Financial Firms

FINRA Fines H & R Block Financial Advisors (Now Ameriprise Advisor Services) over Sales of Reverse Convertible Notes (RCN)

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

The Financial Industry Regulatory Authority (FINRA) has fined H&R Block Financial Advisors (now Ameriprise Advisor Services) $200,000 for failing to put in place the proper system to supervise its reverse convertible notes (RCN) sales to retail clients. FINRA also suspended H & R broker Andrew MacGill for 15 days while ordering him to pay a $10,000 fine and $2,023 in disgorgement for making unsuitable RNC sales to a retired couple. MacGill recommended that they invest close to 40% of their total liquid net worth in RCNs. Meantime, H & R Block has been ordered to pay the couple $75,000 in restitution for their financial losses. Without denying or admitting to the charges, the brokerage firm and MacGill consented to the finding’s entry.

According to FINRA, between January 2004 and December 2007, H&R Block sold RCNs without a system of procedures in place to properly monitor whether possible over-concentrations in RCNs were taking place in customer accounts. FINRA says that the brokerage firm relied on an automated surveillance system to monitor client accounts and review securities transactions for unsuitability but that the system was not set up to monitor RCN placement in customer accounts or RCN transactions. This caused H & R Block to miss signs of when there were potentially unsuitable levels of RCN in client accounts. Furthermore, FINRA says that the firm failed to provide guidance to its supervisors regarding the assessment of suitability standards related to their agents’ recommendation of RCNs to the firm’s clients.

This is FINRA’s first enforcement action over RCN sales.

Bank of America To Settle SEC Charges Regarding Merrill Lynch Acquisition Proxy-Related Disclosures for $150 Million

Published on: February 15, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Bank of America Corp. (BAC) has agreed to pay $150 million, in addition to $1 million in disgorgement, to settle the Securities and Exchange Commission’s charges over the investment bank’s proxy-related disclosures regarding the Merrill Lynch acquisition. U.S. District Judge Jed S. Rakoff said he hopes to decide by February 19 on whether to approve the settlement. He also said he has more questions regarding the deal.

If approved, the settlement would conclude two SEC securities lawsuits against Bank of America over the Merrill Lynch merger. One complaint involves the investment bank’s alleged failure to reveal, prior to a 2008 shareholder meeting to vote on the acquisition, that financial losses were in the billions and rising at Merrill. The second lawsuit is over what the bank did and did not disclose about the billions of dollars in bonuses paid to Merrill Lynch employees right before the $50 billion merger was completed.

Under the proposed SEC settlement, the $150 million would go to Bank of America shareholders who suffered financial losses because of the investment bank’s alleged disclosure violations. Also, for three years BofA would have to maintain and implement a number of remedial measures, including hiring an independent auditor to look at its internal disclosure controls, hiring a disclosure counsel to work on bank disclosures, making sure that BofA’s chief financial officers and chief executive certify yearly and merger proxy statements, and allowing shareholders to have an advisory say-on-pay vote regarding executive compensation.

Earlier this month, New York Attorney General Andrew Cuomo filed a separate securities fraud lawsuit against Kenneth D. Lewis, who formerly served as BofA’s chief executive, Joe Price, the bank’s former chief financial officer, and Bank of America for allegedly concealing Merrill Lynch’s losses. The complaint alleges that BofA general counsel Timothy Mayopoulos was let go because he wanted to disclose the losses at Merrill Lynch before the deal was finalized.

Related Web Resources:
Bank of America Still Dealing With Fallout From Merrill Deal, Fox Business, February 5, 2010
Cuomo Sues Bank of America, Even as It Settles With S.E.C., NY Times, February 4, 2010
US judge has questions on $150 mln SEC-BofA accord, Reuters, February 16, 2010 Continue Reading ›

FINRA to Assess Amerivet Securities Inc. Allegations that Certain SRO Executives Received Excessive Pay in 2008

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

At a closed-door meeting scheduled for February 10, the Financial Industry Regulatory Authority board of governors will preside over a closed-door meeting to assess allegations made by Amerivet Securities Inc. that certain FINRA executives, including chief executive Mary Schapiro, received excessive pay. The brokerage firm submitted a letter to the board last year demanding that action be taken to recover this compensation, as well as the SRO’s unprecedented portfolio losses” in 2008.

A release, filed by Amerivet’s securities litigation lawyers, alleged that in 2008, under Shapiro’s leadership, FINRA failed to warn investors about auction-rate securities risks, paid senior FINRA executives close to $30 million, failed to discover that R. Allen Stanford and Bernard Madoff were engaged in Ponzi scams, and sustained close to $700 million in losses.

FINRA Executives’ Pay

Schapiro was paid $3.3 million in bonuses and salaries in 2008. Per her accumulated retirement plan benefits, She also received approximately $7.2 million.

Another 12 current and ex-FINRA executives made over $1 million in 2008, including ex-chief administrative officer Michael D. Jones, who received $4.3 million in severance, compensation, and accumulated benefits after over 10 years at the SRO. Elisse Walters, now with the SEC, was paid $3.8 million ($2.4 million was supplemental retirement benefits), and Douglas Schulman, now with the IRS, was paid $2.7 million in salary, retirement benefits, and bonuses after over eight years of service.

FINRA has called Amerivet’s statements “part of an ongoing publicity campaign” involving a counsel and a party who have been in “litigation with FINRA.”

Related Web Resources:
Finra execs overpaid? The board wants to know, Investment News, February 20, 2010
FINRA

FINRA Board of Governors
Continue Reading ›

Claims Filed Against Morgan Keegan Division of Regions Financial Causes Shortage of Arbitrators

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

The Financial Industry Regulatory Authority has had to bring in hundreds of additional arbitrators to deal with the approximately 400 securities fraud claims that investors have filed against Regions Financial Corp., the investment banking unit of Morgan Keegan & Co. Investors are seeking to recover $35 million after three of its mutual funds dropped in value by up to 82% when the housing market fell apart. The Region Financial Corp mutual funds contained subprime-related securities, including collateralized debt obligations, low-quality mortgages, and mortgage-backed securities.

Morgan Keegan claims that it notified investors of the risks associated with investing in the mutual funds. Regions says that to date, 79 arbitration cases have been heard. 39 of the cases were dismissed and 114 arbitration claims seeking $24 million were dropped before decisions were reached. The investment firm is putting up a tough fight against the complaints. So far, arbitrators have been awarded $7.6 million.

Because so many investors filed arbitration claims, FINRA has had to contact arbitrators in different parts of the US and ask them to come to the different cities where the hearings on the mutual funds are talking place. The average pool of arbitrators in each city is now approximately 721 persons. This is an increase from its previous average pool of 87 arbitrators.

Former JPMorgan Bankers Sued by SEC Over Swap Transactions Want Judge to Dismiss Securities Fraud Charges

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

Two ex- JPMorgan Chase & Co. bankers that the Securities and Exchange Commission is suing over their alleged involvement in certain swap transactions are asking the U.S. District Court for the Northern District of Alabama to throw out most of the securities fraud charges that the regulator agency has filed against them. According to the SEC, Douglas MacFaddin and Charles LeCroy paid close friends of county commissions and broker-dealers over $8 million in undisclosed payments to make sure that JPMorgan would be chosen as the bond offerings underwriter and its affiliated bank would be selected as swap provider so that both entities could make $5 billion in underwriting and interest rate swap agreement business.

The swaps involve three Jefferson County bond transactions that took place in 2002 and 2003 and are at least partly linked to the Securities Industry and Financial Markets Association’s municipal swap index. The SEC says this index is securities-based because it is derived from variable-rate demand notes. MacFaddin and LeCroy’s lawyers, however, say that the SIFMA swap index is a rate index, which therefall places the swaps outside the agency’s antifraud jurisdiction. The defendants want the case dismissed.

The ex-JPMorgan bankers’ lawyers claim the undisclosed fees were connected to the swap transactions and that the investment bank was not obligated to disclose them. The defendants’ motions argue that the SEC’s failure to cite an instance in which the two men committed securities fraud is another reason the charges should be thrown out.

To resolve SEC administrative charges over its alleged part in the alleged securities scam, J.P. Morgan Securities Inc. consented to pay $75 M and forfeit $647 M in termination fees.

Related Web Resources:
Ex-JPM Bankers Seek End to Swap Charges, Onwallstreet.com, January 21, 2010
Read the SEC Complaint (PDF)
Continue Reading ›

SEC Warns that Disclosure of a “Possible Risk” is Misleading When the Event has Already Occurred

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

According to the US Securities and Exchange Commission, the Private Securities Litigation Reform Act’s safe harbor as it applies to certain forward-looking statements isn’t triggered by cautionary remarks made by defendants over the impact of “potential deterioration in the high-yield sector” if, per the plaintiffs’ claim, the defendants knew the deterioration was taking place. The SEC made its comments in an amicus curiae brief to the U.S. Court of Appeals for the Second Circuit.

The case is Slayton v. American Express Co. The class securities fraud action alleges that the defendant engaged in faulty disclosures related to losses in its high-yield investment portfolio. A district court dismissed the complaint over failure to plead scienter. The plaintiffs appealed the case, and the Second Circuit heard oral argument lat October.

The SEC’s statements address the application of the statutory safe harbor to specific statements that Amex made in its May 2001 Form 10-Q’s Management’s Discussion and Analysis section. Amex stated that the $182 million in high-yield losses was a reflection of it high-yield portfolio’s ongoing deterioration. Amex also stated that total investment losses for the rest of 2001 were expected to be significantly lower than losses sustained during the first quarter.

The parties disagreed about whether the cautionary language that Amex used was “meaningful” enough for the purposes of safe harbor.

According to the SEC, forward-looking statements in the MD & A, which isn’t part of a financial statement that abides by generally accepted accounting principals, doesn’t fall within the statutory exclusion for these kinds of statements. It also noted that Amex’s statement about the “potential deterioration in the high-yield sector” wasn’t enough for safe-harbor purposes because the defendants were warning about a possible deterioration that they knew was already happening. The SEC says that “It is misleading and therefore insufficient for a company to warn of a  potentiality that it is aware currently exists.” Also, “If the speaker knows that any of the implied representations is false,  then the speaker knows that the statement is misleading.”

Misstatements and omissions by an investment adviser, a broker, or an investment firm, can be grounds for a securities fraud claim or lawsuit if financial losses were sustained by others.

Related Web Resources:
Read the SEC’amicus curiae brief (PDF)

Private Securities Litigation Reform Act, Lectlaw Continue Reading ›

Judge Gives Lower Sentence to Former Credit Suisse Broker Convicted of Auction-Rate Securities Fraud

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

Eric Butler, a former Credit Suisse Group AG broker, has been sentenced to five years in prison for securities fraud. A jury found the ex-stockbroker guilty of misleading clients into thinking that they were buying student loan-backed, low-risk auction-rate securities when they were actually buying ARS that were high-risk and backed by home mortgage assets. He modified the trade confirmations to conceal this discrepancy. His securities fraud scam collapsed when the ARS market did, but not before investors sustained $1.1 billion in losses.

The government asked that Butler be ordered to serve a 45-year prison sentence pay stiff penalties. However, U.S. District Court Judge Jack Weinstein sentenced him to just five years, imposed a $5 million fine, and ordered that he forfeit $500,000.

Following the guilty verdict, Weinstein expressed concern about placing all of the blame on Butler. He said that he gave the ex-Credit Suisse broker a reduced sentence because the financial services industry has a “pernicious and pervasive” corrupt culture.

Troubled GunnAllen Securities to be Acquired by Progressive Asset Management as Lawyers for Investors Investigate the Sale.

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

After undergoing major litigation costs, GunnAllen Financial Inc. has agreed to be acquired by Progressive Asset Management Inc., which already controls a smaller broker-dealer. Progressive claims to be a “socially conscious” investment firm.

The combination of the firms would appear to create a broker-dealer with about 1,000 independent advisors and brokers in more than 200 offices nationwide. If so, the resulting firm would be ranked in the 30 largest independent broker-dealers, according to information available from InvestmentNews.

The terms of the acquisition have not been disclosed, according to David Levine, executive vice president of Progressive, who also did not specify whether his firm would be acquiring GunnAllen’s broker-dealer firm or only its advisers and assets. Often buyers of troubled securities firms seek to buy only the assets leaving behind creditors with little or nothing, including former clients of the firm who have ongoing suits and claims.

Former Evergreen Investment Adviser Settles SEC Insider Trading Charges Involving Ultra Short Opportunities Fund

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

Charles Marquardt, Evergreen Investment Management Co. LLC’s former chief administrator, has settled charges filed by the US Securities and Exchange Commission that he sold Evergreen Ultra Short Opportunities Fund shares after obtaining insider information that a number of the MBS holdings were going to drop down in value. Marquardt worked for Evergreen at the time he allegedly engaged in insider trading and served as the Evergreen Ultra Short Opportunities Fund’s investment adviser. The mutual fund mostly invested in mortgage-backed securities.

On June 11, 2008, he allegedly found out about the likely decrease in value of several of its MBS holdings and that there was a possibility that the Ultra Fund could end up shutting down. Marquardt is accused of having redeemed all of his shares the following day. One of his family members also sold Ultra Fund shares. Marquardt and his relative avoided incurring $4,803 and $14,304 in financial losses, respectively. The fund was liquidated on June 19 of that year.

To settle the charges against him, the investment adviser has agreed to a bar from future violations, as well as to a two-year industry bar. He will pay a $19,107 civil penalty, $1,242 in prejudgment interest, and $19,107 in disgorgement. By settling, Marquardt is not admitting to or denying wrongdoing.

Former Southwest Securities Broker’s Lifetime Industry Bar for Texas Securities Fraud is Affirmed, Says Appeals Court

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

The U.S. Court of Appeals for the Fifth Circuit has affirmed the Securities and Exchange Commission’s lifetime bar against a former Southwest Securities Inc. stockbroker. Scott Gann, who allegedly committed Texas securities fraud, is no longer allowed to associate with dealers, investment advisers, and brokers.

The SEC imposed the permanent bar against Gann because of his alleged involvement in a mutual fund market timing scheme. The appeals court says that the SEC’s ruling is not an abuse of discretion and is supported by the record.

Gann and George Fasciano, also a former Southwest Securities broker, are accused of engaging in market timing trades for Haidar Capital Management and Capital Advisor. They allegedly got around the rules of some of the mutual funds that prohibit market timing by using multiple representatives and account numbers. Despite receiving 69 block notices from 34 mutual funds, their strategy allowed them to continue executing market timing trades.

The SEC filed an enforcement action in federal district court accusing the two men of violating the 1934 Securities Exchange Act Section 10(b). Fasciano settled before the case went to trial.

The district court held that Gann was in violation of Section 10(b). An SEC administrative law judge then entered a permanent associational bar against the ex-Southwest Securities broker. The SEC affirmed the bar, as did the appeals court.

The appeals court also noted that as Gann is convinced he did not engage in any wrongdoing even though the SEC and two courts found that Gann acted wrongfully-there is no guarantee he won’t commit future violations.

Related Web Resources:
Gann v. SEC, SEC.gov (PDF)

1934 Securities Exchange Act, Cornell University Law School Continue Reading ›