Financial Firms

Securities Class Action Against Morgan Stanley by Xerox and Kodak Retirees Dismissed by Appeals Court

Published on: July 20, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Second Circuit Court of Appeals in New York has upheld a lower court’s ruling to dismiss that the securities class action filed by Eastman Kodak Co. and Xerox Corp. against Morgan Stanley. The plaintiffs, retirees from both companies, are accusing the broker-dealer of advising them that if they retired early their investments would be enough to support them during retirement. They also claim that the investment bank persuaded them to open accounts that cost them the bulk of their wealth. According to the plaintiffs’ attorney, the retirees gave up job security and employment rights after they were told that if they retired early they could avail of a 10% withdrawal rate from their individual retirement accounts.

However, upon retiring, the retirees that invested lump-sum retirement benefits with Morgan Stanley experienced “disastrous” value declines. Also, they had invested with two Morgan Stanley broker, Michael Kazacos and David Isabella, that were later barred from the securities industry. Last year the broker-dealer settled FINRA charges over the two men’s activities by paying over $7.2 million.

The appeals court says that because of the 1998 Securities Litigation Uniform Standards Act, the plaintiffs are precluded from pursuing class state law claims, including misrepresentation claims. While the statute lets plaintiffs file lawsuits in state court to get around 1995 Private Securities Litigation Reform Act’s securities fraud pleading requirements, federal preemption of class actions claiming “misrepresentations in connection with the purchase or sale of a covered security” are allowed. The three-judge panel also said that because the retirees waited too long to file their securities fraud lawsuit, they cannot raise other federal securities law claims.

Related Web Resources:
Xerox, Kodak retirees lose Morgan Stanley appeal, Reuters, June 29, 2010
Morgan Stanley to Pay More than $7 Million to Resolve FINRA Charges Relating to Misconduct in Early Retirement Investment Promotion, FINRA, March 25, 2009
1998 Securities Litigation Uniform Standards Act, The Library of Congress Continue Reading ›

Goldman Sachs COO Says Investment Firm Shorted 1% of CDOs Mortgage Bonds But Didn’t Bet Against Clients

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

According to Goldman Sachs Group Inc. Chief Operating Operator and President Gary Cohn, the investment firm adamant that the bank did not bet against its own clients. He says that Goldman Sachs purchased protection against a decline in just 1% of mortgage-backed securities it underwrote since late 2006. Former clients, regulators, and members of Congress are accusing Goldman Sachs of designing mortgage-backed securities that would fail and then betting on their failure to purchase credit-default swaps, which pay out when a default occurs.

Cohn testified last month before the Financial Crisis Inquiry Commission. He says that in the wake of the serious allegations, the investment firm has examined the $47 billion in residential mortgage-backed securities (RMBS) and $14.5 billion in collateralized debt obligations (CDOs) that the firm underwrote since firm executives began to feel the need to treat the subprime mortgage market with caution in December 2006. He claims that by the end of June 2007, Goldman Sachs held $2.4 billion of bonds from CDOs and $2.4 billion of bonds from RMBS trusts. The investment bank had protection for approximately 1% of the total underwritten. Nearly 60% of the derivatives and bonds in the CDOs were from other institutions.

The hearing was called to probe the relationship between Goldman and American International Group Inc (AIG). The investment bank had purchased CDO protection from the insurer. Billions of dollars in federal funds had allowed AIG to stay in business even though it was facing bankruptcy and a number of the insurer’s counterparties, including Goldman, are believed to have benefited. Cohn has argued that all market participants benefited from the government’s assistance.

Related Web Resources:
Goldman Sachs Shorted 1% of its Mortgage Bonds, CDOs, Cohn Says, Business Week, June 30, 2010
Goldman’s Cohn: Firm Didn’t Drive Down Mortgage-Asset Marks, Bloomberg.com, June 30, 2010
Financial Crisis Inquiry Commission
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Morgan Stanley Settles Massachusetts Lending Case for $102 Million

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

According to Massachusetts Attorney General Martha Coakley, Morgan Stanley has agreed to pay $102 million to settle allegations that it offered predatory subprime mortgage loan funding in the state. The investment firm filed its assurance of discontinuance in Massachusetts state court, agreeing to pay $19.5 million to the state, $58 million in relief to approximately 1,000 Massachusetts homeowners, $2 million to nonprofit groups that help subprime foreclosure victims, and $23.4 million to a state pension plan and a state trust for investment losses. By agreeing to settle, Morgan Stanley is not admitting to or denying the attorney general’s allegations.

Coakley contends that the investment bank provided subprime lender New Century billions of dollars. The funds were used to target lower-income borrowers to get them into loans they would not be able to pay back. Coakley contends that even though Morgan Stanley “uncovered signals pretty early on” that New Century’s practices “were not sound” and the “bad loans were causing the lender to collapse” the investment bank went forward with funding and securitizing the loans. Coakley also says that Morgan Stanley was aware that New Century repeatedly violated Massachusetts banking standards between 2005 and 2007, used inaccurate and inflated appraisals, and improperly calculate debt-to-ratio from initial “teaser rates.”

The state says that Morgan Stanley packaged the loans and sold them to big investors. The investment bank has been ordered to revise some of its lending practices.

Bank of America/Countrywide, Goldman Sachs, Fremont Investment and Loan, and others have reached similar settlements with the state. The approximately $440 million in settlement money will provide borrowers, investors, homeowners, and the state with relief and recovery.

Related Web Resources:
Morgan Stanley Settles Massachusetts Subprime Loan Probe, ABC News, June 24, 2010
Morgan Stanley to Pay $102 Million in Subprime Accord, Bloomberg Businessweek, June 24, 2010
Massachusetts Attorney General Martha Coakley
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Texas Attorney General Candidate Barbara Ann Radnofsky Says State Should File Securities Fraud Lawsuit Against Wall Street Firms

Published on: June 26, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Barbara Ann Radnofsky, the Democratic candidate for Texas attorney general, says that the state should sue Wall Street firms for securities fraud. Earlier this week, she published a legal brief accusing investment banks of being responsible for the financial crisis. Her Texas securities fraud briefing, which is modeled on the multibillion-dollar tobacco settlements from the 1990’s, is seeking approximately $18 billion in securities fraud damages and other reparations for Texas. She targets Morgan Stanley, Goldman Sachs Group, AIG insurance, and other leading financial firms, banks, and bond-rating agencies.

Radnofsky’s brief is not a securities fraud lawsuit, but it is a framework for one. She hopes that it will push incumbent Texas Attorney General Greg Abbott to take action. She contends that if Abbott fails to sue the firms by September, “he is committing legal malpractice.” She is accusing him of failing to act despite the “clear evidence.”

Radnofsky has noted that the financial meltdown has forced Texas to make cuts to social programs, environmental enforcement, and child protective services. She says the “Great Recession” has lead to child illness, hunger, death, and abuse. She also contends that foreclosures and abandoned homes have severely affected neighborhoods.

LPL Investment Holdings, Inc. IPO Registration Gives Evidence of Disparities Between Wirehouse Broker-Dealers and Independent Brokerage Firms

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

According to InvestmentNews, LPL Investment Holding Inc’s recent IPO registration is clear evidence that the 4 wirehouse brokerage firms still dwarf the approximately 1,200 independent contractor broker-dealers when it comes to controlling client assets. LPL is an independent broker-dealer.

Currently, there are approximately 114,000 independent reps and about 55,000 wirehouse reps. Yet even though there are so many less wirehouse reps, they still are in charge of a larger pool of client assets than their independent counterparts. While wirehouse reps manage $3.95 trillion in client assets, independent reps handle about $1.8 trillion. This means that a wirehouse broker, on average, manages $71.8 million in assets, and independent reps manage about $16 million in assets.

Also, while both wirehouse and independent reps make about 1% in commissions and fees on client assets, wirehouse reps get a 40% average payout of the fees and commissions, while independent reps get about 85%. While the average independent rep makes under $134,000 annually, the average wirehouse rep makes about $287,000 a year.

LPL rep’s earn an average payout of about $155,360. Acquired by two private equity firms in 2005, LLP states in its IPO registration that due to its efficient operating model and scale, its payout to independent contractors far exceeds that of wirehouse firms. InvestmentNews says it is unclear how many of the $1 million plus-producing brokers joined LPL because they wanted the higher payout.

LPL is owned by private equity firms Hellman & Friedman LLC and TPG Capital. The brokerage firm has filed to raise up to $600 million in its IPO.

Related Web Resources:

Does LPL’s filing reveal an unspoken truth about indie B-Ds?, Investment News, June 21, 2010
TPG-Backed LPL Investment Holdings Files for $600 Million IPO, Bloomberg Businessweek, June 4, 2010 Continue Reading ›

FINRA Suspends License of Dallas Broker-Dealer Linked to Failed Medical Capital Notes

Published on: June 18, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Dallas-based securities firm Cullum & Burks Securities Inc. has had its license suspended by the Financial Industry Regulatory Authority Inc. The broker-dealer, which had 1,300 client accounts, 100 affiliated reps, and $150 million in assets, reportedly failed to files its mandatory, quarterly Focus report.

Last November, FINRA said the Texas broker-dealer had violated its net capital requirement because it didn’t have enough capital to stay in business. It was then that Cullum & Burkes raised more capital.

The securities firm was one of three broker-dealers listed as sellers of Medical Provider Funding Corp. V, which is a series of private placements that were created by Medical Capital. Other sellers on the list included Securities America Inc. and First Montauk Securities Corp., which is now defunct.

A Reg D filing with the SEC in 2007 reported that the offering was for $400 million. Medical Capital raised about $2.2 billion in investor funds. Now, over half of the investors’ money has been lost.

Cullum & Burks Securities Inc. is the subject of a class action lawsuit filed over the Medical Capital notes sale. The complaint contends that the notes should have been registered with the Securities and Exchange Commission. However, the securities firm denies that it engaged in broker-misconduct in relation to the sale and sees itself as a victim of any wrongdoing committed by Medical Capital. In 2009, the SEC charged Medical Capital Holdings Inc. with securities fraud related to private placement sales.

Related Web Resources:

Another broker-dealer down: Dallas B-D capsized by MedCap, Investment News, June 16, 2010
FINRA
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Lehman Brothers Lawsuit Claims Its Bankruptcy Was In Part Due to JP Morgan Chase’s Seizure of $8.6 Billion in Cash Reserves

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

The estate of Lehman Brothers Holdings is claiming that JP Morgan Chase abused its position as a clearing firm when it forced Lehman to give up $8.6 billion in cash reserve as collateral. In its securities fraud lawsuit, Lehman contends that if it hadn’t had to give up the money, it could have stayed afloat, or, at the very least, shut down its operations in an orderly manner. Instead, Lehman filed for bankruptcy in September 2008.

JP Morgan was the intermediary between Lehman and its trading partners. Per Lehman’s investment fraud lawsuit, JP Morgan used its insider information to obtain billions of dollars from Lehman through a number of “one sided agreements.” The complaint contends that JP Morgan threatened to stop serving as Lehman’s clearing house unless it offered up more collateral as protection. Lehman says it had to put up the cash because clearing services were the “lifeblood” of its “broker-dealer business.”

JP Morgan’s responsibilities, in relation to Lehman, included providing unsecured and secured intra-day credit advances for the broker-dealer’s clearing activities, acting as Lehman’s primary depositary bank for deposit accounts, and serving in the role of administrative agent and lead arranger of LBHI’s $2 billion unsecured revolving credit facility.

SEC Inquiring About Wisconsin School Districts Failed $200 Million CDO Investments Made Through Stifel Nicolaus and Royal Bank of Canada Subsidiaries

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

According to local new services, the US Securities and Exchange Commission is asking five Wisconsin school districts for additional information about the $200+ million in synthetic collateralized debt obligations that they purchased through Stifel Nicolaus and Royal Bank of Canada subsidiaries in 2006. The CDO’s are now reportedlyworthless.

The districts collectively bought the CDOs with $35 million of their own money and more than $165 million borrowed from Depfa bank. Since then, the entire investment has failed. In March, Depfa noticed default on the district trusts which had been established for the investments and took the $5.6 million in interest that had been earned since the purchase was made.

In their 2008 securities fraud lawsuit against the investment firms, the districts accused the defendants of deceptive practices and fraud. School officials contend that they were misled into investing in CDO’s because of a Stifel product that was supposed to build trusts for post-retirement teacher benefits. They say that they weren’t told that that they could lose their entire investment because of the 4 – 5% default rate among companies within the CDO. They also contend that they were never advised that their investments included sub-prime mortgage debt, credit card receivables, home equity loans, and other risky investments.

J.P.Morgan Securities Ltd. Ordered by UK’s Financial Services Authority to Pay $48.7 M for Breaching Client Money Rules

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

Upon issuing its largest fine ever, the United Kingdom’s Financial Services Authority says it is ordering J.P.Morgan Securities Ltd. to pay $48.7 million for breaching Client Money Rules that are there to make sure that financial organizations properly protect clients’ funds. FSA claims that between November 1, 2002 and July 8, 2009, JPMSL failed to segregate billions of dollars-between $1.96 billion and $23 billion-that belonged to its clients.

PER FSA’s Final Notice on May 25, JPMSL, one of the largest holders of client money in the UK, held its futures and options business’s client in a JPMorgan Chase Bank N.A. unsegregated account. The mistake was a breach of the financial service regulator’s Principle 10 and the Client Money Rules. The rules require that client funds be held in a segregated account overnight.

FSA says that JPMSL’s error would have placed clients at “significant risk” if the investment bank were to ever become insolvent. During the insolvency process, the clients would not have been able to claim from a “pool of protected client money” because they would have been “classed as general unsecured creditors.

FSA says that when determining JMPSL’s penalty, the facts that JMPSL’s misconduct wasn’t intentional and that no clients sustained any financial losses because of the mistake were factored into account.

Related Web Resources:
FSA levies largest ever fine of £33.32m on J.P.Morgan Securities Ltd for client money breaches, FSA.Gov.UK, June 3, 2010
F.S.A. Clamps Down on Client Money Rules, New York Times, June 8, 2010 Continue Reading ›

FINRA Fines Piper Jaffray $700,000 for E-mail Retention Issues and Other Violations

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

The Financial Industry Regulatory Authority is fining Piper Jaffray & Co. $700,000 for violations related to the investment bank’s alleged failure to maintain about 4.3 million emails from November 2002 through December 2008 and for neglecting to tell FINRA about the issues it was having with email retention and retrieval. FINRA contends that this lack of disclosure not only affected Piper Jaffray’s ability to fully comply with the SRO’s email extraction requests, but it also may have impacted the investment bank’s ability to respond to email requests from other regulators, as well as from parties involved in civil arbitration or litigation.

By not disclosing that “it was not making complete production of its emails,” per FINRA Executive Vice President and Acting Director of Enforcement James S. Shorris, Piper Jaffray was “potentially preventing production of crucial evidence of improper conduct…” Shorris said email retention was a “critical regulatory requirement” for broker-dealers.

The broker-dealer was first sanctioned for email retention failure in 2002. Piper Jaffray settled by agreeing to reevaluate its systems and certify that it had set up systems and procedures that were aimed at preserving email communications. Since making that certification in 2003, Piper Jaffray has never indicated that it was experiencing system failures.

It wasn’t until FINRA investigators asked for emails that a former Piper Jaffray employee suspected of misconduct had sent and received that the investment bank’s ongoing email retention deficiencies were discovered. A CD-ROM sent by Piper Jaffray that reportedly had all of the employee’s emails was missing an email that had led to the internal probe. This investigation resulted in the employee’s firing and in FINRA making an enforcement action against the worker.

By agreeing to settle, Piper Jaffray is not admitting to or denying FINRA’s charges.

Related Web Resources:
FINRA Fines Piper Jaffray $700,000 for Email Retention Violations, Related Disclosure, Supervisory and Reporting Violations, FINRA, May 24, 2010
Retention issue: Finra fines Piper Jaffray over e-mail archiving, Investment News, May 25, 2010
Read the Letter of Acceptance (PDF)
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