Financial Firms

Bank of America to Pay $137M Over Alleged Investment Scam To Pay Municipalities Low Interest Rates on Investments and $9M Over Alleged Bid-Rigging Scheme to Nonprofits

Published on: December 16, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Bank of America has agreed to pay $137 million to settle charges that it was involved in a financial scheme that allowed it to pay cities, states, and school districts low interest rates on their investments. The financial firm allegedly conspired with rivals to share municipalities’ investment business without having to pay market rates. As a result, government bodies in “virtually every state, district, and territory” in this country were paid artificially suppressed yields or rates on municipal bond offerings’ invested proceeds.

Bank of America has agreed to pay $36 million to the Securities and Exchange Commission and $101 million to federal and state agencies. The Los Angeles Times is reporting that $67 million will go to 20 US states. BofA will also make payments to the Office of the Comptroller of the Currency and the Internal Revenue Service. The SEC contends that from 1998 to 2002 the investment bank broke the law in 88 separate deals.

In its Formal Agreement with the Office of the Comptroller of the Currency, Bank of America agreed to strengthen its procedures, policies, and internal controls over competitive bidding in the department where the alleged illegal conduct took place, as well as take action to make sure that sufficient procedures, policies, and controls exist related to competitive bidding on an enterprise wide basis. The OCC is accusing the investment bank of taking part in a bid-ridding scheme involving the sale and marketing of financial products to non-profit organizations, including municipalities.

Per their Formal Agreement, the bank must pay profits and prejudgment interest from 38 collateralized certificate of deposit transactions to the non-profits that suffered financial harm in the scam. Total payment is $9,217,218.

Related Web Resources:

Bank of America to Pay $137 Million in Muni Cases, Bloomberg, December 7, 2010

OCC, Bank of America Enter Agreement Requiring Payment of Profits Plus Interest to Municipalities Harmed by Bid-Rigging on Financial Products, Office of the Comptroller of the Currency, December 7, 2010

Goldman Sachs & Co. Clearing Unit Must Pay Unsecured Creditors of Bayou Hedge Funds $20.5M FINRA Arbitration Award, Says District Court

Published on: December 14, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A district court has rejected Goldman Sachs & Co.’s (GS ) challenge to a $20.5 million securities fraud award for unsecured creditors of the failed Bayou hedge funds. The unsecured creditors are blaming the investment bank of failing to look at certain red flags and, as a result, facilitating the massive scam. The U.S. District Court for the Southern District of New York said it was sustaining the award issued by the Financial Industry Regulatory Authority arbitration panel.

The court said that contrary to Goldman’s argument, the FINRA panel “did not ‘manifestly disregard the law’ when reaching its conclusion. Also, the court noted that the panel had found that Goldman Sachs Execution and Clearing unit was not innocent of wrongdoing in that it failed to take part in a “diligent investigation” that could have uncovered the fraud.

The Bayou Hedge Funds group collapsed in 2005. According to regulators, investors lost over $450 million as a result of the false performance data and audit opinions that were issued. The Securities and Exchange Commission and the Justice Department sued the group’s founders, Daniel Marino and Samuel Israel III over the investors’ financial losses and the firm’s collapse. Both men have pleaded guilty to criminal charges and are behind bars.

The court not only disagreed with the Goldman Sachs clearing unit that the panel was not in manifest disregard of the law, but also, it found that as Goldman’s client agreements with the Bayou funds provided it with “broad discretion” over the use of securities and money in the funds’ accounts, it was not unusual for a “reasonable arbitrator” to find that Goldman’s rights in relation to the accounts provided it with “sufficient dominion and control to create transferee liability.”

Related Web Resources:

Court Rebuffs Goldman ChallengeTo $20.5M Bayou Arbitration Award, BNA, December 9, 2010

Goldman Sachs, Stockbroker Fraud Blog

Ex-Smith Barney Adviser Pleads Guilty to Securities Fraud In $3.25M Scam to Bilk Citibank and Firm Clients

Published on: December 13, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Sanjeev Jayant Kumar Shah, a former Smith Barney financial services adviser, has pleaded guilty to one count of securities fraud and three counts of wire fraud over his involvement in a securities scam to bilk clients of Citibank and his firm. Shah was charged with diverting about $3.25 million from a foreign bank client and fabricating documents that he claimed were from bank representatives.

He is also accused of falsely saying that the transfers were required for bond purchases and that he would send statements showing these purchases. Prosecutors say that he attempted to cover up the scam by telling clients that a computer mistake had kept the bonds from showing up online bank statements and that had had bought the bonds for the bank.

The securities fraud charge comes with a 20 year maximum penalty plus a fine. Each wire fraud charge carries a maximum 30 years in prison penalty and also a fine.

Shah was at Citigroup unit Smith Barney for 3 ½ years. Citigroup says that it was the one that brought the case to the attention of the Department of Justice.

Securities Fraud
Our securities fraud lawyers are committed to helping our clients recover their financial losses. The most common investor claims against brokers and investment advisers can involve issues such as:

• Unsuitability • Registration violations • Margin account abuse • Unauthorized trading • Breach of fiduciary duty • Breach of contract • Failure to execute trades • Overconcentration • Negligence • Churning • Misrepresentation and omissions • Failure to supervise
Read the guilty plea, Justice.gov, November 24, 2010 (PDF)

Former Smith Barney adviser admits $3 million fraud, Reuters, November 24, 2010
Former Smith Barney adviser admits $3 mln fraud, CNBC, November 24, 2010 Continue Reading ›

Class Members of Charles Schwab Corporation Securities Litigation Can Still Opt Out to File Individual Securities Claim

Published on: December 6, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The US District Court has approved an amendment to the proposed Charles Schwab Corporation Securities Litigation settlement. The Supplemental Notice of Proposed Settlement of Class Action has been sent to the affected class members, which includes those who may have held Schwab YieldPlus Fund shares on September 1, 2006 and gotten more of them between May 31, 2006 and March 17, 2008. Shares may have been obtained through a dividend reinvestment in the Fund or through purchase. Affected class members cannot have been a resident of California on September 1, 2006.

The Supplemental Notice notes that there has been a clarification in the release claims’ scope that affected class members will be giving Schwab if they decide to take part in the settlement. More claims than those in the federal securities class litigation are now included in the amended release. Class members now have another chance opt out of the class action complaint.

Exclusion Deadline: Your notice of exclusion must be postmarked no later than January 14, 2011 and cannot be received after January 21, 2011.

Citigroup Seeking to Dismiss $11.6 Million Securities Arbitration Award to “Dallas” TV Star Larry Hagman

Published on: November 30, 2010 | by Shepherd Smith Edwards & Kantas, LLP

TV star Larry Hagman, best known for playing the roles of Texas oil tycoon JR Ewing on “Dallas” and Major Anthony Nelson on “I Dream of Jeannie,” recently won an $11.6 million securities fraud arbitration award against Citigroup. The Financial Industry Regulatory Authority says that the award is the largest that has been issued to an individual investor for 2010 and the ninth largest ever. Citi Global Markets is now seeking to dismiss the award.

The investment firm contends that the arbitration panel’s chairman did not disclose a possible conflict of interest. In its petition, Citi cites a FINRA rule obligating arbitrators to reveal such conflicts that could prevent them from issuing an impartial ruling. The financial firm claiming that because the arbitration panel head was once a plaintiff in a lawsuit that dealt with the same type of claims and subject matter, he had an undisclosed potential conflict. Hagman’s legal team have since responded with a memo arguing that the arbitrator’s lawsuit was not related to this complaint and did not involve a securities investment, the same parties, or the same facts.

Hagman and his wife Maj had accused Citigroup of securities fraud, breach of fiduciary duty, and other allegations. They claimed financial losses on bonds and stocks and a life insurance policy. In addition to the arbitration award, which consists of $1.1 million in compensatory damages and $10 million in punitive damages that will go to a charity of Hagman’s choice, Citigroup must also pay a 10% interest on the award.

Related Web Resources:
Messing With J.R., Take Four, NY Times, November 23, 2010
Actor Larry Hagman Wins $12 Million in Finra Case With Citigroup, Bloomberg, October 7, 2010

Citigroup’s petition to dismiss award to Larry Hagman

Citigroup, Stockbroker Fraud Blog Continue Reading ›

Securities Fraud Lawsuit Against Citigroup Involving Mortgage-Related Risk Results in Mixed Ruling

Published on: November 30, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to a district court ruling, investors can proceed with certain securities fraud charges against Citigroup and a number of its directors over the alleged misrepresenting of the risks involved in mortgage-related investments (including auction-rate securities, collateralized debt obligations, Alt-A residential mortgage-backed securities, and structured investment vehicles). However, the majority of claims involving pleading inadequacies have been dismissed. The securities lawsuit seeks to represent persons that bought Citigroup common stock between January 2004 and January 15, 2009.

Current and ex-Citigroup shareholders have said that as a result of the securities fraud, which involved the misrepresentation of the risks involved via exposure to collateralized debt obligations, they ended up paying an inflated stock price. The plaintiffs are accusing several of the defendants of selling significant amounts of Citigroup stock during the class period. They also say that seven of the individual defendants certified the accuracy of certain Securities and Exchange Commission filings that were allegedly fraudulent. They plaintiffs are claiming that there were SEC filings that violated accounting rules because of the failure to report CDO exposure and value such holdings with accuracy.

The plaintiffs claim that the defendants intentionally hid the fact that billions of dollars in CDOs hadn’t been bought. They also said that defendants made misleading statements that did not properly make clear the subprime risks linked to the Citigroup CDO portfolio.

The defendants submitted a dismissal motion, which the court granted for the most part. Although the court is letting certain CDO-related claims to move forward, it agrees with the defense that because the plaintiffs failed to raise an inference of scienter before February 2007 (when the investment bank started buying insurance for its most high risk CDO holdings), the claims for that period cannot be maintained. The court also held that the plaintiffs failed to plead that seven of the individual defendants had been aware of Citigroup’s CDO operations. As a result, the court determined that there can be no finding of scienter in regards to the individuals.

The court, however, did that the plaintiffs adequately pleaded securities fraud claims against Citigroup, Gary Crittenden, Charles Prince, Thomas Maheras, Robert Druskin, David C. Bushnell, Michael Stuart Klein, and Robert Rubin for misstatements made about the bank’s CDO exposure between February and November 3, 2007. The plaintiffs also adequately pleaded securities fraud claims against Citigroup and Crittenden for Nov. 4, 2007, to April 2008 period.

Non-Customers of Wachovia Cannot Bring Stock Loan Related Claim to FINRA, Says Court

Published on: November 21, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Northern District of California has ruled that a married couple and their investment vehicles are not Wachovia “customers” and, therefore, they are not entitled to bring their stock loan related claims against Wachovia Securities Financial Network LLC and financial adviser George Gordon III to Financial Industry Regulatory Authority arbitration. Judge Saundra Brown Armstrong granted Wachovia and Gordon’s request for a preliminary injunction.

Per the statement of claim submitted to FINRA, Gregory and Susan Raifman initiated arbitration as trustees of a family trust, as Gekko Holdings Inc. members, and as the beneficial owners and assignees in interest of Helicon Investments Ltd. The Raifmans accused Wachovia and Gordon of committing securities fraud, breach of fiduciary duties, and violations of the California Securities Act and the rules of both the New York Stock Exchange and National Association of Securities Dealers.

The Raifmans contended that Gekko and Helicon each went into three separate stock loan transactions that Derivium Capital LLC, a third party, had promoted so they could borrow up to 90% of their stock holdings’ value without triggering capital gain on the stock sale. After the three-year loan term ended, the Raifmans were to pay the loan balance and get back or surrender their collateral or renew their loan.

To execute their plan, the Raifmans opened a Wachovia account for the trust in 2003 and transferred nearly $3 million in ValueClick (VLCK) shares into an account owned by a Derivium affiliate. Almost 12 months later, Helicon placed 300,000 ValueClick shares into another Derivium affiliate’s Wachovia account under a 90 percent stock loan agreement. Gekko later deposited 200,000 ValueClick shares in the same account (and also under a 90 percent stock loan agreement).

It wasn’t until 2007 that the Raifmans found out that their Value Click shares had been sold as soon as they were placed in the Derivium affiliates’ accounts. They also had not known that the sales proceeds had been loaned back to them while Wachovia and Derivium kept 10 – 14% of the sales proceeds.

The Raifmans attempted to start the arbitration process in July but Gordon and Wachovia filed their complaint seeking enjoinment against the couple, Helicon, and Gekko. They also requested a stay of the arbitration proceedings. The financial firm and investment adviser contended that they did not have an agreement with the defendants, who were not their customers and therefore not entitled to FINRA arbitration. The district court agreed.

Related Web Resources:
Wachovia Securities LLC v. Raifman

Arbitration and Mediation, FINRA Continue Reading ›

LPL Financial Management and Private Equity Backers TPG and Hellman & Friedman Could Make Over $450M from IPO

Published on: November 19, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Investors are jumping on LPL Financial Management’s initial public offering debut. At midafternoon on Wednesday, shares were up 8% at $32 plus change. (This, compared this to the 6% increase in GM’s IPO.) According to CNN, the Boston-based brokerage service and private equity backers TPG and Helllman & Friedman may make than $450 million from the deal.

LPL provides research, technology, and financial services to 12,000 independent financial advisers in small and medium-sized shops. This allows them to provide services, including financial advice that is supposed to be free from conflict or bias, to retail investors. Seeing as there have been so many alleged incidents recently reported of bankers trying to earn fees by pressing clients to take part in certain deals, LPL says in its IPO prospectus that it make sense that today more investors are drawn to independent advisers. The brokerage service company also says that over the last decade, as rich individuals and brokers have started to question the benefits of dealing with the larger banks, its broker clientele as gone up at a 13% compound annual rate.

That said, the investment adviser system-whether involving independent advisers or those with ties to investment banks-is far from perfect. As Shepherd Smith Edwards & Kantas LTD LLP founder and securities fraud lawyer William Shepherd points out, “We have seen a number of complaints regarding LPL which seemed to stem from failure to supervise. Perhaps this is because LPL has so many advisor/agents in one or two person offices having somewhat detached contact with their supervisor(s). It was recently reported that LPL may have sought to hire another firm to handle its supervisory duties.”

LPL CEO Mark Casady and President COO Esther Stearns are expected to make millions from the IPO-almost $58 million for Casady and $35.1 million for Stearns. LPL executive William Dwyer could make $8.24 million, while the shares that General Counsel Stephanie Brown plans to sell could make her $3.77 million.

Related Web Resources:
LPL Financial IPO outpaces GM, CNN Money, November 18, 2010
LPL Executives Likely To Reap Millions In Public Offering, The Wall Street Journal, November 18, 2010
LPL Investment IPO Faces Struggle, The Street, November 15, 2010 Continue Reading ›

Goldman Sachs Ordered by FINRA to Pay $650K Fine For Not Disclosing that Broker Responsible for CDO ABACUS 2007-ACI Was Target of SEC Investigation

Published on: November 12, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority says it is fining Goldman Sachs $650,000 for failing to disclose that the government was investigating two of its brokers. One of the brokers was Goldman vice president Fabrice Tourre. FINRA says Goldman did not have the proper procedures in place to make sure that this disclosure was made.

The SEC had accused Tourre of being “principally responsible” for Abacus 2007-AC1, a synthetic collateralized debt obligation, and selling the bonds to investors, who ended up losing more than $1 billion while Goldman yielded profits and hedge fund manager John A. Paulson made money from bets he placed against specific mortgage bonds. The SEC contends that Goldman failed to notify investors that Paulson had taken a short position against Abacus 2007-AC1. This summer, Goldman settled for $550 million SEC charges that it misled investors about this CDO, just as the housing market was collapsing.

Regarding Goldman’s failure to disclose that the SEC was investigating two of its brokers, even though investment firms are required to file a Form U4 within 30 days of finding out that a representative has received a Wells notice about the probe, FINRA says that Tourre’s U4 wasn’t amended until May 3, 2010. This date is more than 7 months after Goldman learned about his Well Notice and after the SEC filed its complaint against the investment bank and Tourre. FINRA also says that Goldman’s “employee manual” for brokers does not even specifically mention Wells Notices or the need for disclosure after one is received.

By agreeing to settle with FINRA, Goldman is not admitting to or denying the charges.

Goldman Sachs to Pay $650,000 for Failing to Disclose Wells Notices, FINRA, November 9, 2010
Related Web Resources:
Goldman Fined $650,000 for Lack of Disclosure, New York Times, November 9, 2010
Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million,
Stockbroker Fraud Blog, July 30, 2010
Goldman Sachs, Institutional Investor Securities Blog Continue Reading ›

Citigroup Global Markets to Pay Back $95.5M Over ARS Sold to LandAmerica Exchange Fund

Published on: November 11, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A federal bankruptcy judge has approved a settlement involving Citigroup Global Markets Inc. agreeing to repay $95.5 million to clients who sustained auction-rate securities related-losses. The ARS were told by Citigroup to LandAmerica 1031 Exchange Services Inc. before the latter folded in 2008. The ARS had been valued at about $120 million. The repurchase rate that clients are getting is reportedly better than what the ARS can be sold for now.

Under the approved securities settlement, these creditors should recover a little over 50% of their financial losses. The distribution of the money should begin taking place in December.

LandAmerica 1031 Exchange Services Inc. and parent company LandAmerica Financial Group Inc. filed for Chapter 11 bankruptcy in November 2008. Over 250 clients had placed proceeds from investment property sales in the exchange. Their intention was to defer capital gains taxes while searching for other properties to purchase.

Unfortunately, because the exchange company invested some of the funds in ARS, when the market froze and LandAmerica filed for bankruptcy, the investors became unable to access their money. At the time of the bankruptcy, Landmark held $201.7 million in ARS. $30 million of the securities had sold.

Meantime, the US Securities and Exchange Commission has received complaints claiming that Citigroup engaged in misrepresentation and securities fraud related to the credit worthiness and liquidity of the securities.

Related Web Resources:

Stockbroker Fraud Blog