Financial Firms

Schwab Settles for $119M SEC Charges It Allegedly Misled YieldPlus Fund Investors

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

The Charles Schwab Corp. has agreed to settle for $119 million Securities and Exchange Commission securities fraud charges that it misled investors about the risks involved in its Schwab YieldPlus Fund. By agreeing to settle, Schwab is not denying or admitting wrongdoing.

In 2008, the YieldPlus Fund dropped to $1.8 billion in assets after a peak of $13.5 billion in 2007. The decline happened because, rather than sticking with its stated policy, the fund invested over 25% of assets in private-issuer mortgage-backed securities. According to SEC Division of Enforcement Associate Director Antonia Chion, Schwab promoted the fund as a cash alternative that was supposed to be just slightly riskier than a money market fund even though at one point half the assets were in securities with credit quality and maturity that were very different from the type of investments that money market funds make.

Per the fund’s 1999 registration statement, YieldPlus was to only invest no more than 25% of its assets in one industry. The SEC contends that without obtaining shareholder approval, in 2006 Schwab changed the statement to say that it no longer thought of mortgage-backed securities as an industry. Last year, Schwab agreed to pay $200 million to settle with plaintiffs over the Schwab YieldPlus Fund.

The SEC has also filed a securities fraud complaint against Schwab executives Randall Merk and Kimon Daifotis over the offering, managing, and selling of the Schwab fund. Both men say that they will contest the allegations.

Related Web Resources:
Schwab to Pay $119 Million to Settle SEC Probe Over Misleading Statements, Bloomberg, January 11, 2011
Schwab Settles SEC Charges Over Allegations it Misled YieldPlus Fund Investors for $119M, ThirdAge, January 12, 2011
Class Members of Charles Schwab Corporation Securities Litigation Can Still Opt Out to File Individual Securities Claim, Stockbroker Fraud Blog, December 6, 2010
Read the SEC Complaint against Merk and Daifotis (PDF) Continue Reading ›

Securities Fraud Lawsuit Against UBS Securities LLC by Detroit Pension Funds Won’t Be Remanded to State Court, Says District Court

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

The U.S. District Court for the Eastern District of Michigan says it won’t be remanding the securities fraud lawsuit accusing UBS Securities LLC and related entities of inducing two Detroit pension plans into taking an equity position in a collateralized loan obligation and then breaching their fiduciary duties through the improper liquidation of the securities. As a result of the alleged defrauding, the Detroit Police and Fire Retirement System of Detroit and the Detroit General Retirement System, also known together as the “Systems,” claim they were deprived of their $40 million investment.

The securities fraud lawsuit, which seeks rescission of contracts and damages, alleges violations of the Michigan Uniform Securities Act and numerous Michigan statutory and common law wrongs. The plaintiffs contend that the $20 billion in CLOs that UBS had obtained through subsidiary Dillon Read Capital Management had deteriorated so badly by May 2007 that UBS sought to unload them. They claim that the broker-dealer not only misrepresented the risks involved with CLOs and its ability to control them, but also, the misrepresentations were part of a scam to get rid of the loans.

While the defendants sought to remove the action to federal district court on the grounds of diversity jurisdiction, the plaintiffs wanted to remand the case to state court. They argued that diversity jurisdiction was lacking. The court, however, refused to send the securities lawsuit back.

Related Web Resource:

Securities Fraud Attorneys

Morgan Stanley Failed to Disclose Financial Adviser’s Felony Charge to FINRA, Claims Car Accident Victim’s Attorney

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

According to Harold Haddon, the civil attorney for car accident victim Dr. Steven Milo, Morgan Stanley (MS) failed to disclose to the Financial Industry Regulatory Authority that financial adviser Martin Erzinger had been charged with a felony. Securities firms have 30 days from the time anyone working for them is charged with a felony to file a “Form U4” notifying FINRA.

Erzinger, who works with approximately $1 billion in accounts, was charged with a felony after he struck bicyclist Steven Milo in a car crash last July and then fled the collision site. Milo sustained serious injuries in the traffic crash. In December, the Morgan Stanley Smith Barney financial adviser struck a plea agreement. The felony charge against him was dropped and he pleaded guilty to misdemeanors. Erzinger claimed that at the time of the auto accident, he was suffering from undiagnosed sleep apnea, fell asleep at the steering wheel, and did not realize that he had hit anyone with his vehicle.

Erzinger was sentenced to community service and probation. Judge Fred Gannett also ordered him to tell FINRA about the felony charge. Attorney Haddon, however, says the court-ordered disclosure, which was submitted on December 22, doesn’t meet requirements because it only reveals that Erzinger was charged with a felony crime that was later dropped but does not mention the financial adviser’s misdemeanor guilty pleas or the sentence he must now serve.

Milo had opposed the plea agreement. Dow Jones Newswires reports that in court, Milo’s father-in-law Tom Marisco, who founded Marisco Funds and used to manage Janus mutual funds, blamed Morgan Stanley for not making the disclosures, which are mandatory. Morgan Stanley, however, says it contacted FINRA about the issue last July and believes that it satisfied all reporting requirements.

FINRA spokesperson Nancy Condon says the only way to notify FINRA about a reporting requirement is to electronically submit a Form U4.

Related Web Resources:
Lewis: Simple question tough for Morgan Stanley to answer, Denver Post/Dow Jones, January 8, 2010
Financial manager Martin Erzinger to accept plea bargain in Vail hit-and-run, 9News, November 2010
Form U4 Checklist, FINRA
Institutional Investors Securities Blog
Continue Reading ›

Goldman Sachs Sued by ACA Financial Guaranty Over Failed Abacus Investment for $120M

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

ACA Financial Guaranty Corporation is seeking $90 million in punitive damages and $30 million in compensatory damages from Goldman Sachs over its failed Abacus investment. The insurer contends that the broker-dealer sold a mortgage-backed investment that was designed to fail, causing investors to lose $1 billion.

ACA says that not only did it spend $15 million insuring Abacus, but also that the investment caused it to lose $30 million. The insurer contends that Goldman deceived it into thinking that hedge fund manager John Paulson also had invested in Abacus, when allegedly, the point of the flawed investment was so that Paulson & Co. could make huge profits by shorting the portfolio and the broker-dealer would then earn large investment banking fees.

ACA says that the Abacus 2007-AC1 collateralized debt obligation investment was already “was worthless” when Goldman marketed it to the insurer. Not only did ACA insure the underlying portfolio’s super-senior parts for $909 million, but also it purchased Abacus notes worth millions of dollars. Goldman hired ACA asset-management unit ACA Management LLC as “portfolio selection agent” to choose the securities for the Abacus deal.

Goldman has already settled for $550 million the Securities and Exchange Commission’s securities case against it over the failed collateralized-debt obligation investment. SEC had accused the federal agency the investment bank and its employee Fabrice Tourre of failing to tell investors that Paulson was involved in choosing the securities for Abacus and wanted to bet against the portfolio. Goldman has since acknowledged that it had provided incomplete marketing materials and agreed to business practice reforms.

Related Web Resources:

UPDATE: ACA Financial Sues Goldman For Alleged Abacus-Related Fraud, Wall Street Journal/Dow Jones, January 6, 2011

Goldman Sach’s $550 Million Securities Fraud Settlement Not Tied to Financial Reform Bill, Says SEC IG, Institutional Investor Blog, October 27, 2010

$1 Billion Goldman Sachs Synthetic CDO Debacle a Reminder that Even Highly Sophisticated Investors Can Be Defrauded, Stockbroker Fraud Blog, April 30, 2010

ALJ to Determine Whether to Revoke Registration of STS-Advisors Ltd. and Investment Adviser Representative Richard Lewis Bruce Over Alleged Texas Securities Fraud

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

A hearing will be held next month to determine whether the investment adviser registrations of STS-Advisors Ltd. and Richard Lewis Bruce with the Securities Commissioner of Texas should be revoked and a cease and desist order issued over allegations of securities fraud. STS and Bruce reportedly gave investment advice to STS-STATS, L.P., and from April 2003 through December 2005 24 investors put more than $2,130,000 into STS Fund. Unfortunately, many of the investors their entire investments.

Last September, an inspection of STS-Advisors revealed that the respondents had taken out money from the STS Fund beyond the fees and expenses that were allowed. These unauthorized withdrawals allegedly took place between at least June 2007 through September 2010 and even as the STS Fund lost value. The alleged withdrawals may have contributed to the fund’s losses.

For example, even though the STS Fund’s monthly ending balance never went above $721,000 between June 2007 and September 2010, the respondents allegedly took out nearly $400,000 during this time. Also, during the quarter that ended last September, the STS Fund’s value was just over $10,000 but respondents allegedly withdrew $9,000.

Related Web Resources:

Texas State Securities Board

Read the Docket (PDF)
Continue Reading ›

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

Published on: January 6, 2011 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority arbitration panel has ordered Securities America Inc. and broker Randall Ray Talbott to pay an investor nearly $1.2 million in damages over the sale of allegedly fraudulent Medical Capital notes. Claimant Josephine Wayman had charged the respondents with a number of actions, including securities fraud, deceit, breach of fiduciary duty, industry rules violation, financial elder abuse, and negligence. Ameriprise Financial Inc. owns Securities America.

The award includes $734,000 in compensatory damages, $250,000 in punitive damages, and $171,000 in expert witness and legal fees. Punitive damages are not common in FINRA arbitration awards.

Dozens of other claimants are pursuing securities claims against Securities America over the sale of private placements prior to the financial collapse in 2008. The securities divisions of Montana and Massachusetts are among those suing the broker-dealer. Meantime, Securities America has said that Medical Capital Holdings Inc., which issued the private placements, is the one that should be held liable for investors’ financial losses.

From 2003 to 2008, dozens of independent broker-dealers sold private Medical Capital notes, with Securities America considered the biggest seller at nearly $700 million. The private placements raised $2.2 billion. Unfortunately, many of the medical receivables that were supposed to be underlying the notes were in fact non-existent. Medical Capital has been accused of running a Ponzi-like scam and using newer investors’ funds to pay promised returns to older investors. Securities America has said that it did not act inappropriately when selling the MedCap notes.

Medical Capital is bankrupt and $1.1 billion of investors’ funds are gone. In 2009, the Securities and Exchange Commission charged Medical Capital with securities fraud.

Related Web Resources:

Securities America and Rep to Pay Over $1 Million in FINRA Fraud Case, AdvisorOne, January 5, 2011
Arbitrators hit Securities America, rep with $1.2 million in damages, legal fees over MedCap, Investment News, January 3, 2011
Financial Industry Regulatory Authority Continue Reading ›

School Districts Files Securities Fraud Lawsuit San Mateo County Over Lehman Brothers-Related Investment Losses

Published on: January 6, 2011 | by Shepherd Smith Edwards & Kantas, LLP

12 San Mateo County school districts have filed a $20 million securities fraud lawsuit against the county and its former treasure Lee Buffington. The securities complaint says that the plaintiffs lost approximately that amount in school district funds when Lehman Brothers filed for bankruptcy in 2008. The school districts contend that Buffington should have made smarter investments to protect their money. Instead, they claim that San Mateo County put too much of its pulled investment funds in the Lehman Holdings. The county lost approximately $155 million in the funds.

According to county schools Superintendent Anne Campbell, who is also a plaintiff of the securities case, the intention is to recover the $20 million, which has exacerbated the districts’ financial problems, and make the county change its investment policy so that it gets “specific” about the terms of the portfolio’s diversification. The plaintiffs are accusing Buffington and other county investment managers of negligent management and breach of fiduciary duty.

Meantime, Stuart Gasner, the county’s attorney, has called his client a “victim of Lehman Brothers’ nondisclosures.” He contends that the county did not do anything wrong. Also, not only is he accusing the school districts of failing to follow proper procedures when filing their securities complaint, but he also says that the complaint is not beneficial to taxpayers because it won’t “bring in any new money” while costing funds for the county’s defense.

School districts who are plaintiffs of the securities lawsuit against San Mateo County include Woodside Elementary School District, Belmont-Redwood Shores Elementary School District, San Mateo Union High School District, Burlingame Elementary School District, San Carlos Elementary School District, Cabrillo Unified School District, San Bruno Park Elementary School District, Jefferson Elementary School District, Ravenswood City Elementary School District, Las Lomitas Elementary School District, Portola Valley Elementary School District, and Menlo Park City Elementary School District.

UBS to Pay $2.2M to CNA Financial Head for Lehman Brothers Structured Product Losses

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

A Financial Industry Regulatory Authority arbitration panel says that UBS Financial Services Inc. must pay $2.2 million to CNA Financial Corp. Chief Executive and Chairman Thomas F. Motamed for losses that he and his wife Christine B. Motamed sustained from investing in Lehman Brothers structured products. The Motameds, who filed their claim against the UBS AG (UBS, UBSN.VX) unit and ex-UBS brokers Judith Sierko and Robert Ashley early in 2009, are alleging misrepresentation, breach of fiduciary duty, and other charges.

This is the largest award involving UBS-sold Lehman structured products. However, the Motameds’ securities fraud case is just one of many against UBS over its sale of about $1 billion in Lehman-related structured investment products to US clients. Many of the claimants contend that the broker-dealer failed to properly represent the investments. As part of this arbitration case, UBS must also pay 6% yearly interest on the $2.2 million to the Motameds from April 4, 2008 until payment of the award is complete. The ruling is supposed to represent rescission of the Motameds’ structured products purchase.

UBS reportedly has not won even one case over the Lehman structured products where the claimant had legal representation. Just a few months ago, UBS AG was ordered to pay $529,688 to another couple over their Lehman structured notes purchase. Steven and Ellen Edelson bought the notes while under the impression that they were “principal protected” when in fact the securities did not have such protection.

The award is the largest involving Lehman structured products purchased through UBS, which has expressed disappointment over the panel’s ruling. The broker-dealer maintains that the losses sustained by the Motameds are a result of Lehman Brothers’s failure and not UBS’s handling of the products.

To Pay $2.2 Mln To CNA Chief for Lehman-Related Losses, The Wall Street Journal, December 23, 2010
UBS Must Pay Couple $530,000 for Lehman Brothers-Backed Structured Notes, Institutional Investors Securities Blog, November 5, 2010 Continue Reading ›

Class Action Plaintiffs Dispute Bank of America’s $137M Settlement with State Attorney Generals Over Municipal Derivatives

Published on: December 31, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The plaintiffs in a class action case against Bank of America Corp. (BAC) are asking a court to intervene in the securities settlement reached between the investment bank and 20 state attorneys generals over the alleged manipulation of municipal derivatives bids. As part of the global settlement, BofA agreed to pay approximately $137 million: $9.2 million to the Office of the Comptroller of Currency, $36.1 million to the Securities and Exchange Commission, $25 million in restitution to the Internal Revenue Service, and $66.9 million to the states. The plaintiffs claim that the settlement purports to settle the charges of their case without consulting with or notifying the class counsel.

Fairfax County, Va., the state of Mississippi, and other plaintiffs filed the securities class action against 37 banks. They claimed that the alleged bidding manipulation practices involving municipal derivatives had been occurring as far back as 1992.

Now, the plaintiffs want permission to file a motion to request an enjoinment of the BoA global settlement. Meantime, BoA is arguing that the plaintiffs’ motion is “baseless” and they want the court to not allow it. The investment bank says that it disagrees that the states’ settlement resolves the class claims. BoA also contends that it kept Judge Weinstein and the interim class counsel abreast of settlement negotiations with the state.

Bank of America and Countrywide Financial Sued by Allstate over $700M in Bad Mortgaged-Backed Securities

Published on: December 29, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Allstate has filed a securities fraud lawsuit against Bank of America (NYSE: BAC) and its subsidiary Countrywide Financial. The insurer claims that it purchased over $700 million in toxic mortgage-backed securities that quickly lost their value. Also targeted in the securities complaint are former Countrywide CEO Anthony Mozilo and other executives. Allstate is alleging negligent misrepresentation and securities violations.

The insurance company purchased its securities between March 2005 and June 2007. According to the federal lawsuit, as far back as 2003 Countrywide let go of its underwriting standards, concealed material facts from Allstate and other investors, and misrepresented key information about the underlying mortgage loans. The insurer contends that Countrywide was trying to boost its market share and sold fixed income securities backed by loans that were given to borrowers who were at risk of defaulting on payments. Because key information about the underlying loans was not made available, Allstate says the securities ended up appearing safer than they actually were. Allstate says that in 2008, it suffered $1.69 billion in losses due largely in part to investment losses.

It was just this October that bondholders BlackRock and Pimco and the Federal Reserve Bank of New York started pressing Band of America to buy back mortgages that its Countrywide unit had packaged into $47 billion of bonds. The bondholder group accused BofA, which acquired Countrywide in 2008, of failing to properly service the loans.

Meantime, BofA says it is looking at Allstate’s lawsuit, which it says for now appears to be a case of a “sophisticated investor” looking to blame someone for its investment losses and a poor economy.

Related Web Resources:
Countrywide Comes Between Allstate And BofA, Forbes, December 29, 2010
Allstate sues Bank of America over bad mortgage loans, Business Times, December 28, 2010 Continue Reading ›