Financial Firms

CtW Investment Group Wants JPMorgan Chase Shareholders To Vote Against Re-Electing Four Board of Directors

Published on: April 15, 2013 | by Shepherd Smith Edwards & Kantas, LLP

CtW Investment Group has announced plans to file a document with the Securities and Exchange Commission that would press shareholders to vote against reelecting four JPMorgan Chase & Co. (JPM) board of directors: James Crown, Ellen Futter, Laban Jackson, and David Cote. The group, which represents pension funds that together hold approximately 6 million of the financial firm’s shares and is labor organization Change to Win’s advisory arm, also intends to make its request in writing to the shareholders.

CtW believes that these directors can no longer be depended on to deal with oversight failures and blames most of them for poor risk management oversight that they say allowed the trading fiasco to happen. Meantime, JPMorgan is seeking support among its biggest shareholders. It claims that the board isn’t to be blamed for the “London Whale,” which involved its operation in England making risky bets and losing nearly $6 billion in losses.

Meantime, in a report on the global investment banking industry, JPMorgan’s analysts pointed to Goldman Sachs (GS) and Deutsche Bank (DB) as examples of Tier 1 investment banks to stay away from. It described this tier of banks as “un-investable, with their viability in doubt.

LPL Financial Continues to Stay On Regulators’ Radar

Published on: April 10, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to a number of state and federal regulators, they are continuing to keep their eyes on LPL Financial (LPLA), the fourth biggest brokerage firm in the US after Wells Fargo (WFC), Morgan Stanley (MS)and Merrill Lynch (MER). With 13,300 brokers, 4.3 million customers, and 6,500 offices, it is the biggest broker-dealer in rural America.

Yet even as LPL has grown, so has the number of censures it, and its brokers have been faced with numerous allegations, including securities fraud, selling unsuitable investments to unsophisticated investors, and speculative trading in client accounts. Just in the last 18 months, regulators in Massachusetts, Illinois, Oregon, Montana, and Pennsylvania have imposed penalties on LPL for inadequate broker supervision.

LPL’s recent fast growth can in part be attributed to the 2008 economic crisis, which caused many investors to flee from more prominent brokerage firms and into the arms of independent broker-dealers. Brokers at firms such as LPL are not employees but contractors that are able to earn a huge percentage of the fees and commissions. The supposed advantage for investors is that independent broker-dealers don’t have their own investment products that they are trying to foist onto customers.

However, some analysts believe that the bigger commissions that LPL has to pay its brokers means that the firm has less cash for compliance and is more prone to draw in brokers wanting to get around the rules. Evidence of possible problems from this independent broker system can be found in Montana, where 31 LPL brokers were named in eight securities complaints in the past five years. According to the state, almost half of the LPL brokers there are registered there as their own supervisors. In Washington State, authorities filed a case against LPL last year because a broker allegedly sold nontraded real estate investment trusts to dozens of older investors.

Fast-Growing Brokerage Firm Often Tangles With Regulators, New York Times, March 21, 2013

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Medical Capital Fraud Lawsuit Against Wells Fargo Must Proceed

Published on: April 10, 2013 | by Shepherd Smith Edwards & Kantas, LLP

U.S. District Judge David Carter has turned down Wells Fargo & Co.’s (WFC) bid to throw out a securities lawsuit filed by investors accusing the investment bank of not fulfilling its role as trustee for debt issued by Medical Capital Holdings, which failed in an approximately billion dollar fraud in 2009. His ruling removes any obstacles to a possible trial. Claims could hit the hundreds of millions of dollars.

The investors in this securities case are among those that purchased notes put out by three Medical Capital special purpose companies that named the investment bank as their trustee. They are accusing Wells Fargo of 63 breaches. Meantime, the financial firm maintains that it didn’t act in bad faith and it wasn’t negligent in the way it fulfilled its contractual duties.

Per court documents, the holding company had raised $1.7 billion from over 20,000 investors between 2003 and July 2009, which was when the SEC filed a securities fraud lawsuit against it and two of its executives. The company soon shut its doors. Later, a receiver discovered that investors had lost $839 million to $1.08 billion in a Ponzi-like scam that involved the payment of extra fees.

Many Investors Find that Securities Arbitration Can Be Better than Court

Published on: April 9, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The dismissal of an Apple REIT class action lawsuit against David Lerner Associates Inc. in U.S. District Court for the Eastern District of New York should have little effect on the Apple REIT arbitration cases that are being resolved through Financial Industry Regulatory Authority arbitration. In fact, most investors are likely to recoup their losses via this avenue.

Per Bloomberg, Investors are contending that they were defrauded in the underwriting and sale of more than $6.8 billion Apple Real Estate Investment Trusts (REITs), which were marketed as suitable for conservative investors. Meantime, Lerner Associates earned over $600 million in commissions and fees as five Apple REITs made above $6 billion.

Last year alone, FINRA told David Lerner to pay $12 million in Apple REIT Ten restitution to investors. The financial firm allegedly targeted elderly investors, misleading them while failing to properly disclose the risks involved in the securities.

Previous Dissent by Arbitrator is Not Reason to Vacate Award Morgan Keegan Was Ordered to Pay Investors, Says District Court

Published on: April 8, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Middle District of Florida is holding that an arbitration award granted to investors cannot be vacated under the Federal Arbitration Act just because an arbitrator exhibited obvious partiality when failing to reveal that he wrote a dissent in an unrelated arbitration that allegedly showed he had prejudged issues of law. The securities case is Antietam Industries Inc. v. Morgan Keegan & Co.

Petitioners Antietam Industries Inc., Janice Warfel, and William Warfel contend they sustained financial losses over their RMK fund investments. In 2011, they filed a Financial Industry Regulatory Authority arbitration case claiming that their money was lost because Morgan Keegan had made misrepresentations while failing to disclose how risky the funds were.

Last year, the panel awarded the petitioners $100,000 in compensatory damages and $100,000 in punitive damages, plus fees and interest, for negligence, breach of fiduciary duty, and other claims. When they sought to confirm the award, Morgan Keegan submitted a motion to vacate, pointing to FAA and contending that arbitrator Christopher Mass allegedly showed partiality and “misbehavior” with his failure to disclose his previous dissent. The court, however, rejected Morgan Keegan’s argument, saying it was not convinced that Mass was predisposed or had prejudged.

RMBS Lawsuit Against Deutsche Bank Can Proceed, Says District Court

Published on: April 4, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York is refusing to throw out the shareholder securities fraud lawsuit filed against Deutsche Bank (DB) and three individuals over their alleged role in marketing residential mortgage-backed securities and mortgage-backed securities before the economic crisis. The court found that the plaintiffs, led by Building Trades United Pension Fund, the Steward International Enhanced Index Fund, and the Steward Global Equity Income Fund, provided clear allegations that omissions and misstatements were made and there had been a scam with intent to defraud.

The RMBS lawsuit accuses Deutsche Bank of putting out misleading and false statements regarding its financial health prior to the financial crisis. The plaintiffs contend that the financial firm created and sold MBS it was aware were toxic, while overstating how well it could handle risk, and did not write down fast enough the securities that had dropped in value. Because of this, claim the shareholders, the investment bank’s stock dropped 87% in under 24 months.

U.S. District Judge Katherine Forrest said that the plaintiffs did an adequate job of alleging that even as Deutsche Bank talked in public about its low risk lending standards, senior employees at the firm were given information showing the opposite. She said that there are allegations of recklessness that are “plausible.” The district court also found that the complaint adequately alleged control person and antifraud violations involving defendants Chief Executive Officer Josef Ackermann, Chief Financial Officer Anthony Di Iorio, and Chief Risk Officer Hugo Banziger, who are accused of making material misstatements about the risks involved in investing in CDOS and RMBS while knowing they were less conservative than what investors might think. Claims against defendant ex-Supervisory Board Chairman Clemens Borsig, however, were thrown out due to the plaintiffs’ failure to allege that he made an actual misstatement.

Deutsche Bank Settles Massachusetts CDO Case for $17.5 Million

Published on: April 1, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Deutsche Bank Securities Inc. has consented to pay $17.5 million to the state of Massachusetts to settle allegations by that it did not disclose conflicts of interest involving collateralized debt obligation-related activities leading up to the financial crisis. Secretary of the Commonwealth William Galvin also is accusing the firm of inadequately supervising employees that knew about the conflicts but did not disclose them. DBSI, a Deutsche Bank AG (DB) subsidiary, has agreed to cease and desist from violating state securities law in the future.

In particular, the subsidiary allegedly kept secret its relationship with Magnetar Capital LLC. Galvin claims that DBSI proposed, structured, and invested in a $1.6 billion CDO with the Illinois hedge fund, which was shorting some of the securities’ assets. In total, Deutsche Bank Securities and Magnetar are said to have invested in several CDOs worth approximately $10 million combined.

The state of Massachusetts’s case focused on Carina CDO Ltd., of which Magnetar was the sponsor that invested in the security’s equity and shorted the assets that were BBB-rated. Ratings agencies would go on to downgrade the collateralized debt obligation to junk. Galvin contends that it was Deutsche Bank’s job to tell investors what Magnetar was doing rather than keeping this information secret.

Barclays Capital, Interactive Brokers, Lebenthal & Co., and Advisors Asset Management Pay $105,000 in FINRA Fines Related to Municipal Securities Rulemaking Board Violations

Published on: March 30, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is ordering four financial firms to pay $105,000 in fines for Municipal Securities Rulemaking Board violations related to political contribution, pricing, supervision, and other rules. The SRO noted the fines in its monthly disciplinary report.

One firm, Interactive Brokers LLC, must pay $7,500 for trade reporting violations related to Rule G-14’s requirements. The financial firm is accused of not reporting 60 sale and purchase transactions to the Real Time Transaction Reporting System within 15 minutes of their execution during 2010’s third quarter.

A second firm, Barclays Capital Inc, has to pay $15,000 for violating rules G-14, G-8, and G-27. The firm purportedly did not report 40 transactions to the RTRS, also within 15 minutes of their execution during 2011’s second quarter. It is accused of not reporting the correct trade time of 66 transactions.

Investors are Not Raymond James Financial Customers for FINRA Arbitration Purposes, Rules 4th Circuit

Published on: March 28, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Fourth Circuit affirmed that, for purposes of Financial Industry Regulatory Authority arbitration, investors who lost the investment they made on stock they purchased from a lawyer connected to a Raymond James Financial Services (RJF) Inc. broker are not the brokerage firm’s client. The appeals court said that the investors dealings with the broker-dealer were “too remote.”

Tax lawyer David Affeldt had been recruited by an Inofin Inc. executive to recommend to investors that they buy securities from the company. That employee happened to be the college roommate of then-Morgan Stanley (MS) representative Kevin Keough, who also informally acted in a sales capacity for Inofin.

Because of his employment with the financial firm at the time, Keough had Inofin pay his compensation for the referrals to his wife instead of to him. He and Affeldt, however, agreed to equally share these referral fees-an agreement that continued even after Keough went to work with Raymond James.

2nd Circuit Eases MBS Lawsuits by Reinstating Pension Fund’s Case Against Wells Fargo, Royal Bank of Scotland, Wachovia, & Others

Published on: March 28, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Second Circuit has reinstated New Jersey Carpenters Health Fund v. Royal Bank of Scotland Group PLC (RBS), which also includes defendants Wells Fargo Advisors (WFC), McGraw-Hill (MHP), and a number of others. The decision will ease class action mortgage-backed securities lawsuits by investors.

Holding that the plaintiff did not satisfy pleading requirements under the Securities Act of 1933 for lawsuits, a district court had thrown out the case, which was filed by the New Jersey pension fund. The 2nd circuit, however, reversed the ruling, finding that the allegations made (that an unusually high number of mortgages involving a security had defaulted, credit rater agencies downgraded the ratings of the security after modifying how they account for inadequate underwriting, and ex-employees of the relevant underwriter vouched that underwriting standards were being systematically ignored) make a plausible claim that the security’s offering documents incorrectly stated the applicable writing standards. This would be a Securities Act of 1933 violation.

Expected to benefit from the ruling are federal credit union regulators, including the National Credit Union Administration, which has submitted a number of MBS lawsuits against financial firms and banks. Last year, NCUA filed a $3.6 billion action against JP Morgan Chase (JPM) accusing the latter’s Bear Stearns & Co. unit of employing misleading documents to sell mortgage-backed securities to four corporate credit unions that went on to fail. The credit union agency contends that the mortgage in the pools collateralizing the RMBS (residential mortgage-backed securities) did not primarily adhere to underwriting standards noted in the offering statements and the securities were much riskier than what they were represented to be. NCUA has also sued a few of the defendants that the New Jersey Carpenters Health Fund is suing, as well as Goldman Sachs Group (GS) and Barclays.