Financial Firms

FINRA Orders Charles Schwab to Pay $542,340 Over Short-Term Bond Fund Investor Claim

Published on: October 14, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Earlier this month, a Financial Industry Regulatory Authority panel found Charles Schwab Corp. liable for $542,340 in an investor claim against the company over its YieldPlus short-term bond fund. This case is one of numerous individual arbitration and class action lawsuits against the San Francisco-based investment firm because of the fund.

The Schwab YieldPlus Fund had assets worth over $13 billion last year, but the fund suffered major losses this year because of mortgage-backed securities. At the end of last week, the fund’s assets were worth $432 million.

In this latest arbitration claim, investor Jeffrey Nielson accused Schwab and representative Darin Beckering of purposely misleading him when he purchased the ultrashort-bond fund because they did not fully disclose the extent to which the fund would be exposed to the subprime-mortgage market. Nielson also claims he was never informed that the Schwab YieldPlus Fund was a proprietary fund.

Lehman Brothers’ “Structured Products” Investigated by Stockbroker Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LLP

Published on: September 30, 2008 | by Shepherd Smith Edwards & Kantas, LLP

This week, the securities fraud law firm of Shepherd Smith Edwards & Kantas LTD LLP announced that it is investigating claims involving “structured products” that were created by Lehman Brothers. Structured products are also called “structured notes.”

These financial instruments combine derivatives with equities and/or fixed incomes to create a product meant to provide the upside of the stock market along with fixed income security. These notes were usually marketed to conservative investors wanting a reasonable yield, the possibility of a modest gain in principal, and the preservation of capital. Other brokerage houses that marketed structured products to their own clients included Merrill Lynch, UBS, JP Morgan Chase, Citigroup, and Wachovia.

There is a brochure that discusses structured notes sold by Lehman Brothers in August 2008 (just one month before the now defunct brokerage firm filed for bankruptcy) that promised “100% principal protection” and “uncapped appreciation potential” based on Standard & Poor’s 500 Index gains. The collateral material also said that, at worst, an investor would regain the principal amount invested within three years. However, Lehman Brothers and other brokerage firms were actually using structured products to cover their operational shortfalls.

Two Former Credit Suisse Brokers Charged With Fraud and Conspiracy Related to Auction-Rate Securities Scam

Published on: September 3, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission and the US Attorney’s Office in Brooklyn are charging Eric Butler and Julian Tzolov, two ex-Credit Suisse brokers, with coming up with an auction-rate securities scam to mislead customers and increase their commissions. The fraud and conspiracy charges relate to the alleged deceptive sales of subprime-related auction-rate debt, and charges include violation of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC is seeking permanent injunctive relief, disgorgement of ill-gotten gains, civil money penalties, and prejudgment interest.

Butler and Tzolov are accused of deceiving customers into thinking that ARS were backed by federally guaranteed securities loans that were a safe and liquid investment choice when, in fact, the securities that the men bought for clients were backed by collateralized debt obligations, subprime mortgages, and other non-student loan collateral.

The SEC says ARS scam resulted in clients purchasing over $1 billion in subprime-related securities. According to the complaint, Butler and Tzolov sent out e-mail confirmations to foreign corporate customers with short-term cash management accounts that included the terms “Education” and “St. Loan” added to the names of securities that were not related to student loans. The terms “Mortgage” and “CDO” were deleted from the emails.

As a result, investors were left holding over $800 million in illiquid securities once the market started to collapse. The value of their ARS have dropped significantly since then.

Credit Suisse says it is working with authorities on the case. The investment bank says it suspended the two men after they found out they were involved in prohibited activities. The SEC investigation is part of a larger probe into whether potential market manipulation, fraud, and breaches of fiduciary duty played a role in the problems the credit markets are experiencing.

Related Web Resources:

Ex-Credit Suisse Brokers Charged With Subprime, Bloomberg.com, September 3, 2008
SEC Charges Two Wall Street Brokers in $1 Billion Subprime-Related Auction Rate Securities Fraud, SEC, September 3, 2008
Read the SEC Complaint (PDF)
Continue Reading ›

State Street Sued Over Allegations of Misrepresentation Related to Mortgage-Backed Securities

Published on: August 20, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Massachusetts plumbing and air conditioning supply company F.W. Webb Company is suing State Street Bank and Trust Company, State Street Global Advisors (SSgA), and CitiStreet. F.W. Webb is accusing the defendants of misrepresenting a bond fund as a low risk 401k-investment option, when in fact, the SSgA Yield Plus Fund was invested in mortgage-based securities.

FW Webb says the investment option had been represented on more than one occasion as being similar to a money market portfolio but with better returns. FW Webb alleges that beginning in 1996, State Street changed its investment strategy for the Yield Plus account so that there was an emphasis on lower-quality securities that were accompanied by greater risks.

The lawsuit contends that the Yield Plus Fund create a level of risk that was inappropriate and not in line with the stated investment goals of the Massachusetts company’s 401K Plan or the objectives of a traditional money market fund. The complaint contends that the fund dropped dramatically in mid-2007 because of its overexposure to low-quality assets and securities that were high in risk.

CitiStreet, which has provided FW Webb with investment management and recordkeeping and administrative functions since 2000, is also a defendant in the suit. FW Webb say that any instability related to the Yield Plus Fund was never an issue that CitiStreet or State Street brought to its attention, which gave the plumbing and air conditioning supply company no reason to question whether the fund should be included in its 401K Plan.

The lawsuit also noted that the decision to move the Yield Plus Fund into mortgage-backed investments during 2005-2007 occurred during a time when defaults of the subprime mortgages had skyrocketed and subprime lenders were dealing with insolvency. The SSgA Yield Plus Fund’s Board of Directors decided to liquidate the fund as of May 31, 2008.

Related Web Resources:

FW Webb Company

State Street Corporation Continue Reading ›

Claims Continue over MasterShare – Prudential Securities’ Deferred Compensation Plan

Published on: August 13, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Prudential Securities has been plagued by claims over its deferred compensation plan, known as MasterShare. A number of former representatives have filed claims and recovered damages.

Started in 1999, MasterShare allowed Pru employees to deduct up to 25 percent of their gross pay to purchase discounted shares of a stock index fund. This discount had the effect of a company match of the funds deducted. Yet, the plan also provided that if the employee left the firm early he or she not only forfeited the company’s “match” but also the portion withheld from his or her check!

With the threat of forfeiture of a substantial portion of the employee’s pay, some representatives claim they became hostages of Prudential. One former broker trainee says the firm promoted the plan as a pension plan and that he was “strongly encouraged” to join with the further suggestion that those not participating were perceived as “transients”.

Securities Law Firm Shepherd Smith Edwards & Kantas LTD LLP Investigates Investor Claims Related to Short Term Bond Funds

Published on: August 9, 2008 | by Shepherd Smith Edwards & Kantas, LLP

SSEK law firm, which specializes in investor claims, is investigating compliants over the liquidity and security of so-called “ultra-short term” bond funds. Because these funds were sold as cash alternatives, any loss of principal is not acceptable. Recently, investors have experienced subtantial losses on a number of these funds, including:

SSgA (STATE STREET) Yield Plus Fund: Investors have accused this fund of violating Federal Securities laws. Usually considered a diversified portfolio with high quality credit and debt securities, and “sophisticated credit analysis” and decisions made by a team of investment professionals, the Fund was actually heavily invested in high-risk mortgage-related securities and mortgage backed securities.

Fidelity Ultra-Short Bond Fund: Investors claim that they were told the fund’s goal was to seek a high level of current income that was in line with preserving capital. The plaintiffs’ litigation, however, allege that such statements were misleading and false because the fund failed to properly disclose that it was heavily invested in high risk mortgage-backed securities.

Evergreen Ultra Short Bond Fund: According to recent litigation, investors bought shares because they were told that the fund’s investment goal was to “provide current income consistent with the preservation of capital and low principal fluctuation.” Statements such as these are now being called misleading and materially false because the fund used a high-risk strategy (which it did not reveal to investors) that resulted in realized losses of about 18%.

Charles Schwab YieldPlus Funds — Schwab YieldPlus Select, Schwab California Tax Free YieldPlus, Schwab YieldPlus: Charles Schwab has been accused of violating industry regulations and state securities laws when it allegedly mislead investors about the fund’s underlying risks. All three Schwab funds’ losses have been magnified by mass redemptions.

Oppenheimer Rochester National Municipals: Although not technically an ultra short term bond fund, this high-yield municipal bond can experience short-term volatility. These kinds of bonds are thinly traded and investors could suffer when the bonds are sold into an unreceptive marketplace.

Related Web Resources:

Shepherd Smith Edwards & Kantas LTD LLP Investigate Short Term Bond Funds, PrimeNewswire.com
Shepherd Smith Edwards & Kantas LTD LLP
Continue Reading ›

Judge Approves Citigroup Falcon Fund Investors’ Decision to Withdraw Lawsuit

Published on: July 25, 2008 | by Shepherd Smith Edwards & Kantas, LLP

In New York, a judge has approved the decision by investors of a Citigroup Falcon Fund to drop their lawsuit asking for more data about how the bank plans to liquidate the fund.

On February 22, Citigroup announced it was providing the Falcon Funds a $500 million line of credit and consolidating $10 billion in liabilities and assets.
Citigroup began suspending distributions and redeptions and started closing down the fund in March. The fund’s value dropped by 80% and Citigroup offered to pay investors 45 cents for every dollar.

The investors had been asked to tender shares of Falcon Strategies Two LLC, but they wanted corrections made to the offering memo because misleading and missing information made it impossible for them to value their stakes. U.S. District Judge Sidney Stein, who this week approved the withdrawal of the investors’ class action suit, rejected their motion to push forward the lawsuit about the tender offer. He said the plaintiffs were trying to turn the securities laws’ anti-fraud provisions into provisions of broad disclosure.

The Falcon Funds mainly invested in fixed-income securities and other debt instruments, and they may have been exposed to weaknesses in the mortgage, credit, and bond markets. Citigroup brokers are accused of recommending the funds to investors looking for conservative investments when, in fact, the funds may have been accompanied by a high level of risk.

Related Web Resources:

The Law Firm of Shepherd Smith Edwards & Kantas LTD LLP Investigates Losses in Falcon Hedge Funds, Primenewswire.com, July 2, 2008
Citigroup Alternative Investments LLC : Falcon Strategies Two B LLC Hedge Fund, Stanford Law School Continue Reading ›

SEC Subpoenas Over 50 Hedge Fund Advisors in Probe of Whether Stock Price Manipulation Affected Bear Stearns and Lehman Brothers Shares

Published on: July 21, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has subpoenaed over 50 hedge fund advisors, including SAC Capital Advisors, Goldman Sachs Group Inc., and Citadel Investment Group, as part of its probe into whether rumors affected the shares of Bear Stearns and Lehman Brothers.

The SEC is looking for information related to options trading and short-selling involving the two investment firms. The subpoenas are part of a wider investigation about trades in bank securities and the communications between the hedge funds and others. The SEC has reassured the parties being subpoenaed that they are not necessarily direct targets of the probe.

Last week, regulators announced that they are investigating whether certain managers had spread rumors to cause share prices to drop. Investigators are also trying to figure out whether correct policies and training procedures had been put in place to detect market manipulation.

Securities Regulators Arrive At Wachovia Securities Headquarters to Conduct Auction-Rate Securities Investigation

Published on: July 17, 2008 | by Shepherd Smith Edwards & Kantas, LLP

In St. Louis, Missouri, 10 securities regulators probing the auction-rate securities crisis arrived at Wachovia Securities today. The firm has reportedly failed to fully comply with requests related to the investigation, which is what prompted the onsite visit.

The investigators, from Missouri, Massachusetts, New Jersey, Illinois, Pennsylvania, and other US states, arrived to conduct interviews and demand documents regarding Wachovia’s marketing and sales practices.

The Missouri Securities Division investigation into Wachovia Securities began last April, and the office of Missouri Secretary of State Robert Carnahan has subpoenaed over a dozen Wachovia Securities executives and agents in search of more information related to the company’s auction-rate securities business. Carnahan says that hundreds of Missouri investors have contacted her office frustrated that they cannot access their money.

Deutsche Bank Securities Unit Must Defend Itself Against Xethanol Corp. Lawsuit Related to Auction-Rate Securities Losses

Published on: July 9, 2008 | by Shepherd Smith Edwards & Kantas, LLP

This week, U.S. District Judge Alvin K. Hellerstein announced that the securities arm of Deutsche Bank AG will have to defend itself against a lawsuit alleging that it lost almost $1.6 million in auction-rate securities.

Xethanol Corp., which filed the securities lawsuit, alleges that Deutsche Bank Securities let the alternative-energy company buy the securities even though it didn’t fulfill the requirements for the transaction to take place as a private investment. Xethanol says it ended up selling its positions in two auction-rate securities at a $1.59 million loss last September. The company claims it acquired the positions for $13.3 million last June.

However, Deutsche Bank Securities says it never interacted directly with Xethanol. A third-party broker bought the securities from Deutsche Bank before selling them to Xethanol. The broker is not named as a defendant in the case.