial, a financial firm based in Austin, Texas, has been indicted on 33 counts, including Texas securities fraud, money laundering, and wire fraud. Barton allegedly used ex-NFL stars and church contacts in a $50 million Ponzi scam.

The American-Statesman reports that beginning in 2002, Barton accumulated a number of partnerships and companies based around Triton Financial. He even hired ex-NFL stars Chris Weinke and Ty Detmer to persuade clients to invest. Many investors belonged to the Church of Jesus Christ of Latter-day Saints (Barton is also a member).

Court documents contend that Barton got investors to give him over $50 million and that he used the funds to live a lavish lifestyle that included expensive vehicles, flying in private planes, and a luxury box for watching University of Texas football games. He also made money in political campaign contributions.

By 2009, however, several securities fraud complaints had been filed. Investors accused Barton of misleading them about where their money would go. The Securities and Exchange Commission would go on to file a securities fraud lawsuit against Triton Financial and Barton, and the Texas State Securities Board has stripped him of his investment adviser license.

The indictment accuses Barton of lying about his investments to investors regulators and of creating “false, fictitious, and fraudulent limited partnerships. He also allegedly used an E-Trade statement that showed his holdings had a balance of over $3 million even though the actual balance was $3,161.17. Barton is accused of giving regulators “altered and fabricated documents” about his business dealings.

A judge has placed Triton Financial in receivership. Per the receiver’ statement on January 31, 2011, over 600 investors have made $63.3 million in securities fraud claims against the financial firm and its ex-CEO.

Related Web Resources:
Former Triton chief indicted on charges of money laundering and fraud, Statesman, February 15, 2011
Broker indicted in fraud with NFL stars, KXAN, February 16, 2011
Read the Indictment (PDF)

More Stockbroker Fraud Blog Posts:
Texas Securities Act Control Person Claims against Merrill Lynch Pierce Fenner & Smith Inc. is Revived by Appeals Court, Stockbroker Fraud Blog Posts, January 20, 2011
R. Allen Stanford’s Criminal Trial Over $7 Billion Ponzi Scam Delayed So He Can Detoxify from Medication Addiction, Stockbroker Fraud Blog Posts, January 11, 2011
ALJ to Determine Whether to Revoke Registration of STS-Advisors Ltd. and Investment Adviser Representative Richard Lewis Bruce Over Alleged Texas Securities Fraud, Stockbroker Fraud Blog Posts, January 7, 2011 Continue Reading ›

Ex-Goldman Sachs Broker’s Request for SEC Help in Obtaining Documents from Germany Denied by District Court

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

The U.S. District Court for the Southern District of New York says it will not direct the Securities and Exchange Commission to contact German authorities on behalf ex-Goldman Sachs & Co. (GS) executive Fabrice Tourre, who is seeking to obtain certain documents related to the securities fraud case against him. Per Magistrate Judge Michael Dolinger’s ruling, a discovery request based on Federal Rule of Civil Procedure 34(a) doesn’t “extend” to having a
“government agency make requests to a foreign government under the terms of” a memorandum of understanding between both parties. Dolinger notes that while MOU between the SEC and its German equivalent allows both regulators to help each other in the enforcement of their respective securities laws, “there is no indication” that the MOU is supposed to offer a right or a benefit to a private party, such as allowing a securities fraud litigant to obtain discovery in Germany.

The SEC charged Goldman Sachs and Tourre over alleged misstatements and omissions related to collateralized debt obligations called Abacus 2007-AC1, a derivative product linked to subprime mortgages. The broker-dealer settled its securities case for $550 million. Meantime, Tourre, who is accused of giving Goldman Sachs “substantial assistance” in its alleged efforts to mislead investors, is seeking to have the SEC case against him dismissed. He is pointing to Morrison v. National Australia Bank Ltd., a US Supreme Court decision that was issued two months after the SEC filed charges against him.

This week, his lawyers argued that the SEC was attempting to circumvent the Supreme Court ruling, which limits the reach of civil claims over acts that occurred outside the country. The transactions involving Tourre that are under dispute took place abroad.

Goldman’s Tourre Shouldn’t Face SEC Lawsuit, His Lawyers Say, Bloomberg Businessweek, February 15, 2011

The SEC Complaint (PDF)

Ex-UBS Employee Can Proceed with Her Whistleblower Claim, Says District Court

Published on: February 15, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the District of Connecticut says that ex-UBS (UBS) employee Mary Barker’s whistleblower claim alleging that she was retaliated against for she reporting a purported accounting mistake can move forward. Her Age Discrimination in Employment Act claim, however, was dismissed.

Barker, who used to work UBS’s Stamford, Conn. Office, was given the responsibility of reconciling UBS’s existing exchange seat shares with old company records in December 2006. The valuation had to take place because UBS’s holdings of exchange seat assets were redistributed after the Commodity Exchange Inc. and the New York Mercantile Exchange merged.

Barker allegedly found that some of UBS’s historical exchange seat holdings had either not been accounted for or had been improperly accounted on the financial firm’s balance sheet. UBS went on to realize that about $80 million from the sale of exchange seats had been overlooked.

Barker told her manager about the brokerage firm’s alleged failure to disclose the seat holdings in February 2007. She says that not only did her manager fail to report her findings, which violated federal securities laws, to upper management, but also, her worries were never addressed. She says that her interactions with other UBS officials over the matter were similarly unsatisfying.

Despite getting a “Thank You Award” for her efforts, Barker says that UBS began to take retaliatory action against her. Not only did she get a poor review rating that year and fail to get a salary bump the following year, but also she was passed over for a promotion and her complaints were disregarded. In May 2008, Barker was told that the financial firm was letting her go due to a general reduction in UBS’ workforce.

Related Web Resource:
Barker v. UBS AG

More Blogs on Whistleblower Cases:

Why Whistleblowers Should Act Quickly and Consult Competent Legal Counsel, Stockbroker Fraud Blog, December 18, 2010

Whistleblower Sues Moody’s Investors Service for Defamation, Stockbroker Fraud Blog, September 15, 2010