Financial Firms

UBS AG Motion to Dismiss Class Securities Case Test’s US Supreme Court’s Ruling Regarding Extraterritorial Transactions

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

UBS AG has filed a motion to dismiss a class securities case against it. The move is putting the US Supreme Court’s recent ruling in Morrison v. National Australia Bank Ltd. to the test.

In this securities fraud case, four institutional investors—three of them foreign—are charging UBS and a number of individual defendants with violating Section 10(b) of the 1934 Securities Exchange Act. This is based on misstatements that were allegedly made regarding its auction rate securities-related and mortgage-related activities. They are seeking relief for all purchasers of UBS stock on all worldwide exchanges. Most of the statements in question were issued from the bank’s headquarters in Switzerland.

In 2008, the defendants asked the court to dismiss the allegations due to lack of subject matter jurisdiction. They cited the decision made in Morrison by the U.S. Court of Appeals for the Second Circuit, which had dismissed the action.

Now that the US Supreme Court issued its ruling in Morrison, with the justices concluding that Section 10(b) only applies to securities transactions on domestic exchanges and in other securities, the defendants are attempting to also have the securities case against them dismissed per Morrison’s “bright-line, location-of-the transaction rule.”

The defendants say that the plaintiffs have advised them that they will use the Supreme Court’s use of the word “listed” to end-run Morrison. Per the justices’ decision, Section 10(b) applies to transactions involving securities that are “listed on an American stock exchange.” UBS shares can be found on the NYSE.

However, the defendants are contending that there isn’t any support in the “the test of Section 10(B), its legislative history, or Morrison” for this type of unprecedented interpretation. They say that the word “listed,” as it is used in Morrison is only applicable to two kinds of securities that can be purchased in the US—an unlisted security that trades over the counter in this country and a listed one that trades on a US exchange. The defendants claim that the plaintiffs are misreading the word “listed” in order to authorize international class action lawsuits based on securities purchases on a foreign market and that this “flies in the face of Morrison’s statements that Section 10 (b) doesn’t “regulate foreign securities exchanges.”

Related Web Resources:
Morrison v. National Australia Bank Ltd., Supreme Court (PDF)

1934 Securities Exchange Act

Lincoln Financial Advisors Corp. Ordered by FINRA to Pay $4.43M Over Alleged “Selling Away” Scheme to Investors

Published on: October 8, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority panel has ordered Lincoln Financial Advisors Corp. to pay $4.43 million in damages and interest to about 22 investors that had accused brokerage manager Scott B. Gordon of “selling away.” The panel wrote in its decision that the brokerage firm was “negligent” in failing to prevent Gordon from using an outside business to raise money from investors. The alleged misconduct took place for almost a year.

“Selling away” involves a broker soliciting clients to purchase securities not offered by his/her broker-dealer and without the brokerage firm’s approval. Regulators consider “selling away” to be a violation of securities laws.

Gordon became software-development company Healthright Inc.’s chief executive in 2005 and ran the company from his Lincoln Financial office. Two Healthright investors sent a written complaint to Lincoln the following year.

A request by Gordon to the brokerage firm that he be able to conduct outside business activity was not approved or denied. In 2006, Grant Gifford, who is a Healthright investor and a claimant in the securities fraud case, discovered alleged misstatements and omissions that Gordon had made. In 2008, FINRA barred Gordon from the securities industry.

Except for Gifford, who lent money to Healthright in his personal capacity, all the other investors in the securities case against Lincoln were part of Healthright Partners, LP.

Related Web Resources:
Finra Panel Orders Lincoln to Pay $4.3 Million to Investors, The Wall Street Journal, October 7, 2010
Lincoln Financial hit with hefty arbitration award over selling away, Investment News, October 5, 2010
Activity Away From Associated Person’s Member Firm, FINRA Continue Reading ›

Goldman Sachs International Fined $27M by UK’s FSA for Not Reporting SEC Investigation into Abacus 2007-AC1 Synthetic Collateralized Debt Obligation

Published on: October 7, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Goldman Sachs International has been ordered by the United Kingdom’s Financial Services Authority to pay $27 million. The FSA says that Goldman failed to notify it about the US Securities and Exchange Commission’s probe into the investment bank’s marketing of the Abacus 2007-AC1 synthetic collateralized debt obligation, a derivative product tied to subprime mortgages.

Goldman Sachs and Co. has settled the SEC’s case for a record $550 million dollars. However, even though Goldman knew for months in advance that SEC charges were likely, the investment bank did not notify regulators, shareholders, or clients.

FSA’s Enforcement and Financial Crime Managing Director Margaret Cole says that while GSI didn’t intentionally hide the information, it became obvious that the investment firm’s reporting systems and controls were defective and that this was why its ability to communicate with FSA was well below the level of communication expected. Cole says that large institutions need to remember that their reporting obligations to the FSA must stay a priority.

FSA contends that Goldman was in breach of FSA Principle 2, which says that a firm has to “conduct its business with due skill, care, and diligence,” FSA Principle 3, which talks about a firm’s responsibility to “organize and control its affairs responsibly and effectively, with adequate risk management systems,” and FSA Principle 11, which stresses a firm’s responsibility to disclose to the FSA that “of which it would reasonably expect notice.”

For example, Fabrice Tourre, a Goldman vice president that worked on the Abacus team and who became an FSA-approved person after he was transferred to GSI in London, was later slapped with SEC civil charges. Along with Goldman, the SEC accused Tourre of alleged misrepresentations and material omissions in the way the derivatives product was marketed and structured.

Cole notes that FSA was disappointed that even though senior members of GSI in London were aware that Tourre had received a Wells Notice that SEC charges were likely, they did not take into account the regulatory implications that this could have for the investment firm. Because of the failure to notify, Tourre ended up staying in the UK and continued to perform at a “controlled function for several months without further enquiry or challenge.”

Because FSA did not find that GSI purposely withheld information, the investment bank received a discount on the fine, reducing it from $38.5 million to the current amount.

Securities fraud lawsuits and investigations have followed in the wake of the SEC’s case against Goldman.

Related Web Resources:
FSA fines Goldman Sachs £17.5 million, Reuters, September 9, 2010

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

Morgan Keegan to Pay $9.2M to Investors in Texas Securities Fraud Case Involving Risky Bond Funds

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

In a Texas securities case, FINRA arbitration panel has ordered Morgan Keegan & Co., a Regions Financial Corp., to pay 18 investors $9.2M for losses related to risky bond funds. The investors contend that the investment firm committed securities fraud when it convinced them to invest in certain funds that included high-risk “subprime” mortgage assets. Clients also claimed that they were persuaded to automatically reinvest dividends in the funds.

This is the biggest award that an arbitration panel has awarded in a Morgan Keegan case involving six bond funds that were heavily involved in mortgage-related holdings. The funds dropped in value significantly in 2007 and 2008. Hundreds of securities claims against the brokerage firm followed. Last July, Regions Financial announced that Morgan Keegan had recorded a $200M charge for probable costs of the bond fund lawsuits.

Arbitrators in Houston made the ruling in the Texas securities case. Included in the total sum was $1.1M in legal fees that, per state law, will be paid to investors. All of the investors involved were clients of Russell W. Stein, a Morgan Keegan broker. Stein is no longer with the broker-dealer. Regulatory filings indicate that he is currently employed with Raymond James Financial Inc. unit Raymond James & Associates Inc.

Stein and his wife were original claimants in this Texas securities fraud case. They too had invested in the bond funds. Their claims are now part of another case involving a group of other investors. Morgan Keegan is considering appealing the FINRA arbitration panel’s decision.

Related Web Resources:
Morgan Keegan to pay bond fund investors $9.2 mln, Reuters, October 6, 2010
Morgan Keegan Must Pay $9.2Mln To Investors – Panel, Wall Street Journal, October 6, 2010
Morgan Keegan Ordered by FINRA Panel to Pay Investor $2.5 Million for Bond Fund Losses, Stockbroker Fraud Blog, February 23, 2010
Morgan Keegan Again Ordered by Arbitrators to Pay Bond Fund Losses to Investors, Stockbroker Fraud Blog, October 27, 2009
Financial Industry Regulatory Authority
Continue Reading ›

In Securities Fraud Case Against Morgan Stanley Pension Fund Doesn’t Have Standing to Bring Certain Claims, Says Court

Published on: October 4, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A US district court judge has issued a ruling in the securities fraud lawsuit against Morgan Stanley and several affiliates. The case, which was brought by West Virginia Investment Management Board (WVIMB), involves mortgage-backed securities.

WVIMB, which bought securities from Morgan Stanley Mortgage Loan Trust 2007-11AR, had filed class claims against securities bought under the trust claiming that the defendants had violated federal securities laws when making mortgage-backed securities sales. However, WVIMB wanted to expand the claims to include 30 other loan trusts even though it hadn’t bought securities from them.

Morgan Stanley and its affiliates contended that WVIMB did not have the legal standing to pursue claims on certificates it didn’t buy. They also said that the plaintiff waited too long to file its claims on Trust 2007-11AR. The court agreed.

According to Judge Laura Taylor Swain’s decision, pension funds do not have standing to bring certain claims, and, at least in court, there will be a distinction made between loan trusts that have separate prospectus supplements even if they have the same shelf registration statement. The court also noted that the pension fund had enough information that it could and should have filed its securities lawsuit sooner. Swain’s decision narrowed the pension fund’s claims that the defendants affiliates violated federal securities laws when making mortgage-backed securities sales.

Mortgage-Backed Securities
Many securities fraud lawsuits that have been filed over the alleged wrongdoings related to the marketing, packaging, and sale of mortgage-backed securities. Retirement funds, pension funds, and other investors are among those that have sued investment firms and banks for misleading them about these securities and failing to reveal the true degree of risk involved in investing in them.

Related Web Resources:
West Virginia Investment Management Board

Ex-Ferris, Baker Watts, Inc. General Counsel Did Not Fail to Properly Supervise Broker Fraudster, Says SEC Judge

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

According to Securities & Exchange Commission Administrative Law Judge Brenda Murray, former Ferris, Baker Watts, Inc. general counsel Theodore Urban did not fail to reasonably supervise broker, Stephen Glantz, who has admitted to his involvement in a stock market manipulating scheme involving Innotrac Corp. stock. Murray says that Urban performed his job in a “thorough and reasonable manner” and that he was careful and objective.

Urban had been accused of allegedly abdicating his supervisory responsibilities by not responding to red flags related to the Glantz’s alleged misconduct even though prior to the broker’s hiring, he had already been flagged because of several customer complaints and his “questionable reputation in the industry.”

The SEC would later also find that Glantz had been involved in unauthorized, manipulative transactions of TC Healthcare, Inc. stock in February 2005. After pleading guilty to violations of Section 10(b) of the Securities Exchange Act of 1934, in 2007 he was sentenced to 33 months in prison and ordered to pay $110,000 in restitution

When determining whether Urban, who was Glantz’s supervisor, properly supervised him in a manner intended to prevent securities fraud violations, ALJ Murray noted that per the 1934 Securities Exchange Act, a person cannot be held liable for supervisory deficiencies if the proper procedures that should have detected and stopped the violations were applied and the person had no reasonable grounds to believe that the procedures were not being followed.

Related Web Resources:
SEC Judge Finds Investment Bank GC was not Negligent in Supervising Rogue Broker, The Blog of Legal Times, September 8, 2010
Judge: Former general counsel of Ferris, Baker Watts was not responsible for supervising broker convicted of securities fraud, Baltimore Sun, September 9, 2010
Broker Glantz charged with fraud in Innotrac stock scheme, Cleveland.com, September 4, 2007 Continue Reading ›

Federal Judge to Approve Citigroup’s $75M Securities Settlement with SEC Over Bank’s Subprime Mortgage Debt Reporting to Investors

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

Judge Ellen Segal Huvelle says she will approve the $75 securities settlement between Citigroup and the SEC once the agreement includes changes that the bank has already made to its disclosure policy in the agreement. The federal judge says she wants the changes added to the settlement terms so that executives can’t revise them. She also wants the $75 million used to compensate shareholders who lost money because of Citigroup’s misstatements.

Last month, Huvelle had refused to approve the settlement over Citibank’s alleged failure to fully disclosure its exposure to subprime assets by almost $40 billion. The SEC accused the investment bank of misleading investors and telling them that its exposure was only $13 billion. When questioning the agreement, Huvelle asked why Citigroup shareholders should have to pay for the bank executives’ alleged misconducts. She also wanted to know why only two individuals were pursued.

The SEC had also filed cases against former CFO Gary Crittenden and ex-investor relations head Arthur Tildesley Jr. Both men have settled the cases against them without denying or admitting wrongdoing.

Despite giving conditional approval of the settlement, Huvelle noted that she didn’t think the $75 million would “deter anyone” unless Citibank abided by the changes to the disclosure policy. She also noted that the bank was “doing a disservice to the public” because other Citigroup executives were not held accountable for their alleged involvement.

The Wall Street Journal reports that lawmakers and others have becoming extremely frustrated at the considerably small number of senior executives that have been charged in connection with the financial debacle that has impacted Wall Street. The SEC has said that it can only file charges when there is sufficient evidence. Meantime, defense attorneys have argued that the multibillion dollar losses by investment firms were a result of bad business calls and not intentional fraud.

Related Web Resources:
Citigroup’s $75 Million Settlement With SEC Gets Green Light — Almost, Law.com, September 28, 2010

US court approves SEC settlement with Citi, Financial Times, September 24, 2010

Judge Won’t Approve Citi-SEC Pact, Wall Street Journal, August 17, 2010

SEC Examining Whether Investment Advisers of Alternative Investment Funds Have Sufficient Due Diligence Processes in Place

Published on: September 28, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The SEC’s Office of Compliance Inspections and Examinations is checking the due diligence processes at investment advisers of private pools of capital. In a letter sent this month to the chief compliance officers of registered investment advisers that have alternative investment options in their portfolios, OCIE asked the CCOs to provide copies of the investment firm’s trade blotter, due diligence policies and procedures, compliance policies and procedures, the names of the staff that take part in the due diligence process, and the names of third parties that provide due diligence services.

OCIE also requested all marketing materials that are offered to existing and potential clients, as well as current financial records. The SEC wants to know how fund managers are managing any conflicts of interest while performing due diligence.

The probe comes nearly two years after Bernard Madoff’s Ponzi scam was discovered. Many of his investors became indirectly involved with the scheme through advisors that had invested in his funds.

In securities fraud lawsuits filed by some of the investors against their advisers, the plaintiffs contend that proper due diligence would have allowed the scam to be uncovered sooner. The SEC has also come under fire for failing to detect the scheme despite examining and investigating Bernard Madoff’s company on several occasions.

During this review, OCIE staff will visit the investment firms. They also want to meet with personnel knowledgeable about the due diligence process and with the firm’s investment committee head.

Related Web Resources:
SEC Scrutinizing Due Diligence Processes at Advisers of Alternative Investment Funds, US Law Watch, September 15, 2010
Office of Compliance Inspections and Examinations, SEC Continue Reading ›

Jefferson County, Alabama Officials Want JP Morgan Chase & Other Wall Street Creditors to Accept Proposal that Would Eliminate Almost Half of Its $3.2 Billion Sewer Debt

Published on: September 28, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Jefferson County, Alabama officials have presented a proposed settlement to Wall Street creditors that could get rid of almost half of its $3.2 billion sewer debt, create a $30 million relief fund for ratepayers that have a hard time paying their sewer bills, and limit sewer rate increases to approximately 2.5% annually. The county wants to solve its sewer bet crisis before the current County Commission leaves in November.

A significant number of investors have to agree to the proposal. JPMorgan Chase and Co. owns most of the county warrants. However, the other banks, including State Street Bank of Boston, Lloyds Bank of Scotland, the Bank of Nova Scotia in Canada, and Societe Generale of Paris would also have to approve it. Getting all of them to agree could prove challenging. Not all creditors may end up with half of what is owed. Some creditors want the settlement discussions to slow down while efforts are made to determine if more money can be obtained from the county.

“Our firm is handling a number of multi-million dollar Jefferson County-related securities claims and other ARS claims, which included claims for ‘consequential damages,” says Stockbroker Fraud Lawyer William Shepherd. “In these cases damages have been incurred by businesses and others when they denied access to their funds for months or years. Meanwhile, they had been told that the funds were placed into ‘money market’ type investments and were readily available on short notice. Some business completely failed because their cash flow was interrupted when the funds were suddenly tied up in these illiquid investments.”

In 1994, the county started a sewer restoration and rehabilitation program after individuals and the Cahaba River Society won their lawsuit demonstrating that the county had polluted rivers and creaks with untreated waste. In a consent decree in 1996, the county agreed to fix the sewer system. Initially estimated to cost $1 billion, it became a $3.2 billion project.

In 2002, a number of financial advisers, including bankers from JP Morgan, convinced county officials to replace traditional fixed-rate bonds with notes that came with floating interest rates, such as ARS. Following the credit crisis in 2008, and as borrowing costs rose, the complex financing scheme that the county was using failed. The county has been trying to figure out how to pay back the money it borrowed and is attempting to restructure its debt. In 2009, JP Morgan settled SEC charges related to an illegal payment scam that enabled the broker dealer to obtain business (involving swap agreement transactions and municipal bond offerings) in Jefferson County for a $75 million penalty. JP Morgan also agreed to forfeit $647 million in swap termination fees.

“Our securities claims are not against Jefferson County, but against the securities firms that sold our clients these securities,” says Shepherd. “Thus, the amounts not recovered by investors in the settlement are losses we are also seeking for our clients based on misrepresentations and omissions in the sales process.”

Related Web Resources:
Jefferson County officials proposing that creditors accept half of $3.2 billion sewer debt, AL.com, September 26, 2010

Jefferson County, Alabama

Class Auction-Rate Securities Lawsuit Against Raymond James Financial Survives Dismissal

Published on: September 27, 2010 | by Shepherd Smith Edwards & Kantas, LLP

In the U.S. District Court for the Southern District of New York, U.S. District Judge Lewis A. Kaplan has allowed some of the investor claims in the class action auction-rate securities lawsuit against broker-dealer Raymond James Financial Inc. (RJF) and its broker-dealer subsidiary to proceed. This is the first ARS class action case filed since the auction rate securities market failed in 2008 to survive a dismissal motion. The case can now go to the discovery stage.

Kaplan, who had dismissed an earlier lawsuit in this case, let the plaintiffs move forward with their auction-rate securities case on the claim that Raymond James & Associates Inc. (RJA) violated antifraud provisions between November 2007 and February 13, 2008. A claim against RJF was allowed to proceed because of its “operational and management control” of RJA during this time. Other claims were dismissed.

Investors had filed the initial class action in April 2008 against RJA, RJF, and Raymond James Financial Services Inc. (RJFS), another Raymond James broker-dealer subsidiary. The plaintiffs contended that between April 8, 2003 and February 13, 2008, the two subsidiaries told financial advisers that ARS were extremely liquid, short-term investments that could work well for any investor with at least $25,000 and with as little as a week to invest. However, when the auction-rate securities market failed, over $300 million in ARS became illiquid. Per Kaplan, RJA sold $2.3 billion of ARS, underwrote $1.2 billion, and was the auction dealer for over $725 million.

Auction-rate securities cases filed by individual investors have been faring better than class-action ARS lawsuits. Of the class-action and group complaints filed against some 19 underwriters and broker-dealers since the ARS market failed, Bloomberg.com reports that Citigroup, Deutsche Bank AG, and at least six other financial firms have managed to get the lawsuits thrown out by judges ruling that the complaints failed to meet pleading requirements. Some plaintiffs were told to refile their lawsuits and provide more details.

Raymond James Auction Rate Class-Action Fraud Suit Is First to Be Upheld, Bloomberg, September 8, 2010
Court Clears Lawsuit Against Raymond James, FA-Mag.com, September 9, 2010 Continue Reading ›