Articles Posted in Financial Firms

Ex-Morgan Keegan Adviser Pleads Guilty to Stealing from Senior Investor

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

A former Morgan Keegan adviser has pleaded guilty to charges that he stole from an elderly investor. Charges included investment adviser fraud and making and subscribing a bogus tax return. Now, Harold “Hal” Blondeau could be facing up to eight years in prison. He also may have to pay restitution to his victim. Martha B. Capps is now 83.

Blondeau received power of attorney over the senior investor’s accounts as she was experiencing the beginning stages of Alzheimer’s. She wanted him to keep her inheritance away from her husband. Large sums were taken out of Capps’ accounts.

The former Morgan Keegan adviser is accused of using some of the stolen funds to pay for personal expenses, including a beach house and $24,000 in wine. The beach house, purchased in Capps’ name, would have gone to Blondeau upon her death.

Almost $3 million was taken from the account of Martha B Capps. In 2007, attorneys for the elderly woman filed a lawsuit against Blondeau, his son Neal Knight, and Knight’s two daughters. The complaint contends that the group stole money from Capps. Blondeau and Knight are accused of establishing a non-profit foundation in the name of Capps’ father and donating the money to different organizations to enhance their own images. Capps’ money was also used for the college education of the two men’s children.

In 2007, Blondeau was let go from Morgan Keegan because he failed to disclose a loan that was obtained from a client. To date, Blondeau is the only one out of the four civil lawsuit defendants that is facing criminal charges in federal court.

Taking advantage of an elderly investor is a crime and can be grounds for an investor fraud lawsuit. Unfortunately, senior investors-especially those that have inherited money or have retirement savings are easy targets of investor fraud.

Related Web Resources:
Raleigh investment adviser pleads guilty to fraud, Triangle Business Journal, June 11, 2009
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Brokers Renew Push for Investors to Buy Structured Products

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

Brokers are once again getting behind structured products, hoping that investors will bite. While sales of structured products during 2008’s 4th quarter-at $5.8 billion-was down 75% from the year’s 1st quarter, sales are starting to go up. One reason for this is that certain structured products, such as return-enhanced notes and principal protected notes, are considered safer than reverse convertibles, which led to some of the worst losses for investor.

Ideally, structured products are supposed to provide sturdy profits, while limiting losses, and brokers like them because the commissions are high. However, representatives must still account for why these products haven’t delivered the way investors were told they would. Many investors that bought structured products from Lehman Brothers, such as the Lehman principal-protected notes, incurred some large losses. Some of these notes were bought through a UBS Financial Services office in Houston, Texas.

Until the bear market struck, structured products did incredibly well, and sales almost doubled to $105 billion in 2007 before dropping to $70 billion last year when structured products, collateralized debt loans, and credit default swaps played a huge role in the global financial collapse.

Reverse convertibles are considered the most high-risk structured product-short-term bonds with a large interest that can seriously hurt investors if the underlying stock drops dramatically. Investors can end up with shares with a value far below the principal. For example, 78-year-old Dominic Annino says he invested $300,000 in IndyMac shares and JetBlue shares and lost money after the stocks fell. He filed an arbitration complaint with FINRA and claims that the broker that sold him the Wells Fargo reverse convertibles never fully explained to him what he was getting himself into. Still, brokers are hoping that last year’s stock market fiasco won’t discourage investors from trying structured products again.

Twice Shy On Structured Products? Wall Street Journal Online, May 28, 2009
Understanding Structured Products, Investopedia Continue Reading ›

Morgan Keegan, Charles Schwab and Others Fight as Wells Fargo Unit Settles Claims of Misrepresented Securities in Short Term Bond Funds

Published on: June 9, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Evergreen Investment Management Company, a Wells Fargo unit, has agreed to a $40 million settlement with federal and state regulators over allegations that it misrepresented securities in short-term bond funds. The settlement could be a sign that other fund providers, including Morgan Keegan, Charles Schwab Corp., and Fidelity Investments, may face similar lawsuits. Already bond providers are facing securities fraud lawsuits and arbitration claims from clients that experienced heavy losses from investing in debts that were either high risk or became illiquid.

The Massachusetts Securities Division and the Securities and Exchange Commission had accused Evergreen and one of its affiliates of inflating the value of its Ultra Short Opportunities Fund by up to 17%. The SEC says that this inflated value allowed the fund in 2007 and 2008 to be ranked high compared to other peer funds, when its true value should have placed it closer to the bottom of its class. At the time of the alleged violations, Evergreen was a Wachovia Corp. subsidiary.

With the housing crisis getting worse, Evergreen is accused of not using the information it had access to about mortgage-backed securities when engaging in the valuation process. Evergreen dealt with the fund by adjusting the prices on specific holdings, but only notified a select number of investors about the reasons for the re-pricings, as well as the possibility of adjustments in the future.

The investors that were given this information managed to leave the fund before their shares’ value went down even more. However, the other shareholders that did not receive the preferential information were left at a disadvantage. In June 2008, Evergreen closed the Ultra Short Fund, which, at the time, had $403 million in assets.

By agreeing to settle, Evergreen is not admitting to or disagreeing with the SEC’s findings. As part of the agreement, the Wells Fargo unit will pay $33 million to fund shareholders, $3 million in disgorgement of ill-gotten gains, a $4 million SEC penalty, and $1 million to Massachusetts.

Evergreen settles state, US charges for $40 mln, Reuters, June 8, 2009
Settlement in Mutual Fund Case, NY Times, June 8, 2009 Continue Reading ›

UBS Financial Services Misled Investors about Lehman Brothers Securities, Says New Hampshire Regulators

Published on: June 4, 2009 | by Shepherd Smith Edwards & Kantas, LLP

According to New Hampshire securities regulators, UBS Financial Services Inc., a unit of UBS AG, misled investors regarding complex securities that were issued by Lehman Brothers before the latter filed for bankruptcy protection in 2008. The Bureau of Securities Regulation says investors were misled when the representatives for the UBS unit told them that the securities were safe, while failing to let them know that Lehman Brothers was in trouble. The state regulators are also accusing UBS of failing to properly supervise the employees that sold the structured products and of engaging in improper sales practices.

Some 42 New Hampshire investors could lose more than $2.5 million from securities underwritten by Lehman Brothers. State regulators have filed a cease-and-desist order against UBS and they are seeking an unspecified sum from the financial firm.

UBS disputes the Bureau of Securities Regulation’s allegations. The investment bank claims it didn’t do anything improper when it sold the Lehman products to UBS clients and that its employees engaged in the proper sales practices, followed all regulatory guidelines, abided by client disclosure guidelines, as well as followed firm procedures and industry regulations. The investment bank contends that any losses experienced by investors occurred because Lehman Brothers failed unexpectedly. UBS vows to combat the New Hampshire regulators’ allegations.

Already, a number of investors have filed claims against Lehman Brothers. Last year, with $613 billion in debt, Lehman filed the largest bankruptcy in US history. Globally, the collapse of Lehman Brothers resulted in investor losses worth billions of dollars. Many clients have blamed lenders for failing to warn them that Lehman was in trouble.

Meantime, Credit Suisse has offered to pay $140.7 million to compensate more than 3,700 of its retail clients for their Lehman financial products that now have no value.

Securities Fraud Attorney Sam Edwards, partner of the law firm of Shepherd Smith Edwards & Kantas LTD LLP says: “While many smaller investors into Auction Rate Securities have now been paid, our firm is representing a number of larger investors, many of whom have millions of dollars that have been frozen for more than a year. Many of these are business which have been crippled by the loss of liquidity of these funds and are seeking resulting business losses.”

Related Web Resources:
UBS says will fight New Hampshire Lehman case, Reuters, June 4, 2009
UBS Sold Unsuitable Lehman Securities, New Hampshire Alleges, Bloomberg.com, June 4, 2009
Bureau of Securities Regulation
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FINRA Orders RD Capital Group and Its President to Pay $1 Million for Fraudulent STRIPS Markups

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

The Financial Industry Regulatory Authority says that RD Capital Group, based in Puerto Rico, and its president Ramon Luis Dominguez have agreed to pay $950,000 in restitution plus interest to three clients over fraudulent and excessive markups involving the sale of U.S. Treasury Separate Trading of Registered Interest and Principal Securities, also known as STRIPS. The firm and Dominguez are also to pay a $50,000 fine, while the latter was suspended for 30 days as a principal and in every capacity for 5 business days.

According to FINRA, RD Capital and Dominguez sold more than $34 million in US treasury STRIPS to three clients between August and August 2005. They made the sale while charging $1,289,727 in total markups. However, FINRA says that Dominguez neglected to tell the clients how much of a markup they got-from 3.5 – 6.2%-and that these markups were fraudulent and too much because they were more than what the market conditions warranted.

STRIPS are zero-coupon securities created from U.S. Treasury bonds by “stripping” the future interest payment oblitations from the final principle payment obligation on those bonds, then selling each of these separately at a discount. FINRA mandates that firms make sure customers are fairly charged for STRIPS transactions, with the cost for effectuating the sale, profit by the dealer or broker and the expertise provided, the total cost of the transaction, the financial product’s availability, the instrument’s yield or price, and other factors taken into consideration.

By agreeing to the terms of the settlement agreement, RD Capital Group and Dominguez are not admitting to or denying wrongdoing.

More about STRIPS:

• STRIPS can be bought or held via government securities dealers and brokers.
• STRIPS cannot be sold or issued directly to an investor.
• An investor receives payment from STRIPS upon maturity.

Related Web Resources:
RD Capital Group and Firm President Ordered to Pay $1 Million in Fines, Restitution for Fraudulent Markups of U.S. Treasury STRIPS, FINRA, May 11, 2009
TreasuryDirect.gov
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Auction-Rate Securities Probes Lead to More Enforcement Actions and Final Settlements with Investment Firms

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

Another state has filed an individual enforcement against brokerage and investment banking firm Stifel, Nicolaus, & Co. Inc. On May 7, Virginia’s State Corporation Commission’s ‘s Division of Securities and Retail Franchising filed its civil lawsuit accusing the broker-dealer of making misrepresentations and false statements related to the sale of auction-rate securities, as well as failing to properly supervise its sales representatives that sold ARS to Virginia residents.

Just this March, Missouri Secretary of State Robin Carnahan had sued Stifel, Nicolaus, accusing the investment firm of making misrepresentations to over 100 ARS clients that were told that the securities were liquid, conservative investments. In May, Carnahan reached an agreement with two Bank of America Corp subsidiaries. Under the agreement, the bank would pay a $1.37 million fine and provide relief to numerous Missouri entities that bought $400 million in ARS.

Meantime, state officials are looking into whether TD Ameritrade Holding Corp., Charles Schwab Corp., and E*Trade Financial Corp also engaged in ARS-related violations. Broker-dealers that have reached preliminary settlements with federal and state regulators over their misrepresentation of ARS to clients include Citigroup Inc., Deutsche Bank AG, Credit Suisse Group, JP Morgan Chase & Co, Goldman Sachs Group Inc., Merrill Lynch & Co. Inc., Royal Bank of Canada, Morgan Stanley, Wachovia Corp, and UBS AG.

Per the agreements, settlement parties would repurchase up to $56 billion in illiquid ARS at par from charities, retail investors, and mid-sized and small businesses, as well as pay $522 million in penalties. The agreements with Bank of America, Wachovia, and Citigroup have been finalized.

Last month, the Financial Industry Regulatory Authority announced final settlements reached with NatCity Investments Inc. of Cleveland (a $300,000 fine), M & T Securities Inc. of Buffalo (a $200,000 fine), M & I Financial Advisors Inc. of Milwaukee (a $150,000 fine), and Janney Montgomery Scott LLC of Philadelphia (a $200,00 fine). FINRA also announced that SunTrust Investment Services Inc. and SunTrust Robinson Humphrey Inc. decided not to finalize their preliminary settlements. FINRA is still investigating both firms’ activities pertaining to ARS.

Related Web Resources:
Virginia sues Stifel, Nicolaus & Co. over auction rate securities, St Louis Business Journal, May 15, 2009
FINRA Announces Agreements with Four Additional Firms to Settle Auction Rate Securities Violations, FINRA, May 7, 2009
Carnahan Finalizes $400 Million Bank of America Auction Rate Securities Settlement, Missouri Secretary of State, May 14, 2009
Carnahan sues Stifel Nicolaus over auction rate securities, St Louis Business Journal, March 12, 2009 Continue Reading ›

Merrill Lynch Life Agency to Pay Illinois Division Of Insurance $18 Million Over Funeral Trust Scam Allegations

Published on: May 27, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Merrill Lynch Life Agency Inc. will pay $18 million to the Illinois Division of Insurance to settle the state’s investigation into the investment firm’s involvement with a trust fund overseen by the Illinois Funeral Directors Association. The trust was supposed to cover funeral costs for about 49,000 consumers that had prepaid for funeral contracts. The $18 million will be placed in a special fund and will be used to offset losses by association members when delivering on their funeral contract commitments to consumers.

Merrill Lynch & Co. Inc, between 1986 and 1999, had marketed and sold tax-exempt variable universal life insurance policies as investments within the pre-need trust. Unfortunately, in 2007, the trust imploded, and its value dropped from over $300 million to approximately $250 million.

The Illinois Department of Financial and Professional Regulation then conducted a probe into the trust and discovered that the funds’ trustees had used the policies as investments within the trust. Also state comptroller Dan Hynes is asking the association to account for $10 million that trustees allegedly obtained from the trust as excess management fees.

According to state regulators, Merrill Lynch Life registered representative Edward L. Schainker, who served as the association’s investment advisor, recommended and sold over 300 policies to its members. The policies were to offer tax-exempt investment returns. Merrill Lynch’s life insurance division put forth 120 policies and received over $32 million in premiums that were invested in bonds and stocks that over the years have dropped in value and placed the trust’s solvency at risk.

Schainker is accused of violating Illinois insurable-interest laws and of failing to determine whether his investment plan could provide the needed revenue to cover trust liabilities. The Illinois secretary of state’s office has suspended his broker’s license and the state’s insurance division is seeking to revoke Schainker’s insurance license. He also has been ordered to pay civil penalties of $100,000.

By settling, Merrill Lynch Life is not admitting to the allegations made by the state of Illinois.

Related Web Resources:
Merrill Lynch to pay $18 million to halt state probe into funeral trust fund, Chicago Tribune, May 20, 2009
Illinois slams Merrill Lynch Life to the tune of $18M for funeral trust scam, Investment News, May 21, 2009
Illinois Funeral Directors Association

Illinois Department of Financial and Professional Regulation
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VSR Financial Services Settles FINRA Claim Over Improper Securities Sales Made to Senior Investors

Published on: May 25, 2009 | by Shepherd Smith Edwards & Kantas, LLP

VSR Financial Services, an investment firm, has agreed to pay $10.3 million to settle a FINRA claim that it failed to properly supervise two ex-brokers accused of improperly selling risky investments to 249 customers. The agreement ends the litigation brought by the investors, many of them retirees, against VSR and its two ex-brokers, Rebecca Engle and Brian Schuster.

Although a number of securities fraud lawsuits have been filed against Schuster, Engle, and VSR, most of the investment fraud victims opted to pursue their cases through arbitration because the terms of their investment agreements prevented them from filing lawsuits. The claimants have accused the former VSR brokers of selling them investments that were inappropriate and high-risk.

The majority of investors who were defrauded say that because they were already either retired or about to retire, they had wanted to place their money in investments that were conservative and low risk. Instead, they claim that Schuster and Engle made high-risk investments for them, selling them securities in Royal Palm Capital Group and American Capital Corp while failing to explain the risks involved. Schuster and Engle allegedly promoted these investments as “mini Berkshire Hathaways” and “can’t miss” opportunities when the companies were actually startups that had limited operating histories. According to criminal complaints and court documents, the investment fraud victims lost at least $20 million.

Engle and Schuster have been charged with eight felony counts of securities fraud. They worked together a number of times between 2000 and 2007 and have also been affiliated with Wachovia Securities LLC and Capital Growth Financial LLC. More arbitration claims against the other companies they’ve been associated with are pending.

Employer to pay $10M, CayCompass.com, May 24, 2009
VSR Financial Services settles securities claims, Kansas City, May 20, 2009 Continue Reading ›

Wells Fargo Sued Over ARS Sales by California Attorney General for $1.5 Billion

Published on: May 21, 2009 | by Shepherd Smith Edwards & Kantas, LLP

California Attorney General Edmund G Brown, Jr. is suing Wells Fargo Investments LLC, Wells Fargo Institutional Securities, and Wells Fargo Brokerage Services for $1.5 billion. Brown is accusing the Wells Fargo affiliates of violating state securities laws and misleading California investors with false statements about auction-rate securities.

According to the California Attorney General’s securities fraud lawsuit, the Wells units engaged in fraud and deception to sell the securities, neglected to properly train and supervise the agents that sold the ARS, marketed the securities to investors that shouldn’t have been investing in them, and regularly misrepresented the securities when marketing them.

Brown says that nearly 40% of the ARS that the Wells defendants sold are owned by Californians. ARS investors included individuals, non-profits, small businesses, and others that were never fully informed about the risks of investing in theses securities.

ARS sales pitches by Wells Fargo representatives reportedly continued even though there were warnings as early as 2005 from the Financial Accounting Standards Board and others that auction-rate securities should not be considered cash-like equivalents. In November 2007, a Wells Fargo Bank’s Trust Department reportedly sent a memo warning against buying ARS.

Following the collapse of the $330 billion ARS market in February 2008, some 2,400 Californians, who were told that their ARS were liquid like cash, were unable to access their investments that ranged in worth from $25,000 to millions.

Brown says he is suing the Wells units because unlike Citigroup, UBS, Wachovia, and Merrill Lynch, the affiliates have not been able restore the securities’ cash value. The California Attorney General wants Wells Fargo to restore the securities’ value, disgorge any associated profits, and pay civil penalties at $25,000/violation.

Wells Fargo Chief Executive Officer Charles W. Daggs says the investment bank is disputing the claims made in the California Attorney General’s lawsuit. He also noted that Wells was among the first in the investment bank industry to voluntarily give clients with frozen securities significant liquidity. Daggs says that since April 2008, these clients have been able to access 90% of their ARP holdings’ par value via non-recourse loans with favorable rates.

Related Web Resources:
Calif. AG sues Wells Fargo for $1.5 billion, News Daily, April 23, 2009
Read the Attorney General’s Complaint Against Wells Fargo (PDF)
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Goldman Sachs Reaches $60 Million Settlement with Massachusetts Over Subprime-Mortgage Loans

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

Massachusetts Attorney General Martha Coakley has announced a $60 million settlement with Goldman Sachs over the alleged role the investment bank played in the subprime mortgage crisis. While Goldman did not originate the loans, it played a role in their securitization. Coakley has been conducting a nationwide probe targeting investment banks that knew certain loans were high risk but still opted to write them, as well as underwrite securities from these loans. Coakley says that state courts are in agreement that a number of these loans were destined to fail from the start.

Massachusetts will use $50 million of the settlement to help 714 Massachusetts homeowners with mortgages that are either delinquent or still performing. The money, however, won’t go toward helping homeowners whose homes have already foreclosed. The other $10 million will go to the state.

Among the terms of the settlement:

• Goldman has consented to principal write-downs of 25% to 30% for first mortgages and upward of 50% for second mortgages if owners want to sell or refinance their homes.

• A homeowner who is significantly delinquent will have to make manageable payments toward mortgages until they are able to sell or refinance.

• If a homeowner cannot sell his or her home, Goldman will help qualified borrowers to refinance and provide other solutions so that they don’t have to foreclose.

• Homeowners that have loans with Goldman entities and those that Litton Loan Servicing LP has serviced will receive immediate help.

By agreeing to the settlement, Goldman is not admitting to or denying wrongdoing. This is the first settlement, however, where an investment bank has been held to task for its role in the subprime lending crisis. Up until this point, prosecutors were only targeting the sources of the subprime loans and not the parties that put together the loans and presented them to investors.

Related Web Resources:
Massachusetts settles with Goldman Sachs, UPI, May 11, 2009
Goldman Sachs, Massachusetts reach settlement on mortgage securities, LA Times, May 12, 2009
Attorney General Martha Coakley
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