Financial Firms

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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Morgan Keegan & Co’s Regions Financial May Face SEC Charges Over Improper Auction-Rate Securities Sales

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

Regions Financial Corp, a Morgan Keegan & Co brokerage unit, says the US Securities and Exchange Commission may file a civil proceeding against it over charges that the firm allegedly engaged in the improper sale of auction-rate securities. The regulator filed a “Wells Notice” against Morgan Keegan in March. The notice means that a civil proceeding could be next. It also gives Morgan Keegan the opportunity to prepare a defense.

The SEC is examining the degree to which Morgan Keegan revealed to its clients the risks associated with investing in the auction-rate market and whether the firm sold a huge amount of that debt even when its ability to support the auction had declined.

Morgan Keegan is purchasing back the ARS it sold to clients. According to Morgan Keegan spokesperson Kathy Ridley, the investment firm has already gotten back $28 million in ARS.

Our securities fraud lawyers at Shepherd Smith Edwards & Kantas LTD LLP are working with numerous clients on claims against Morgan Keegan and Regions Financial over failed auction-rate securities investments, as well as investor claims involving these Morgan Keegan Bond Funds:

• RMK Strategic Income Fund (RSF)

• RMK Advantage Income Fund (RMA)

• RMK Multi-Sector-High Income Fund (RHY)

• RMK High Income Fund (RHM)

• RMK Select High Income Funds: C (RHICX), I (RHIIX), and A (MKHIX)

• RMK Select Intermediate Bond Funds: A (MKIBX), C (RIBCX), I (RIBIX)

The collapse of the $330 billion auction-rate securities market left many investors unable to sell auction-rate debt that they were told were safe to invest in and that were the liquid equivalent of cash. Since then, many investors have come forward complaining that they were misled about the risks tied to investing in the market.

Regions Financial unit may face SEC charges, Reuters, May 11, 2009
Regions Financial says Morgan Keegan unit received ‘Wells notice’, The Birmingham News, May 12, 2009 Continue Reading ›

Centaurus Financial Slapped with $175,000 FINRA Fine for Failing to Protect Confidential Client Info

Published on: May 10, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority says it is fining Centaurus Financial Inc. because the firm failed to protect customers’ confidential information. The California-based company must notify brokers and affected customers of the breach and give clients a year of free credit monitoring. Also as part of its settlement with FINRA, Centaurus has agreed to entry of the SRO’s findings. It will also certify with the SRO that its systems and procedures comply with privacy requirements. Centaurus, however, is not denying or admitting to the FINRA charges.

FINRA says that from April 2006 to July 2007, Centaurus neglected to make sure that the computer firewall, password system, and username for its computer fax server were providing the necessary protections. As a result, FINRA contends that persons that lacked the proper authorization were able to gain access to images stored on the faxes that included account numbers, social security data, personal information, and other sensitive, confidential client information.

An unauthorized party was even able to use Centaurus’s fax server to run a “phishing” scheme in July 2007. The scam was intended to fool computer users into giving out their personal information, including credit card information, banking data, passwords, and usernames. Over a 3-day period, 894 unauthorized logins by 459 unique IP addresses occurred after a file simulating a known Internet auction site was loaded to CFI’s fax server.

Phishing Scams
These schemes are designed to persuade recipients to reveal personal account data. For example, a target might be sent a Web site link or an attachment via email that asks for confidential personal and financial data. The sender or the Web site involved may appear to be legitimate but is actually illegal.

FINRA says that following the “phishing” incidents, Centaurus sent to some 1,400 clients and their brokers letters about the incident but that what they told them was misleading. The SRO contends that rather than admit that the breach of confidentiality occurred because the firm’s protections were inadequate and, as a result, unauthorized logins occurred, Centaurus reported that only one person had unauthorized access to the client information found on the server and that that data was not openly accessible.

Related Web Resources:
FINRA Fines Centaurus Financial $175,000 for Failure to Protect Confidential Customer Information, FINRA, April 28, 2009
Recognize phishing scams and fraudulent e-mail, Microsoft, September 14, 2006 Continue Reading ›

Ex-Citigroup Banker Among Six Defendants the SEC is Charging with $6 Million Insider Trading Scam

Published on: May 6, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Last week, the Securities and Exchange Commission charged six people, including ex-Citigroup Global Markets’ investment banker Maher Kara and his brother Michael Kara, with taking part in a multimillion-dollar insider trading investment scam that involved tipping others about upcoming merger deals. The Karas were indicted in a California district court. Other defendants include Zahi Haddad, Emile Jilwan, Karim Bayyouk, and Bassam Salman. Except for Salman, all of them allegedly made between $82,000 to $2.3 million, with Maher Kara making over $1.5 million. The SEC wants to the defendants to pay fines, disgorgement, and other relief.

The SEC says that from at least April 2004 to April 2007, Maher Kara told his brother on numerous occasions about deals that were pending involving Citigroup clients in the health care industry. Michael Cara would then buy options and stock in at least 20 companies involved in the Citigroup deals and would give the information to relatives and friends in Illinois and California who would also trade before the deals occurred.

Scam participants reportedly made the most money from trading in Biosite right before an announcement was made in March 2007 that the medical testing company was being acquired. Following the public disclosure, stock price in Biosite increased by more than 50% and Michael Kara and six tippees allegedly made over $5 million in illegal profits.

Two other tippees have agreed to disgorge their illegal profits to settle the SEC allegations. Nasser Mardini disgorged $291,000, while Joseph Azar disgorged $118,000 and will pay a fine. Both are not denying or admitting wrongdoing by settling.

Related Web Resources:
SEC charges former Citi banker with insider trading, Reuters, April 30, 2009
SEC Charges Wall Street Investment Banker and Seven Others in Widespread Insider Trading Scheme, SEC.gov, April 30, 2009 Continue Reading ›

SEC Sues Broker-Dealer Morgan Peabody Inc Owner For Investment Fraud

Published on: April 30, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is suing Morgan Peabody Inc. owner and chief executive officer Davis Williams for allegedly misappropriating investor funds that were raised in three public offerings. Also named in the complaint were Williams Financial Group, Sherwood, and WFG Holdings. The defendants are accused of violating federal securities laws, including Section 10(b) of the Securities Exchange Act of 1934, Section 17(a) of the Securities Act of 1933, and Rule 10b-5 thereunder.

The SEC says that from January 2007 – September 2008, Williams notified Morgan Peabody registered representatives that they should sell and offer LLC promissory notes and debentures from WFG Holdings Inc. and Sherwood Secured Income Fund. He then allegedly used millions of dollars (he’d raised $9 million from investors) for personal purposes, including rent at his residence that cost almost $50,000 a month, at least $175,000 in personal travel, and over $200,000 in entertainment and food.

The SEC claims that WFG Holdings investors thought that their money was being invested in Morgan Peabody. Meantime, Sherwood investors were notified that most of their money would go into real estate. Instead, the SEC contends that Williams moved the investors’ money into bank accounts that he oversaw and used the money for personal purposes.

More than 100 investors in nine states purchased the securities. The SEC is seeking disgorgement, injunctive relief, and civil penalties.

Obtaining Financial Recovery from Securities Fraud
Investors that are the victims of securities fraud may be entitled to financial recovery. An experienced stockbroker fraud law firmcan help you successfully get through arbitration or court proceedings so that you recover your lost funds.

Related Web Resources:
SEC sues L.A. broker for fraud, Dailybreeze.com, April 21, 2009
SEC Charges Owner of California Broker-Dealer with Misappropriating Millions in Investor Funds, TradingMarkets.com, April 21, 2009 Continue Reading ›

Wachovia and Citigroup Settle Michigan ARS Case for $880 Million

Published on: April 26, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Wachovia Capital Markets LLC and Citigroup Global Markets Inc. will settle allegations by the Michigan Office of Financial and Insurance Regulation that the firms misled investors who bought auction rate securities by paying a combined $880.3 million-$717 million for Citigroup and $159 million for Wachovia-to reimburse clients. The OFIR says the firms misled clients into thinking ARS were liquid like cash and were surprised when the market collapsed, freezing their assets. OFIR claims the securities were sold and marketed as if they were conservative investment and that the firms did not give investors information about the risks involved.

Both firms will also pay $2.3 million to Michigan to resolve the ARS charges. Citigroup will pay $1.72 million per an administrative consent order and Wachovia will pay $654,000. According to OFIR, 90% of the funds will be placed in a general fund for the state, while the rest will go to the Michigan Investor Protection Trust for consumer education about a number of issues, including investment fraud.

Just this March, Wachovia and Citigroup said they would pay back California investors over $4.7 billion after the investment firms were accused of misleading investors about investing in ARS. Also last month, the North American Securities Administrators Association set up a Web site so investors could find out how to file arbitration claims for damages stemming from ARS losses.

Citigroup, Wachovia in $876M Mich. ARS Buyback, The Bond Buyer, April 17, 2009
Michigan regulators detail settlement with Citigroup, Wachovia over auction rate securities, Associated Press, April 16, 2009

Related Web Resources:
North American Securities Administrators Association

Michigan Office of Financial and Insurance Regulation
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Another Securities Fraud Lawsuit Filed Against UBS International

Published on: April 23, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Another securities fraud lawsuit has been filed against UBS International, which is a division of UBS. This latest claim brings forth allegations similar to those filed earlier in the year against UBSI. Both claims revolve around the use of loans to buy securities, such as stocks, and UBS created products. Shepherd Smith Edwards & Kantas LTD LLP is the stockbroker fraud law firm to file this latest case.

According to the securities fraud claim, a UBSI broker working out of the Coral Cables office recommended specific loans along with a portfolio that mostly was comprised of equities to a certain Latin American client. Because of this, “margin calls” were made on the UBSI accounts.

When the client couldn’t come up with additional funds, the assets already in the account were sold off, resulting in losses worth hundreds of thousands of dollars. The complaint contends that the transactions made within the UBSI accounts were unsuitable and inappropriate and placed most (if not all) of the investor’s funds at risk.

It is unclear whether the satellite office in Florida had supervisors or compliance officers charged with overseeing the broker. There is evidence, however, that UBSI sent client statements to the broker’s other office in Guatemala rather than directly to the clients. This could have resulted in the client not being able to avail of certain safeguards. The broker also used Americorp Trust, an offshore entity located in the Netherlands Antilles, to deal with this specific client’s assets.

Shepherd Smith Edwards & Kantas LTD LLP specializes in securities fraud cases requiring litigation or arbitration, as well as cases involving broker misconduct.

Related Web Resource:
SEC Center for Complaints and Enforcement Tips, SEC.gov Continue Reading ›

Oregon’s Attorney General Files $36 Million Lawsuit Against OppenheimerFunds

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

Last week, Oregon’s Attorney General sued OppenheimerFunds Inc. for allegedly mismanaging the state’s 529 College Savings Plan when it recommended a bond that took risks that were not in alignment with the Plan’s conservative investment objectives. The 529 College Savings Plan allows investors to avail of tax benefits while they save for their children’s college education.

According to the $36 million securities fraud lawsuit, the defendants had signed a contract agreeing to recommend only funds that were consistent with the Oregon 529 College Savings Board’s investment policy and would let the board know about any fund changes. Also, as an investment adviser, OppenheimerFunds had fiduciary duties it owed the board.

The complaint contends that the defendants breached their fiduciary and contractual duties by continuing to recommend the Oppenheimer Core Bond Fund even after it took part in risky leverage and speculative bets with derivatives.

According to the lawsuit, the Oregon College Savings Plan Trust retained the services of OppenheimerFunds to put together, manage, and make recommendations for its portfolios. All recommendations had to be compatible with each portfolio’s objectives.

When OppenheimerFunds initially recommended the Core Bond Fund, the bond was a “straightforward” bond fund that was primarily invested in high-quality corporate bonds. That is, until sometime between 2007 and 2008 when fund managers allegedly began taking part in credit default swaps and total return swaps. This, says the lawsuit, dramatically changed the risk profile of the fund.

Yet OppenheimerFunds failed to let the board know about this change until January 22. The fund lost more than 35% of its value in 2008 and another 10% during the first three months of 2009. The complaint says that rather than moderate the degree of risk, OppenheimerFunds increased the risks.

OppenheimerFunds maintains that significant losses occurred as a result of market volatility and not due to dramatic changes in investment strategies and that the Board was notified of all changes. The investment adviser says it is extremely disappointed with the lawsuit and expressed concern that an outside lawyer, and not the state, conducted the probe into the case.

However, Keith S. Dubanevich, the special counsel in the Oregon attorney general’s office, says it is their common practice to retain outside help when dealing with certain areas of law, including securities fraud, and that Oregon’s Justice Department did lead the investigation.

Related Web Resources:
Oregon Sues Over Risks Taken In Its ‘529’ Fund, The Wall Street Journal, April 14, 2009
Oregon 529 College Savings Network

Oregon Attorney Continue Reading ›

Merrill Lynch Cannot Prevent Former Brokers From Using Customer Information and Soliciting Clients, Says District Court

Published on: April 20, 2009 | by Shepherd Smith Edwards & Kantas, LLP

A motion by Merrill Lynch, Pierce, Fenner & Smith Inc. to stop two former financial advisers from using customer information they received while working at the investment firm has been denied. In the U.S. District Court for the District of Utah, Judge Dale Kimball says Merrill neglected to show that it would suffer irreparable harm if that relief wasn’t granted or that public interest/ the balance of that harm is in its favor.

Per the court, Paul Aiman started working for Merrill as a financial adviser in 1989 and Rex Baxter was hired to do the same in 1997. Both men resigned from the firm on April 3 to work for Ameriprise Financial Services. Merrill countered by trying to obtain a temporary restraining order preventing the former employees from using customer data the two now ex-advisers allegedly misappropriated.

Merrill asked the U.S. District Court for the District of Utah to enjoin the two men from soliciting its clients and making them give back or “purge” all documents and data that they had allegedly illegally misappropriated, such as client contact information, financial statements, account figures, assets, investment goals, net worth, investment histories, and other financial data.

The court, however, said that to receive preliminary injunctive relief or a TRO, the moving party must show that:

• There was a good chance of succeeding on the merits.
• The possibility of injury surpasses the harm that the opposing party might experience.
• Relief is in the public interest.
• Irreparable harm will occur unless relief is granted.

In regards to irreparable harm, the court said that Merrill’s argument that because the two men worked with 180 clients with millions of dollars in assets it was not possible to determine damages if relief is not granted is “outdated” since all transactions are electronically monitored. The court also said that there is no clear evidence that the defendants even possess any of the clients’ financial information and that any customer information they might have could easily be accessed through regular sources, such as telephone directories. The court noted that it is not unusual for brokers to move to a different brokerage firm, bringing their client lists with them, and that preventing the two men from using these lists could hamper their careers-causing them great harm.

Also, the “diminished public interest” in Merrill’s enforcement of non-solicitation agreements-considering that many brokerage firms opt not to enforce such agreements-and the public interest in a client being able to keep working with their chosen financial adviser do not indicate that the “public interest” factor weighs in Merrill’s favor.

The parties will now take their case before an arbitration panel.
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Magistrate Judge Tells Texas Court that Citigroup Global Markets Holding Inc. Should Not Be Denied Arbitration Award for Unpaid Promissory Note

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

The US District Court for the Western District of Texas should confirm an arbitration award for brokerage firm Citigroup Global Markets Holding Inc. against a former employee who failed to pay his promissory note-so says magistrate judge Nancy Stein Nowak.

Nowak argued before the Texas court that even if “equitable reasons” exist for why stockbroker Ernest Elam shouldn’t pay the brokerage firm the money he owes for the note, the arbitrator’s decision must still be upheld because the former Citigroup broker failed to provide a reason for why he shouldn’t pay that falls under the Federal Arbitration Act.

Last July, the arbitration panel found in favor of Smith Barney and Elam was told to pay the investment firm $193,484.28, $15,768.70 in legal fees, and 5% interest per annum for any balance that is not paid. In turn, Elam asked for the award to be vacated because he claims that:

• The promissory note was a forgivable lone.
• He was misled about repayment requirements.
• Smith Barney sought repayment because the broker’s departure caused the branch manager’s end of the year bonus to go down.
• Smith Barney benefits financially from commissions through Elam’s previous clients.

According to Nowak, Citigroup Global Markets Holdings Inc. and Citigroup Global Markets Inc. (as Smith Barney) had asked for confirmation of the award against Elam for the 2004 note he defaulted on in the original principal amount of $270,878. The magistrate judge says that according to the FAA, an arbitration award can only be vacated if:

• The award was obtained through fraud, corruption, or undue measures.
• The arbitrators were at least partially corrupt or engaged in misconduct or went beyond the scope of their powers.

Therefore, Novak contends that the district court cannot vacate the award and should grant Smith Barney’s motion.
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