Financial Firms

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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Wells Fargo to Pay $30M in Compensatory Damages to Four Nonprofits for Securities Fraud

Published on: June 3, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A jury has ordered Wells Fargo to pay four Minnesota nonprofits $30 million in securities fraud damages. The Minnesota Medical Foundation, the Minneapolis Foundation, the Minnesota Workers’ Compensation Reinsurance Association, and the Robins, Kaplan, Miller & Ciresi Foundation for Children had accused the investment bank of investing their funds in high risk securities and then failing to disclose until it was too late that the investments were going down in value. The same jury has yet to decide the issue of punitive damages
The jury found that Wells Fargo violated the Minnesota Consumer Fraud Act and breached its fiduciary duty to the nonprofits. In the investment program that the Minnesota nonprofits participated in, Wells Fargo would hold its clients’ securities in custodial accounts and use the money to issue temporary loans to brokerage firms for their trading activities. Each brokerage firm posted collateral of at least 102% the worth of the borrowed securities’ value.

While the investment bank had promised that the nonprofits money would be placed in liquid, safe investments, the plaintiffs contend that Wells Fargo put their money in high-risk securities, including asset-backed and mortgage-backed securities. They say that even as the collateral investments’ value became less stable in 2007, the investment bank continued to place more of the nonprofits’ securities out on loan. The nonprofits also claim that when two of the SIV’s went into receivership and they asked Wells Fargo to either redeem their interests or return the securities, the investment bank refused to do so until the collateral investments were sold and the nonprofits made up a shortfall in value.

While the nonprofits are asking for over $400 million in damages, Wells Fargo’s lawyers argue that the actual damages to the plaintiffs was just $14.3 million. According to the bank, “the investments made by Wells Fargo on behalf of our clients in the securities lending program were in accordance with investment guidelines and were prudent and suitable at the time of purchase.” Apparently ignoring the claim or puntive damages, the investment bank says it is pleased that the plaintiffs were denied the full amount of damages they had sought. Wells Fargo continues to maintain that it didn’t invest in high-risk securities and that the nonprofits had the choice to get out of the investments if they were willing to pay 102% of the collateral.

Related Web Resources:
Wells Fargo ordered to pay $30 million for fraud, MRNewsQ, June 3, 2010
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Citigroup to Pay $1.5 M for Supervisory Violations Related to Broker’s Handling of Trust Funds

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

According to the Financial Industry Regulatory Authority, Citigroup Global Markets Inc. has consented to pay $1.5 million in disgorgement and fines for failing to properly supervise broker Mark Singer and his handling of trust funds belonging to two cemeteries. By agreeing to settle, Citigroup is not denying or admitting to the charges. Also, the disgorgement amount of $750,000 will be given back to the cemetery trusts as partial restitution.

FINRA says that from September 2004 and October 2006, Singer and his clients Craig Bush and Clayton Smith were engaged in securities fraud. Their scheme involved misappropriating some $60 million from cemetery trust funds. Bush and Smart were the successive owners of the group of cemeteries in Michigan that the funds are believed to have been stolen from. Smart bought the cemeteries from Bush in August 2004 using trust funds that were improperly transferred from the cemeteries to a company that Smart owned.

When Singer went to work for Citigroup as a branch manager in September 2004, he brought Bush’s cemetery trust accounts with him. FINRA says that Singer then helped Smart and Bush open a number of Citigroup accounts in their names and in the names of corporate entities that the two men controlled or owned. The broker also helped them deposit cemetery trust funds into some of the accounts, as well as effect improper transfers to third parties. Some of the fund transfers were disguised as fictitious investments made for the cemeteries.

FINRA says that Citigroup failed to properly supervise Singer when it did not respond to “red flags” and that this lack of action allowed the investment scheme to continue until October 2006. As early as September 2004, Singer’s previous employer warned Citigroup of irregular fund movements involving the Michigan cemetery trusts. Within a few months, Citigroup management also noticed the unusual activity.

Citigroup failed to “conduct an adequate inquiry” even after finding out in February 2005 that Smart may have been making misrepresentations about his acquisition of hedge fund investments that belonged to the Michigan cemetery trusts and had used the hedge funds as collateral for a $24 million credit line. Although the investment bank had received a whistleblower letter in May 2006 accusing Singer of broker misconduct related to his handling of the cemetery trusts, it still failed to restrict Singer’s activities or more strictly supervise him.

Related Web Resources:
Citi Sanctioned $1.5M By Finra In Supervisory Lapse, The Wall Street Journal, May 26, 2010
Stealing from the dead, CNN Money, August 13, 2007 Continue Reading ›

Deutsche Bank Securities & National Financial Services Fined $925,000 for Regulation SHO Short Sale Restrictions & Supervisory Violations

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

The Financial Industry Regulatory Authority says that Deutsche Bank Securities and National Financial Services LLC have consented to be fined $925,000 in total for supervisory violations, as well as Regulation SHO short sale restrictions violations. By agreeing to settle, the broker-dealers are not denying or admitting to the charges.

FINRA claims that the two investment firms used Direct Market Access order sytems to facilitate client execution of short sales and that they violated the Reg SHO “locate” requirement, which the Securities and Exchange Commission adopted in 2004 to discourage “naked” short selling. FINRA says that while the two broker-dealers put into effect DMA trading systems that were supposed to block short sale order executions unless a locate was documented, the two investment banks submitted short sale orders that lacked evidence of these locates.

FINRA says that during the occasional outages in Deutsche Bank’s systems, short sale orders were automatically rejected even though a valid documented locate had been obtained. This is when the the investment bank would disable the automatic block in its system, which allowed client short sales to automatically go through without first confirming that there were associated locates.

As for NFS, FINRA contends that the investment bank set up a separate locate request and approval process for 12 prime clients that preferred to get locates in multiple securities prior to the start of trading day. With this separate system, the requests and approvals for the numerous locates did not have to be submitted through the firm’s stock loan system at approval time. Instead, the clients could enter and execute orders through automated platforms that lacked the capacity to automatically block short sale order executions that didn’t have proper, documented locates.