Financial Firms

Former Head of Commodity Trading and Head Trader at Citibank Both Jailed for Inflating Profits

Published on: May 30, 2007 | by Shepherd Smith Edwards & Kantas, LLP

After his former boss was sentenced, a former head of American trading on the Citibank NA commodity desk was sentenced in May to 12 months and a day in prison and ordered to pay approximately $188,000 after pleading guilty to conspiring to falsify bank records and to commit wire fraud, said a U.S. Attorney for the Southern District of New York.

U.S. Attorney Michael Garcia said Charles Craig Gile schemed to inflate trading profits of the Citibank commodity desk by as much as $20 million during 2003 to increase his stature at the firm and make himself eligible for bonuses. Garcia added that Gile and David Becker, Head of Commodities Trading at Citicorp, understated the market risk and overstated the financial performance of Citibank’s commodity holdings that year. In March, Becker was sentenced to 15 months in prison.

Garcia said the defendants accomplished their scheme using various means, including inputting false data into computer models used to estimate the value of positions held by the commodity desk. Other false inputs were apparently made to artificially decrease the amount of risk being taken by the trading desk. The models therefore showed millions of dollars of artificially inflated profits for Citibank.

Citigroup, Merrill Lynch and Lehman Ex-Brokers Face Retrial in Eavesdropping Case

Published on: May 27, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Three former brokers of Citigroup, Merrill Lynch and Lehman Brothers face a second trial on charges they conspired to commit fraud by allowing day traders to eavesdrop on orders being discussed on investment firms’ internal “squawk boxes.” Four current and former executives at the day trading firm A. B. Watley Group will also be retried for their alleged roles in the scheme.

After a seven-week trail seven defendants including these former brokers were acquitted of securities fraud and other charges, but the jury deadlocked on the conspiracy charges opening the door to a retrial.

Prosecutors assert the brokers conspired to give Watley traders access to large orders broadcast over intercoms, or “squawk boxes”, in exchange for cash and commissions. The traders bought or sold stock ahead of the orders in anticipation of share-price swings, prosecutors say.

SEC says AIG and Other Insurance Companys’ Products Used for Earnings Fraud

Published on: May 27, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission for the first time proved a company used insurance to hide its losses.

The agency accused an executive of cellphone distributor Brightpoint Inc. of overstating the company’s earnings through improper use of an insurance policy. A New York jury found the company’s director liable for assisting in Brightpoint’s fraud and other violations of securities law said the SEC

In November, the American International Group(AIG) paid $126 million to settle claims by the Department of Justice and SEC that it assisted companies, including Brightpoint and the PNC Financial Services Group, inflate earnings through AIG’s insurance products.

SEC Says Credit Suisse First Boston Broker’s Tips on TXU Used by Pakistani Banker

Published on: May 22, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The SEC says it is requesting that the name of Pakistani banker Ajaz Rahim be added to the lawsuit charging the trading in of call options for TXU Corp that were based on insider information regarding an investment group’s leveraged buyout of the entity. The commission filed its third amended complaint in the U.S. District Court for the Northern District of Illinois.

The SEC is accusing Rahim of accepting tips offered by CSFP banker Hafiz Naseem, who is said to have misappropriated information from Credit Suisse, LLC, which advised TXU regarding the buyout.

Naseem was charged in connection to his alleged involvement in the controversy in the SEC’s second amended complaint. The SEC had issued allegations of insider trading just before the TXU buyout against “Certain Unknown Purchasers of TXU Call Options.

RBC Dain Rauscher Fined $90K for Compliance Program Flaws

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

The New York Stock Exchange Regulation Inc. announced that RBC Dain Rauscher Inc. consented to be fined $90,000 for failures related to its anti-money laundering compliance program.

According to an exchange press release, the Minneapolis-based firm failed to establish written procedures regarding filing of suspicious activity reports. Additionally, the exchange alleged, the firm did not have an adequate monitoring system to review and document follow-up on exceptions found by the firm’s department, the release stated.

The firm, which neither admitted nor denied the allegations, consented to the fine and a censure, according to the release.

Wachovia is Among the Financial Institutions Accused of Assisting Scam Artists To Bilk Seniors

Published on: May 20, 2007 | by Shepherd Smith Edwards & Kantas, LLP

For decades, telemarkers in “boiler rooms” have bilked the elderly by convincing touting them to buy investments which supposedly pay high rates of return or have fabulous growth potential.

Now thieves operating in small offices in Canada and warehouses in India work day and night targeting elderly Americans. Working from lists of names and phone numbers, they call War veterans, retired schoolteachers and thousands of other elderly Americans and posed as government and insurance workers updating their files.

Then, the criminals empty their victims’ bank accounts!

Citigroup Will Pay $200,000 in SEC Sanctions Connected to LMWW Auction Market Misconduct

Published on: May 16, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Last week, Citigroup Global Markets Inc. said it would pay a $200,000 fine to settle charges by the Securities and Exchange Commission. The charges are connected to Leg Mason Wood Walker Inc’s allegedly improper interference with auction rate securities. Citigroup is LMWW’s merger successor.

According to the SEC, the penalty amount was determined based on LMWW’s willingness to cooperate, the “relatively small share of the auction rate securities markets,” and LMWW’s decision to report the allegedly illegal practices at a later time than did other broker-dealers from an earlier settlement.

During that related case, 15 broker-dealers-Citigroup included-said they would pay penalties of over $13 million related to charges that they participated in violative practices affecting the $200 billion auction rate securities market.

Claims Against Goldman Sachs for Alleged Fannie Mae Fraud Must Be Filed Individually

Published on: May 14, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the District of Columbia dismissed class action claims against Goldman Sachs & Co. stemming from two Real Estate Mortgage Investment Conduit–or REMIC–deals with Fannie Mae.

Judge Richard Leon said that the plaintiffs–Fannie Mae investors–-failed plead a case which involved “direct acts” of securities fraud by Goldman. (In a court system friendly to those accused of securities fraud, claims are not allowed for aiding and abetting Federal Securities violations and class action claims involving securities fraud can no longer be filed under state laws.)

However, this court’s decision does not prevent members of the former class action from now seeking their own claim against Goldman in court or arbitration. Clients of Goldman who purchased shares of Fannie Mae during this period would likely have the stronger claims. Such claims could include aiding and abetting, conspiracy and other claims under state laws which were not allowed in the class action. Fortunately, statutes of limitations on individual claims are usually preserved while a class action case is pending in court.

NASD Fines Two Fidelity Brokerage Subsidaries $400,000 for Distributing Misleading Sales Literature Regarding Systematic Investment Plans Sold to Military Personnel

Published on: May 10, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The NASD announced this week that it fined two Fidelity brokerage firms $400,000 for preparing and distributing misleading sales literature promoting Systematic Investment Plans, which were sold primarily to U.S. military personnel. Issuance and sales of new systematic investment plans after these were prohibited by Congress last fall.

The NASD found that between January 2003 and January 2006, the two firms violated NASD advertising rules by preparing and distributing misleading sales literature. From May 2003 through January 2006, the Fidelity firms prepared and distributed a brochure entitled “Time is Money” that included misleading performance claims about its “Destiny Plans”. According to “mountain charts” contained in the brochures, these plans significantly outperformed the S&P 500 Index over a 30-year period. Yet, during the most recent 10- and 15-year periods-the time frame most relevant to current and prospective investors – Destiny Plans substantially underperformed the S&P 500 Index.

The brochures also showed average annual total returns for 1, 5 and 10 years as well as the life of the Plan, without showing comparable returns for the S&P 500 Index. This also created the misleading impression that the plans outperformed the S&P 500 Index when instead that index significantly outperformed the plans.

A Warning on Risk in Securities backed by Commercial Mortgages

Published on: May 7, 2007 | by Shepherd Smith Edwards & Kantas, LLP

In the wake of the collapse of the subprime residential mortgage market, the leading bond rating agencies are beginning to crack down on what they see as risky lending practices in commercial real estate as well.

Like residential loans, commercial mortgages are pooled and packaged into bonds that are sliced up into portions carrying different degrees of risk. According to Moody’s, there were $769.6 billion in commercial mortgage-backed securities at the end of last year, representing 26.1 percent of all outstanding commercial mortgages, including apartment buildings.

The agencies that rate these securities have issued warnings in the past, but last month they sounded a new note of urgency, saying that for the first time they would adjust their ratings to reflect their concerns.