Financial Firms

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 ›

Illegal High Frequency Trading: Trillium Brokerage Services LLC and 11 individuals agree to settle FINRA Charges for $2.27M

Published on: September 22, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority says that it is fining and censuring Trillium Brokerages LLC and 11 individuals $2.27 million for their involvement in an illegal high frequency trading strategy and supervisory failures. It is the first enforcement action to target this type of improper trading behavior.

FINRA claims that through the traders, Trillium entered a number of layered, non-bona fide market moving orders in more than 46,000 instances to purposely make it appear that there was substantial selling and buying in NASDAQ and NYSE Arca stocks. Because of the high frequency trading, others in the industry submitted orders to execute against those that the Trillium traders had placed. However, after the Trillium traders submitted their orders they would immediately cancel them.

FINRA Market Regulation Executive Vice President Thomas Gira says that Trillium purposely and “improperly baited unsuspecting market participants” into making trades at illegitimate prices and to the advantage of Trillium’s traders. Gira says that FINRA will continue to “aggressively pursue disciplinary action” against those involve in illegal high frequency trading activity that undermines legitimate trades, abusive momentum ignition strategies, and other illegal conduct.

Regarding the FINRA fines, the New York-based broker-dealer has agreed to pay $1 million for using a trading technique involving the placement of a number of nonauthentic orders to make it falsely appear as if there was market activity for specific NASDAQ and NYSE Arca stocks. Trillium also must disgorge $173,000 in illegal profits.

Nine Trillium traders, the brokerage company’s chief compliance officer, and its trading director have agreed to pay a total of $805,500. They have been told to disgorge $292,000. The individuals are temporarily suspended from the securities industry or as principals.

The SEC also is looking into high frequency trading- and “quote stuffing,” which involves the placement and then immediate cancellation of bulk stock orders. The SEC wants to see whether such practices have allowed for improper or fraudulent conduct.

Related Web Resources:
FINRA Investigating Whether Broker-Dealers Providing Adequate Risk Controls to High-Frequency Traders, Institutionalinvestorsecuritiesblog.com, September 19, 2010

FINRA Sanctions Trillium Brokerage Services, LLC, Director of Trading, Chief Compliance Officer, and Nine Traders $2.26 Million for Illicit Equities Trading Strategy, FINRA, September 13, 2010

Trillium Fined by Finra for Illegal Trading Strategy, BusinessWeek, September 13, 2010

Broker-Dealer Can Be Held Liable as Control Person if Ponzi Scammer is a Registered Representative, Says Eight Circuit

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

According to the U.S. Court of Appeals for the Eighth Circuit, under federal securities law a broker-dealer can be liable as a control person if one of its registered representatives is involved in a Ponzi scam even if the scheme was channeled through a separate entity. The court issued its ruling in Lustgraaf v. Behrens last month. In making his decision, Judge Michael J. Melloy reinstated the investors’ control person claims against Sunset Financial Services Inc. and didn’t join the other circuits in making culpable participation by a defendant a requirement in a control-person liability action.

Melloy said that even though the Ponzi scheme didn’t take place through Sunset, the broker-dealer is the one that gave scammer Bryan S. Behrens access to the markets. Melloy says that Sunset had the duty to monitor Behrens’ activities. It was in 2008 that the Securities and Exchange Commission obtained a temporary restraining order against Behrens and National Investments Incorporated. The SEC accused Behrens of raising more than $6 million from some 20 investors through promissory notes. He and National Investments, which he controls, also are accused of falsely claiming that the high percentage of interest payable on the notes would come from the lending of investors’ funds to other people at a high interest rate when actually the assets belonging to newer investors were used to pay off current clients.

A number of the investors sued Behrens, Kansas City Life Insurance Company, and its wholly owned subsidiary Sunset. They argued that the defendants should be held liable for Behrens actions on claims of apparent authority, state and federal control-person liability, and respondeat superior.

In reversing the previous ruling, the court rejected the broker-dealer’s claim that under the 1934 Securities Exchange Act Section 20 no control person liability could come from Behren’s use of National, which is an entity unrelated to Sunset. The court, however, did affirm that the control person claims against Kansas City Life were lacking.

Related Web Resources:
LUSTGRAAF v. Behrens, Court of Appeals, 8th Circuit 2010

1934 Securities Exchange Act Section 20, SEC.gov, (PDF)
Continue Reading ›

Securities Fraud Lawsuit Against Calamos Investments Filed on Behalf of Calamos Convertible Opportunities and Income Fund Shareholders

Published on: September 17, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Calamos Asset Management, Inc., the Calamos Convertible Opportunities and Income Fund (NYSE: CHI), Calamos Advisors LLC, current trustees, and one former Fund trustee are now the defendants of a putative class action securities complaint purportedly submitted on behalf of a class of common fund shareholders. The securities fraud lawsuit is alleging breach of fiduciary duty, the aiding and abetting of that breach, and unjust enrichment related to the redemption of auction rate preferred securities (ARPS) after the ARS market collapsed in 2008.

In the securities fraud lawsuit filed by Christopher Brown, Calamos Holdings LLC founder John Calamos Sr. is accused of allowing the investment firm and its management team to benefit from investors’ losses. Brown’s complaint is a refiling of a lawsuit filed in federal court last July. That complaint was withdrawn earlier this month and the claims resubmitted in state court.

Brown contends that Calamos and others were aware they were breaching their fiduciary duty when they let fund advisers benefit while investors sustained financial losses in the “multiple millions of dollars.” Brown wants all losses restored.

He claims that even as the ARS market failed, a burden was not placed on the Calamos Convertible Opportunities and Income Fund, which held auction market preferred shares. However, in June and August, Calamos managers allegedly redeemed some of the funds’ holdings, which were replaced with debt financing that was “less favorable.” Brown says that because this advanced the interests of the managers, the funds’ investment advisors and affiliates but not the interests of common shareholders, it was a breach of fiduciary duty.

Brown is seeking class-action status for any investors in the fund since March 19, 2008. He wants a judge to prevent Calamos trustees from earning fees from the fund or acting as advisers.

Related Web Resources:
Calamos Investments Statement on ARPS Lawsuit for Convertible Opportunities and Income Fund, Centredaily.com, September 15, 2010
Calamos founder sued by investor who claims bad fund management, Chicago Business, September 14, 2010 Continue Reading ›

Allegations Against Goldman Sachs in $56M Securities Fraud Lawsuit Meet Morrison Standard, Says Australian Hedge Fund

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

Basis Yield Alpha Fund says that its $56 million securities fraud lawsuit against Goldman Sachs Group Inc. should go to trial. The Australian hedge fund contends that its securities complaint, which accuses the investment bank of inflating certain collateralized debt obligations’ value, meet the standard recently articulated by the US Supreme Court in Morrison v. National Australia Bank. Goldman, however, contends that the transactions and securities under dispute do not meet the Morrison standard.

In the Supreme Court’s ruling, The judges limited Section 10(b) of the 1934 Securities Exchange Act’s extraterritorial reach by determining that the law was applicable only to transactions involving securities that took place in the United States or were listed on US exchanges. Following the decision, a district court ordered Goldman and Basis to use Morrison for determining whether there is grounds to drop the case. Goldman submitted its motion to dismiss and noted that the securities in the CDOs were not included on any US exchange list and that the underlying agreements were subject to English law and executed in Australia.

Meantime, Basis is arguing that its case is a “quintessential” securities fraud case involving a US sales transaction. The Australian hedge fund, which invested $42 million in “Timberwolf,” an AAA-rated tranche, and $36 million in an AA-rated tranche of CDOs, maintains that the CDO assembled mortgage-backed securities in Timberwolf came from the subprime real estate market in the US and was a New York sales transaction from beginning to end. The hedge fund was forced into insolvency when after investing in Timberwolf the CDOs value dropped dramatically and the fund sustained over $50 million in losses.

Basis contends that Goldman’s effort to make the transaction an Australian one that is not subject to federal securities laws has no legal or factual basis. It argues that adopting Goldman’s theory would nullify US securities law whenever a US seller committed securities fraud when effecting the sale of a security to a foreign buyer.

Related Web Resources:
Basis Yield Alpha Fund v Goldman Sachs Complaint, Scribd

Timberwolf Lawsuit: Goldman Sachs Sued By Australian Hedge Fund Over ‘Sh–ty Deal, Huffington Post, June 9, 2009

Read the Supreme Court Ruling (PDF)

Goldman Sachs Permanently Exempted from Company Act Disqualification Provision, Says SEC

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

The Securities and Exchange Commission has decided to permanently exempt Goldman & Sachs Co. from a 1940 Investment Company Act provision that would have disqualified the financial firm from serving as a principal underwrite. Goldman and several of its affiliates applied for exemption from ICA Section 9(a) after settling for $550 million SEC securities fraud charges that it made material misrepresentations related to the 2007 structuring and sale of derivative product connected to subprime mortgages.

Under the provision, a person cannot act as a principal underwriter or investment adviser for an investment firm if, due to misconduct, the party in question is enjoined from taking part in any practice or conduct related to the purchase or sale of any security. Goldman, in its application, noted that since the district court had barred it and its affiliates from violating federal securities laws moving forward, the provision would apply to disqualify them from giving advisory services to investment companies.

After granting the broker-dealer a temporary exemption in July, the SEC issued Goldman a permanent one. The SEC noted that the applicants’ behavior did not make it against the “public interest or protection of investors” to grant the permanent exemption.

Regarding the $550 million securities fraud settlement, which is the largest penalty that the SEC has ordered a financial firm to pay, Goldman was accused of misleading investors about a synthetic collateralized debt obligation as the housing market was collapsing. Investors suffered more than $1 billion in financial losses. The brokerage firm admitted that it provided incomplete marketing information for the product and has agreed to reform its business practices.

Related Web Resources:
Investment Company Act of 1940

Goldman Sachs, SEC Reach $550 Million Settlement, PBS News, July 15, 2010 Continue Reading ›

Morgan Stanley, UBS, Wells Fargo, and Merrill Lynch Recruit Other Investment Firms’ Brokers

Published on: September 9, 2010 | by Shepherd Smith Edwards & Kantas, LLP

UBS AG unit UBS Wealth Management Americas recently recruited Bank of America Corp.’s Merrill Lynch financial adviser Nina Hakim to join its Westfield, New Jersey office. Hakim, who reportedly managed $300 million in client assets and generated $1.5 million in commissions and fees, will now report to UBS branch Manager Erik Gaucher.

Another new addition to the UBS team is Morgan Stanley Smith Barney adviser Raymond Schmidtke, who will be based in Seattle, Washington. According to regulatory records, Schmidtke, was employed by Citigroup Inc. for over two decades and stayed at the MS joint venture for a year. He reportedly had close to $100 million in assets under management and $1 million in annual production. He now reports to UBS branch manager Shawn MacFarlan.

In other investment adviser news, a team of now former Wells Fargo Advisors advisers has joined Morgan Stanley Smith Barney. Francis Schiavetti and Ben Dembin’s base will be the Boca Raton, Florida office. The team reportedly manages $107 million in client assets and produces approximately $1.2 million in commissions and annual fees. The two men both were employed by Wells Fargo and predecessor firm Wachovia Securities before joining the Morgan Stanley Smith Barney team.

In August, the Financial Industry Regulatory Authority fined and censured Morgan Stanley $800,000 for not making public disclosures, which is required under the SRO’s rules that oversee research-analyst conflicts of interest. FINRA claims that the financial firm also did not comply with a key 2003 Research Analyst Settlement provision when it failed to disclose independent research availability in customer account statements. Every six months, for the next two years, Morgan Stanley must now review a sample of its research reports and certify that they are in compliance with FINRA’s rules.

Related Web Resources:
Hires Merrill Lynch, Morgan Stanley Brokers, Fox Business, August 24, 2010
Morgan Stanley Adds Team From Wells Fargo, Faces FINRA Fine, Investment Advisor, August 24, 2010
FINRA Fines Morgan Stanley $800,000 for Deficient Conflict of Interest Disclosures in Equity Research Reports and Public Appearances by Research Analysts, FINRA, August 10, 2010 Continue Reading ›