Financial Firms

Market Timing Violations Against AG Edwards & Sons Inc. Supervisors and Broker Upheld by the SEC

Published on: October 17, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission is upholding the market timing violations against two AG Edwards and Sons Inc. supervisors and one of its stockbrokers. Billions of dollars were involved in the mutual fund market timing transactions.

While market timing, which involves the buying and selling of mutual fund shares in a manner that takes advantage of price inefficiencies, is not illegal, a violation of 1934 Securities Exchange Act Section 10(b) and Rule 10b-5. can arise when there is intent to deceive.

Last year, the ALJ found that AG Edwards and Sons brokers Charles Sacco and Thomas Bridge intentionally violated antifraud provisions when they engaged in market timing activities even though they had been restricted from doing so. The ALJ also found that supervisors Jeffrey Robles and James Edge failed to properly supervise the stockbrokers.

The antifraud charges filed against Bridge by the SEC Enforcement Division involved 1,352 trades (representing $1.126 billion) he executed over a two-year period for companies belonging to client Martin Oliner. The Enforcement Division accused Sacco of entering 25,533 market timing trades (representing $4.036 billion) for two hedge fund clients between 5/02 – 9/03.

The SEC determined that Edge, who was Bridge’s supervisor, knew and was complicit in the latter’s actions. Although Robles was not considered to have been complicit in Sacco’s alleged broker fraud, the commission said he should have noticed there were problems.

The SEC ordered Bridge to cease and desist from future violations. He is also barred from associating with any dealers or brokers for five years. Sacco has already settled his broker-fraud case.

Edge is barred from acting in a supervisory role over any dealer or broker for five years. Robles received a similar bar lasting three years. All three men were ordered to pay penalties, while Bridge was ordered to disgorge almost $39,000 plus $16,665.57 in prejudgment interest.

Related Web Resources:
Read the SEC’s Opinion regarding this matter

Commission Sanctions Thomas C. Bridge for Violations of the Antifraud Provisions of the Securities Laws and James D. Edge and Jeffrey K. Robles for Failing to Supervise Reasonably, Trading Markets, September 29, 2009 Continue Reading ›

SEC Warns Charles Schwab Corp. of Possible Civil Charges Over Two Bond Funds

Published on: October 15, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Charles Schwab Corp. has received a Wells notice from the Securities and Exchange Commission about possible civil charges related to the discount brokerage’s Schwab Total Bond Market Fund and Schwab YieldPlus Fund. Schwab has been the target of regulatory investigations over the two funds and is a defendant in a number of civil lawsuits.

SEC staff members plan on recommending civil charges against a number of Schwab affiliates over possible securities violations. The Wells notice is not a finding of wrongdoing or a formal allegation. It does, however, give Schwab an opportunity to respond before the SEC makes a decision on whether to move forward with an enforcement action. The discount brokerage says the possible charges are unwarranted.

In San Francisco, Schwab is defending itself against a class-action fraud lawsuit in federal district court. YieldPlus fund investors are accusing the brokerage firm of failing to fully disclose the risks connected with some securities in the Schwab funds.

Notice: Schwab YieldPlus Investors Must Act Quickly To File Independent Claims For Losses

Published on: October 13, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Investors who invested into YieldPlus Funds issued by the Charles Schwab Corp. must take immediate action to avoid being limited in recovery to the amount obtained through a class action suit. Many with significant losses have been advised by attorneys to seek individual recovery in Securities Arbitration through the Financial Industry Regulatory Authority (FINRA). Those with smaller losses are being advised to remain in the class action.

Most investors who seek recovery of investment losses through private claims receive a greater portion of their losses than those who remain in class actions, even after paying expenses including legal fees. In some cases investors can recover many times the amount paid through class action settlements.

To file a private claim a YieldPlus investor must “opt out” of the class on or before December 28, 2009. This requires the investor to provide a written statement requesting exclusion from the Schwab YieldPlus class-action lawsuit, sign and date the request, include their mailing address and mail this information by the due date. It is highly recommended that this be done earlier than that date and on a form provided by the Administrator. Any flaw in the process can result in a failure to be eligible to proceed.

Citigroup ordered to pay $600,000 FINRA fine for inadequate supervision that may have allowed foreign clients to avoid paying taxes on dividends

Published on: October 12, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup, Inc. has agreed to pay a $600,000 Financial Industry Regulatory Authority fine to settle claims that its alleged inadequate supervision of certain derivative transactions between 2002 and 2005 allowed a number of foreign clients to avoid paying taxes on dividends.

The way this allegedly worked is that during a period of dividend payments, the customer would sell stock to Citigroup. The bank would pay the client an income equal to the dividend. It would also pay any share price increase.

FINRA is accusing Citigroup of failing to control trades and failing to prevent improper trades, both internally and with trading partners. The dividend equivalent that certain foreign Citigroup clients obtained was not considered subject to withholding taxes. Citigroup’s strategy was allegedly intended to lower its tax bill.

Former Merrill Lynch Employee, Guilty of $1.4 Million Texas Securities Fraud Scheme, Receives Prison Term

Published on: October 5, 2009 | by Shepherd Smith Edwards & Kantas, LLP

A judge has ordered a former Merrill Lynch employee, San Antonio stockbroker Bruce E. Hammonds, to serve almost five years in prison and three years supervised release for Texas securities fraud. Bruce E. Hammonds also must pay $1.1 million in restitution to the Merrill Lynch investors he defrauded and almost $60,000 to two clients that he continued to defraud after the broker-dealer fired him in June 2008.

Hammonds reportedly did not deny the alleged fraud when Merrill Lynch confronted him about his activities. The broker-dealer has paid the investment fraud victims back in full.

According to the criminal complaint affidavit, Hammonds opened a working capital account under the name B & J Partnership.He was supposed to register the account in an internal monitoring system, which he never did. Instead of placing investors’ funds in a Merrill Lynch fund, he deposited $1.4 million of their money in his working capital account. He provided clients with charts demonstrating the performance of the B&J Partnership investment fund even though no such fund existed.

Hammonds pleaded guilty to federal securities fraud charges earlier this year after an investigation found that between August 2006 and October 2008, Hammonds didn’t invest clients’ funds in stocks and hedge funds. Instead, he used the money for personal purposes, including an alleged house-flipping business. He gave back $486,000 to clients so it would appear as if they had made money off their investments.

Related Web Resources:
Judge sends ex-stockbroker to jail for bilking investors, Business Journal, October 2, 2009
Stockbroker sent to prison for $1.4 million scheme, My San Antonio, October 3, 2009 Continue Reading ›

Colorado Sues Stifel, Nicolaus for Misrepresenting Auction-Rate Securities to Investors

Published on: October 3, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The Colorado Securities Division is suing Stifel, Nicolaus & Co. for securities fraud. State regulators are accusing the broker-dealer of making false assurances to investors about auction-rate securities.

In its Colorado securities fraud complaint, the securities division accused Stifel Nifel, Nicolaus of violating the Colorado Securities Act by allowing investors to think that their ARS-investments would always be liquid, failing to properly supervise sales team members, and making unsuitable investment recommendations to clients.

The Division claims that Stifel, in the role of underwriter, knew that there were liquidity risks linked to ARS but never let its sales force know about them. Stifel brokers allegedly compared ARS to money market funds on a regular basis and sold them as if they were appropriate for cash management purposes. Investors were told they would always be able to access their funds as if it were cash. However, when the ARS market collapsed in February 2008, the Colorado investors that purchased auction-rate securities were unable to get their funds or sell their bonds.

Indiana Accuses Stifel Nicolaus & Co. of Auction Rate Securities Fraud

Published on: October 1, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The Indiana Secretary of State’s Office filed an administrative complaint today accusing Stifel Nicolaus & Co.’s local office of securities fraud, failing to properly train members of its sales team, and failing to disclose risks associated with purchasing auction-rate securities. As a result, some 141 Hoosiers who had invested $54.0 million sustained losses when the ARS market fell apart last year and their securities were frozen.

92 of the ARS investors who were affected were Jeffrey Cohen’s clients. Cohen is the local Stifel office’s managing director. His clients had invested $45 million.

For violating the Indiana Securities Act, the broker-dealer could be ordered to pay a $10,000 fine/violation, as well as restitution to the securities fraud victims. Other states, including Colorado and Missouri, have made similar charges against Stifel Nicolaus.

Colorado’s securities regulator also filed its auction-rate securities complaint against Stifel Nicolaus today alleging that the broker-dealer failed to fully inform local investors about ARS risks. The securities fraud lawsuit also accuses the broker-dealer of violating the Colorado Securities Act, misrepresenting ARS as short-term investments that were liquid, and providing clients with unsuitable recommendations.

Missouri’s complaint, filed in March by Secretary of State Robin Carnahan, claims that over 1,200 investors suffered losses when ARS worth $180 million were frozen.

Auction-Rate Securities
Many investors throughout the US were shocked to discover that the ARS they had purchased were not, as broker-dealers had told them, investments that were liquid like cash. Our stockbroker fraud law firm continues to work diligently with many ARS clients to recover their investments.

Related Web Resources:
Local Stifel office accused of securities fraud, IBJ, October 1, 2009
Colorado charges Stifel unit with ARS sales fraud, Reuters, October 1, 2009
Continue Reading ›

UBS Securities, Citigroup Global Markets, and Deutsche Bank Securities Agree to FINRA Sanction Over Vonage IPO

Published on: September 28, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup Global Markets, Deutsche Bank Securities, and UBS Securities have agreed to pay fines for Financial Industry Regulatory Authority sanctions over their handling of Vonage LLC stock’s initial public offering in 2006. FINRA says that the firms’ failure to adequately supervise communications with customers cost investors hundreds of thousands of dollars. By agreeing to settle, none of the broker-dealers are agreeing to or denying wrongdoing.

The three firms acted as the Vonage offering’s lead underwriters. A “directed share program” was included. Clients used accounts with the broker-dealers to purchase about 4.2 million shares.

An external company designed and administered a Web site for DSP participants that the firms’ clients used to communicate about the IPO. According to the SRO, however, inadequate supervision and the failure to follow procedures regarding outside sourcing and directed share programs resulted in the broker-dealers being unable to respond appropriately or take effective action when certain clients obtained misinformation about their orders.

By the time customers were finally notified that shares were allocated to them, the Vonage stock price had dropped significantly compared to the offering price. In addition to paying the higher price, investors sustained financial losses when the stocks were sold.

UBS, Citigroup, and Deutsche Bank have agreed to fines totaling $845,000. UBS will pay a $150,000 fine and a maximum of $118,000 to 26 clients who are potentially eligible. In addition to its $175,000 fine, Citigroup will pay 284 potentially eligible customers a maximum of $250,000. Deutsche Bank will pay 59 potentially eligible clients a maximum of $52,000, plus its $100,000. Customers are to be compensated the difference between Vonage stock’s price when clients found out they had been allocated shares and the $17/share IPO price that they paid.

Related Web Resources:
FINRA Fines Citigroup Global Markets, UBS and Deutsche Bank $425,000, Orders Customer Restitution for Supervisory Failures in Vonage IPO, FINRA, September 22, 2009
Citi, UBS, Deutsche Fined Over Vonage IPO
Continue Reading ›

Regions Bank Settles SEC Charges Over Latin American Investment Fraud Scam

Published on: September 24, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Regions Bank has agreed to a $1 million fine to settle SEC allegations that it helped defraud some 14,000 investors. Most of the affected investors are based in Latin America.

According to the SEC, Regions Bank helped two unregistered broker-dealers, U.S. College Trust Corp. and U.S. Pension Trust Corp., commit securities fraud against Latin American investors.

Beginning October 2001, Regions Bank played the role of “trustee” to the broker-dealers’ investment plans. It continued to accept USPT clients until January 2008. The SEC contends that this affiliation with a US bank gave the securities fraud scheme an aura of “legitimacy” and became a big draw for Latin American investors.

The SEC says that by taking on the role of trustee, Regions Bank formed individual trust relationships with investors, processed client contributions, and bought mutual funds on their behalf.

Investor had the option of paying one lump sum or making yearly contributions. Investors were not notified until March 2006 that USPT deducted substantial chunks of investors’ contributions-up to 85% of initial contributions made by investors who took part in an annual plan and up to 18% of single contributions-and used the money to pay for commissions and other fees.

The SEC says that Regions Bank either knew or should have known about USPT’s deceptive sales practices. The Commission is accusing Regions Bank of dispatching representatives to Latin America to meet prospective investors and allowing USPT to use the bank’s name in marketing and promotional materials.

The $1 million penalty will be placed in a Fair Fund to compensate investment fraud victims. Regions bank has also agreed to a cease-and-desist order.

SEC charges Regions Bank for role in Latin American fraud scheme, Investment News, September 21, 2009
Read the SEC Complaint (PDF)
Continue Reading ›

Bank of America’s Merrill Lynch unit agrees to $26.5 million national settlement stemming from Texas securities fraud claim

Published on: September 22, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Following a Texas securities fraud claim that Bank of America‘s Merrill Lynch, Pierce, Fenner & Smith Inc. allowed unregistered sales persons to sell securities, the Bank of America unit has agreed to pay $26.5 million as part of a national settlement over the allegations. The state of Texas’s portion of the settlement is $1.6 million. The other states that were part of the task force, led by the Texas State Securities Board, are Arizona, Colorado, Vermont, Missouri, Delaware, and New Hampshire.

Client associates who accept trade orders must be registered not just in their own state but also in the client’s state. Per the probe, the task force determined that Merrill did not have a supervisory system that was designed in a manner that made sure that associates were in compliance with registration requirements. The task force was investigating a tip, provided in May 2008 by a Merrill Lynch employee, that the company saved money on registration fees by allowing client associates to register only in their home state and in a neighboring state.

Last week, Merrill Lynch agreed to pay the state of Texas another $12.7 million over a Texas securities fraud cause involving auction-rate securities. The settlement ends the state’s probe into the broker-dealer’s handling of ARS and clients’ funds even as the market was collapsing.

The board determined that not only did Merrill Lynch not tell investors that the market could very well collapse, but also that the broker-dealer offered financial associates sales incentives to sell ARS despite knowing that the auction process could fail.

September has been a rough month for Bank of America and Merrill Lynch. On the same day that the Texas securities commissioner announced the $26.5 million settlement, New York Attorney General Andrew Cuomo accused high-level Bank of America Corp. executives of failing to reveal key information about its Merrill Lynch & Co. takeover. Cuomo is threatening to press charges. Bank of America, however, is calling Cuomo’s allegations “spurious.”

BofA’s Merrill to pay US$26.5M in settlement on unregistered salespeople, AP/Yahoo, September 8, 2009
Bank of America Calls Cuomo’s Merrill Allegations ‘Spurious,’ Bloomberg.com, September 10, 2009
Merrill Lynch pays $12.7M to settle Texas auction rate securities case, Taragana.com, September 14, 2009 Continue Reading ›