Financial Firms

Bank of America Settles for $4.25M New York Securities Fraud Allegations that Merrill Lynch & Co. Inc. Hid Subprime Mortgage Risks from Investors

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

Bank of America Corp. (BAC) and the New York State Common Retirement Fund have settled the latter’s securities fraud lawsuit accusing Merrill Lynch & Co. Inc. of concealing the risks involved in investing in the subprime mortgage market. Under the terms of the settlement, Bank of America, which owns Merrill Lynch, will pay $4.25 million.

The comptroller’s office is keeping the terms of the securities settlement confidential. State Comptroller Thomas P. DiNapoli did announce last July that the New York pension fund wanted to recover losses sustained by investors from Merrill’s alleged “fraud and deception” that “artificially inflated” the value of Merrill stock, which rapidly declined when the extent of exposure was revealed.

By opting out of a similar class action complaint involving other funds, the state pension fund has a chance of recovering more from the investment bank. Another securities lawsuit that has yet to be resolved seeks to recover losses related to Bank of America’s proxy disclosure when acquiring Merrill.

The demise of the subprime mortgage market a few years ago contributed to the crisis in the housing market and the economic collapse that has affected millions in the US and the rest of the world. Investors have since stepped forward and filed securities claims and lawsuits against investment banks, brokers, and others in the financial industry for misrepresenting the risks involved with subprime mortgages that have resulted in losses in the billions.

DiNapoli, BOA/Merrill Lynch settle for $4.25 million, Capitol Confidential, January 13, 2011

The Subprime Mortgage Market Collapse: A Primer on the Causes and Possible Solutions, The Heritage Foundation

NY comptroller settles Merrill Lynch fraud suit, BusinessWeek, January 13, 2011

New York State Common Retirement Fund

Texas Securities Act Control Person Claims against Merrill Lynch Pierce Fenner & Smith Inc. is Revived by Appeals Court

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

The Texas Court of Appeals has reinstated the Texas Securities Act control person claims against Merrill Lynch Pierce Fenner & Smith Inc. related to its former broker Terry Christopher Bounds’s allegedly fraudulent outside sales transactions.
According to the appeals court, Bounds, who owned two “outside” direct-marketing corporations, solicited David Fernea, who is now the appellant of this Texas securities case, to buy shares in both businesses. The latter purchased 50% interest in each company.

Fernea claims that after he bought into the companies, Bounds refused to uphold his part of the agreement and concealed his actions with the delivery of a fake stock certificate. He also contends that the ex-Merrill Lynch broker had made misrepresentations and omissions to persuade him to buy the stock. Among the alleged omissions was failing to disclose that Bounds’s companies were involved in a consumer protection dispute with the Texas Attorney General and that the stocks that Fernea had purchased were not registered with the Texas State Securities Board. The appellant also claims that Bounds tried to secretly resell the corporations he had already bought from him to other parties.

Fernea is suing Merrill Lynch for Texas securities fraud because he says that that Bounds’s working relationship with the investment bank had played an important part in his decision to buy into the broker’s companies. He is accusing the broker-dealer of violations of its own internal polices regarding its employees’ outside transactions, violating the Texas Securities Act’s Section 33, negligent supervision of Bounds related to his outside transactions, “control person” liability under the Texas Securities Act, and violation of several NASD and NYSE internal rules.

While the appeals court initially remanded the control person claim to a lower court, it has now reinstated the claim. The court says that it is up to the plaintiff to bear the initial burden of proving control, including that the alleged control person actually had influence or power of the controlled person and that this power to influence or control the specific activity or transaction led to the violation in question. The court has found that there is evidence that Merrill Lynch’s policies gave it control or issue over the “transaction at issue.”

Related Web Resources:
Texas Securities Act

BNA Securities Daily Law

Fernea v. Merrill Lynch Pierce Fenner & Smith Inc.
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JPMorgan Chase & Co. CEO Warns Municipal Bond Investors to Expect More Bankruptcies

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

According to JPMorgan Chase & Co. (NYSE: JPM) Chief Executive Officer Jamie Dimon, investors of the municipal bond market can expect expect more bankruptcies. He spoke at the investment bank’s annual healthcare conference and called for those investing in the $2.9 trillion public dept market to be cautious. Dimon is not alone in his prediction. Cities, such as Harrisburg, Pennsylvania and Detroit, Michigan, have also talked about possibly filing for bankruptcy.

Dimon’s statements come even as the number of bankruptcy filings has gone down. Bloomberg.com reports that while 10 municipal entities sought bankruptcy protection in 2009, just five bankruptcy filings were made last year. The largest last year was a South Carolina toll road that had over $300 million in debt. Also, in 2008, Vallejo California sought bankruptcy protection after it didn’t win union pay cuts.

Now, Liberty Mutual Holding Co. has reduced its municipal debt holdings in California, Connecticut, and Illinois. At the end of 2009, it had about $15.5 billion in municipal securities. As of last September, it had about $13.7 billion in municipal securities, or about 20% in invested assets. Moody’s Investors Service has given Liberty Mutual’s holdings in Illinois an A1 rating. Its holdings in Connecticut have been rated Aa2. Insurer Allstate also has had to reduce its municipal securities holdings.

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
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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)
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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.