Financial Firms

Citigroup’s Smith Barney Draws Ire of Investors and Its Own Brokers Over ASTA/MAT and Falcon Funds

Published on: July 2, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup is offering to cover some of the losses of investors involved with certain hedge funds sold by the firm’s Smith Barney brokerage unit. Citigroup and Smith Barney brokers allegedly recommended the funds, ASTA/MAT and Falcon, to investors looking for conservative investments.

Citigroup marketed the hedge funds as being ideal for retirees and other investors seeking safe investments, and Smith Barney raised hundreds of millions of dollars for the funds. The funds were reportedly marketed to investors as low-risk and accompanied by only a minimal probability of loss when, in fact, they came with high levels of risk-information that was kept from investors.

Last year, Citigroup told Smith Barney and Citigroup bankers to market the funds to their best clients. These clients were not informed that the new pitch initiative was an effort to inject new funds into Falcon, which had dropped by over 10%. The fund would be worth 25% of its original value by the end of March 2008.

Investors Seek Arbitration Resolutions Against Charles Schwab for Alleged Securities Violations

Published on: July 1, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Charles Schwab & Co. has recently been barraged with FINRA arbitration claims filed by investors alleging that the firm violated industry regulations and state securities laws. In their complaints, investors are accusing Charles Schwab of misleading them about the risks associated with certain mutual funds, including the degree to which the funds were exposed to the hazards of the sub-prime mortgage market. They say that rather than diversify the investments, the brokerage firm over-concentrated them in securities tied to the mortgage industry.

The claims cite numerous omissions and misrepresentations in mutual funds that the brokerage firm had underwritten, including those involving Schwab YieldPlus Funds Investor Shares (SWYPX) and the Schwab YieldPlus Fund Select Shares (SWYSX). The funds have undergone major losses recently, and investors claim these losses were not brought about by market events, but, rather, due to mismanagement by Schwab fund managers, including its failure to disclose key information to investors.

Investors say that in addition to Schwab’s alleged failure to diversify its fund assets, the brokerage firm also failed to reveal that Schwab’s leading broker-dealers issued most of the bonds that the funds held, there was no primary market for the majority of the bonds, and the firm’s credit and market analyst did not have the experience to evaluate the value and risk of mortgage backed securities.

Citigroup Settles Securities and Exchange Commission Charges Over Accounting Issues Related to Argentine Bonds

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

Without admitting to our denying any wrongdoing, Citigroup has agreed to settle Securities and Exchange Commission charges that it took part in improper accounting related to specific Argentine bonds. According to the SEC, Citigroup was able to avoid paying another $479 million in pre-tax charges during the 4th quarter of 2001.

Citigroup became affected by Argentina’s economic and political problems because the bank owns Argentine government bonds and over $1 billion in Argentine-related consumer loans. Because of the crisis, the South American country’s government had to default on certain sovereign debt obligations and devalue the country’s currency.

Citibank had to make several accounting decisions, including those involving Argentine government bonds that were not eligible for bond swap, government-sponsored exchanges involving bonds for loans, the sale of Banco Bansud S.A. (a bank subsidiary that Citigroup had acquired), and the result of government actions that lead to the conversion of $1 billion in Citigroup loans to Argentine pesos.

SEC Judge Slaps Next Financial Group With $125,000 Fine Over Recruiting Practices

Published on: June 18, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Commission Administrative Law Judge James T. Kelly is ordering Next Financial Group Inc. to cease and desist from recruiting practices that violate privacy laws. He also has slapped the company with a $125,000 penalty.

Recruiting practices that need to stop included those involving use of clients’ private information. Next has been known to ask recruits to provide their user id and password so that the firm could enter the computer systems of the recruits’ brokerage firms and collect clients’ non-public personal information.

The SEC had originally requested that the judge impose a $325,000 on Next. Judge Kelly, however, acknowledged that there is general confusion within the securities industry about Regulation S-P, which implements stricter privacy laws under the Gramm-Leach-Bliley Act of 2000. However, even Next’s expert witnesses agreed that using the passwords and user ID’s of recruits in this way is not in line with normal industry practices.

Former JP Morgan Chase and Credit Suisse Banker is Sentenced to 10 Years in Prison for Insider Trading Tip Scam

Published on: June 12, 2008 | by Shepherd Smith Edwards & Kantas, LLP

In the U.S. District Court for the Southern District of New York, former JP Morgan Chase and Credit Suisse investment banker Hafiz Muhammed Zubair Naseem was sentenced to 10 years in prison for his involvement in an insider tip scam.

Prosecutors say that Naseem retrieved insider information from the internal bases of both Credit Suisse and JP Morgan Chase. Confidential information that he pulled from Credit Suisse’s files included data related to possible deals with TXU Corp., John H. Harland Co., Caremark Rx Inc., Hydril Co., Trammell Crow Co., Jacuzzi Brands Inc., Veritas DGC Inc., Energy Partners Ltd., and Northwestern Corp.

Insider information from JP Morgan Chase dealt with possible transactions in Engineered Support Systems, Computer Science Systems, Alliance Data Systems, K2 Inc., Education Management Corp., Aramark Corp., Huntsman Corp., and Northwestern Corp.

Piper Jaffray Accused of Giving Faulty Advice in Two Bond Offerings

Published on: May 27, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Earlier this month, the U.S. Court of Appeals for the Eighth Circuit refused to hear an interloculatory appeal regarding attorney-client privilege related to the lawsuit accusing Piper Jaffray & Co of giving faulty advice in two bond offerings. The lawsuit names Union County, Iowa as the petitioner.

The case involves a soybean crushing plant in Union County. CF Processing, owned by Crestland Cooperative, was supposed to construct the plant. Union County says that Piper Jaffray gave the county advice regarding the issuance of two general capital loan notes-bond offerings worth $5.865 million-related to the construction project.

The mill was going to be assessed for property tax purposes. CF Processing agreed to pay any shortfall so the county could make its necessary debt service payments if the tax revenue generated from the assessment did not cover them. Crestland also gave its guarantee regarding CF Processing’s performance. The two companies, however, defaulted on all their obligations when they filed for bankruptcy in 2001.

GunnAllen Financial Settles FINRA Charges Over the Firm’s Alleged Involvement in Trade Allocations

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

GunnAllen Financial Inc. has settled Financial Industry Regulatory Authority charges that it was allegedly involved in a trade allocation scheme, in addition to several reporting, anti-money laundering, supervisory, and recordkeeping deficiencies. The trade allocation scheme was allegedly conducted by Alexis J. Rivera, the former head trader at GunnAllen.

FINRA says that in 2002 and 2003 and acting through Rivera, GunnAllen participated in a “cherry picking” scam. Rivera took profitable stock trades and put them into his wife’s personal account instead of GunnAllen customer accounts. Rivera allegedly made over $270,000 in illegal profits.

The ex-trader has been barred from FINRA. The trade allocation scheme violated FINRA rules and the federal securities laws’ anti-fraud provisions. Rivera’s supervisor, Kelley McMahon, has agreed to a six-month suspension from taking part in a principal role with any FINRA-registered company. She has also agreed to a $25,000 fine.

Wachovia Securities LLC Sued For Alleged Fraud Involving the Sale of Le Nature’s Senior Subordinated Notes

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

In Los Angeles Superior Court, a number of life insurance companies, mutual funds, retirement systems, and other investors are suing Wachovia Securities LLC for alleged fraud related to the sale of senior subordinated notes for beverage maker Le Nature’s Inc. The Pennsylvania-based company filed for bankruptcy in 2006.

Causes of action include fraud, negligent misrepresentation, aiding and abetting fraud, and fraudulent inducement. California Public Employees’ Retirement System (CalPERS) and the Nature Conservancy are among the scores of plaintiffs.

The plaintiffs are accusing Wachovia of knowing about the fraud and financial problems at Le Nature’s but keeping this information from investors so that the beverage company would keep paying the firm substantial fees. They say the lack of disclosure also helped Wachovia’s high-yield debt business.

Ex-Southwest Brokers Found Liable for Concealing Market Timing Trades

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

The U.S. District Court for the Northern District of Texas says that two ex-Southwest Securities Inc. brokers acted fraudulently when they purposely tried to circumvent policies designed to prevent market timing trades. The Securities and Exchange Commission had brought the case against the two men.

The brokers were aleged to have violated Act’s Section 10(b) and Rule 10b-5.

The court also found one culpable under the act’s antifraud provisions and ordered him to disgorge $56,640.67 in commissions. The court also ordered a $50,000 civil penalty and granted the SEC’s request for injunctive relief.

AARP Financial Inc. Survey Says Investors Find Financial Lingo “Technical and Confusing”

Published on: April 28, 2008 | by Shepherd Smith Edwards & Kantas, LLP

An AARP Financial Inc. survey says that many U.S. investors make investment errors and miss out on opportunities to invest because they find financial jargon confusing, technical, and hard to understand. GfK Custom Research North America of New York interviewed 1,203 adults by phone for the survey.

Findings included:

*Over 52% of respondents said they made an investment mistake because they did not understand or were confused about the investment.