Financial Firms

$600 Million Set Aside by State Street May Be Tip of Mortgage Litigation Iceburg

Published on: January 8, 2008 | by Shepherd Smith Edwards & Kantas, LLP

State Street Corp. announced it established a pre-tax reserve of $618 million billion “to address legal exposure and other costs associated with the under-performance of fixed-income strategies managed by the company’s investment management arm,” blaming exposure to subprime mortgages. The company referenced “customer concerns as to whether the execution of the strategies was consistent with the customers’ investment intent” without identifying any specific litigation.

However, the New York Times published an article stating that State Street created the reserve “after five clients sued it, claiming they had lost tens of millions of dollars in State Street funds they were told would be invested in risk-free debt like Treasuries.” The article added that State Street’s reserve “highlight the legal challenges that lie ahead for financial firms.”

The first of the five lawsuits referenced by the Times article was filed October 1, 2007, by Prudential Retirement Insurance and Annuity Co. The action “seeks, among other relief, restitution of certain losses attributable to certain investment funds” sold by State Street’s investment management arm, and alleges State Street “failed to exercise prudent investment management,” in violation of the Employee Retirement Income Security Act of 1974 (ERISA).

Goldman Sachs Class Securities Fraud Lawsuit is Dismissed

Published on: December 26, 2007 | by Shepherd Smith Edwards & Kantas, LLP

A class securities fraud lawsuit against Goldman Sachs & Co. was dismissed by the U.S. District Court for the Southern District of New York. The lawsuit had charged that a Goldman Sachs & Co. senior analyst issued false research reports with inflated projections of Exodus Communications Inc.’s financial growth on more than one occasion.

Judge Thomas Griesa granted the motion to dismiss after deciding that the second amendment complaint “fails to adequately plead loss causation.” The court dismissed the original lawsuit filed by Exodus investors based on the same grounds.

The Allegations:

Citibank and Columbia University Sued for Charging College Students Extremely High Interest Rates on School Loans

Published on: December 23, 2007 | by Shepherd Smith Edwards & Kantas, LLP

A former Columbia University student is suing Citibank and Columbia University for what he is calling “modern-day slavery,” for allegedly colluding to charge unreasonably high interest rates on student loans.

Brian Baxter, 57, is now a licensed psychotherapist and a social worker. He graduated from Columbia University in the 1990’s with a BA in sociology and a master’s in social work. Baxter says that he is still paying back the interest on his student loan even though it has been 10 years since he graduated.

He says that his $65,000 loan has turned into $172,000. Creditors take 15% of his paycheck regularly. Baxter says he will likely spend the rest of his life paying back his debt.

Ronin Capital, Goldman Sachs Execution & Clearing, Penn Mott Securities, and Pearson Capital Management Receive Censures and Fines from NYSE Regulation

Published on: December 19, 2007 | by Shepherd Smith Edwards & Kantas, LLP

New York Stock Regulation Inc. announced its enforcement actions against four trading companies. The regulator says that Ronin Capital, LLC mismarked over 8,300 short orders because of inadequate supervisory procedures and supervision. The company continued to mismark short orders even after the SEC brought the violation to its attention. Ronin Capital was censured by NYSE Arca and ordered to pay $200,000.

NYSE Arca fined Goldman Sachs Execution & Clearing LP (GSEC) $105,000 for failing to adequately supervise business operators and associated persons in a way that guaranteed compliance with odd lot trading order rules.

Pearson Capital Management LLC was censured and fined $5,000 because it failed to meet market maker requirements. Penn Mott Securities was fined $3,200 for similar violations.

Bear Stearns, Deutsche Bank, and Merrill Lynch Among the Wall Street Firms Subpoenaed by New York Prosecutors

Published on: December 12, 2007 | by Shepherd Smith Edwards & Kantas, LLP

New York Attorney General Andrew Cuomo is subpoenaing several Wall Street firms, including Deutsche Bank AG, Merrill Lynch & Co, and Bear Stearns, for information about packaging and selling debt connect to high-risk mortgages.

Prosecutors want to look at the way investment banks review the quality of mortgages before turning them into packaged products that can be sold to investors. They also want to find out how debt is being turned into securities and learn more about the credit-rating firm-bank relationship.

This past summer, mortgage-backed securities affected by growing default and delinquency rates had high debt ratings despite the backing of loans issued to lenders.

Cromwell Financial Services and Several Employees Will Pay Over $20 Million to Settle Fraudulent Solicitations Allegations

Published on: November 19, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Cromwell Financial Services Inc. and several of its employees says they will pay over $20 million to settle allegations by the state of New Hampshire and the Commodity Futures Trading Commission that they engaged in fraudulent solicitations.

The New Hampshire Bureau of Securities Regulation and the CFTC claim that Cromwell Financial Services and a number of its employees, from 2002 to 2003, engaged in sales presentations that were fraudulent and misleading in an attempt to convince some 900 people to trade options on commodity futures contracts. The options were from commodity futures contracts in accounts at two futures commission merchants.

According to the Consent Order of Permanent Injunction and Other Equitable Relief, Cromwell employees allegedly exaggerated the degree and possibility of profit, while minimizing the investment risks, and neglected to inform the public that over 75% of Cromwell investors have lost money.

Oppenheimer to Pay $1 Million to Settle FINRA Bogus Data Charges

Published on: November 13, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Oppenheimer & Co. says it will pay a $1 million fine to settle charges by the Financial Industry Regulatory Authority that it turned in false information regarding mutual fund breakpoints. The company also has agreed to submit to having an independent consultant conduct an audit regarding how Oppenheimer handles regulatory inquiries. By agreeing to the settlement terms, Oppenheimer is not agreeing to or denying FINRA’s allegations.

Background

FINRA says it initially asked Oppenheimer for the information in March 2003 when the self-regulatory organization (then the NASD) looked at over 2000 broker-dealers who had sold front-end loan funds over a two-year period.

HSBC Securities, Citigroup Global Markets Inc., UBS Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Inc., and Interactive Brokers LLC Among Firms Disciplined by NYSER

Published on: October 21, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The New York Stock Exchange Regulation Inc. is disciplining nine companies and eight people for numerous violation. The firms disciplined include:

Merrill Lynch, Pierce, Fenner & Smith: Fined $100,000 for violating rule 123c about 480 times when it cancelled or submitted securities orders after the mandatory cutoff period.

Citigroup Global markets Inc: Find $300,000-half of this to be payed to NASDAQ; the other half to be paid to NYSE. The firm made inaccurate reports about short interest positions in securities that were listed on the NYSE.

Fidelity Investments and The Vanguard Group Offer Retirees Managed-Payout Funds

Published on: October 17, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Fidelity Investments has launched 11 funds focused on generating steady income for retired seniors. The launch followed a similar launch by The Vanguard Group Inc., who will launch three similar funds in the next couple of months. Fidelity and Vanguard are the largest and second largest mutual funds in the country.

The move by both companies will likely force competitors to do the same. Industry experts say that they expect fund companies with a solid 401 (k) plan market to announce similar fund launches.

However, a number of major fund companies have only admitted to closely monitoring open-end managed-payout funds. This type of fund has been part of a number of closed-end funds for awhile. However, closed-end funds only appeal to a small section of investors.

Interactive Brokers LLC Sanctioned for Failing to Supervise Its Compliance Staff

Published on: October 15, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Commodity Futures Trading Commission (CFTC) ordered Interactive Brokers LLC (IBL) to relinquish $175,000 in commissions, for failing to properly supervise its compliance employees while handling a commodity futures trading account. The National Futures Association (NFA) recently fined IBL $125,000 regarding the same matter and for failing to maintain adequate books and records.

IBL is a discount direct access brokerage firm and registered futures commission merchant (FCM) headquartered in Greenwich, Connecticut. According to the order, an account was maintained at IBL in the name of Kevin Steele, a Canadian who used the account to defraud more than 200 Canadian, German, and US citizens of over $8 million in a commodity pool fraud that was the subject of an earlier CFTC enforcement action.

The CFTC found that, from February 2003 through May 2005, IBL accepted 135 third-party deposits in the form of wire transfers and checks totaling $7.7 million into Steele’s personal account, but did not have procedures reasonably designed to detect the deposit of third-party funds in an individual trading account. The frequency and magnitude of deposits and withdrawals to Steele’s account, relative to his stated liquid net worth, and the pattern of deposits followed by withdrawals suggested that Steele might be operating as an unregistered commodity pool operator.