Financial Firms

Texas Securities: SEC Says District Court is Mistaken In Not Forcing SIPC to Act for Stanford Ponzi Scam Victims

Published on: January 19, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Addressing the U.S. Court of Appeals for the District of Columbia Circuit, the Securities and Exchange Commission maintains that a lower court was wrong to deny the agency’s bid to compel the Securities Investor Protection Corporation to act on behalf of investors who were victimized by the Allen R. Stanford Ponzi scam. Thousands of investors sustained losses as a result of the scheme. Meantime, Stanford is serving 110 years behind bars for running the $7 billion scheme that involved certificate of deposit sales issued by his Stanford International Bank in Antigua.

“Stanford Securities was a Houston-based firm which sold uninsured CD’s issued by foreign firms to investors all over the world,” said Texas securities fraud attorney William Shepherd. “Its founder was tried for securities fraud in a Federal Court and was sentenced to what will be a lifetime without parole in a federal penitentiary. Little has been gotten back by investors who, unlike the victims of the Ponzi scheme perpetrated by Barnard Madoff, have not been able to recover up to a maximum of $500,000 each from SIPC.”

It was last summer that the U.S. District Court for the District of Columbia noted the preponderance of the evidence standard and found that investors that had bought CD’s from Stanford’s Antigua bank were not, under the meaning of the Securities Investor Protection Act, “customers” of Stanford Group Co., which was Stanford’s brokerage firm in the US. Had that court ruled otherwise, SIPC would have to start liquidation proceedings for the broker-dealer and some 21,000 Stanford CD purchasers could have sought reimbursement through SIPC claims.

NY AG Says Madoff Trustee Shouldn’t Be Able to Block $410M Settlement with Money Manager Merkin

Published on: January 17, 2013 | by Shepherd Smith Edwards & Kantas, LLP

New York Attorney General Eric Schneiderman doesn’t believe that Madoff Trustee Irving Picard should be allowed to block the $410 million securities settlement reached between the state and J. Ezra Merkin, the former GMAC Financial Services chairman who was the money manager of funds that acted as the “feeders” to the Ponzi mastermind. Picard wants the settlement stayed.

Schneiderman had filed a New York securities case against Merckin in 2009 to recover some of the money lost in the multibillion dollar Bernard Madoff Ponzi scam that went on for decades. Picard, however, contends that he is the only one entitled to seek recovery for the victims of the scheme. He also says it is his job to thwart attempts to take assets owned by the bankruptcy estate. He has argued that with the Merckin deal Schneiderman is trying to get around bankruptcy law. As of August 2012, he had raised approximately $9 billion for Madoff’s former clients, who lost about $17 billion of their capital when the Ponzi scam collapsed.

Now, Schneiderman and Bart Schwartz, who is the receiver for Merkins’ funds, are asking a federal district court to stop Picard’s motion seeking injunction to block the settlement. They say that Picard has known for some time that this case was seeking resolution but that he had previously made no attempt to stay their efforts. They pointed out that there are investors depending on this settlement to get their lost funds back.

JPMorgan Chase Ordered to Remedy Risk Management Breakdowns Involving “London Whale” Trades

Published on: January 17, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Office of the Comptroller of the Currency and The Federal Reserve is ordering JPMorgan Chase (JPM) to fix the breakdown that occurred in its risk management that resulted in the “London Whale” trades. These were outsized credit derivatives bets made by a group of traders in the UK that resulted in over $6 billion in losses for the investment bank. Due to the extremity of the some of the positions, prices in the markets became distorted. The “London Whale” is the nickname of one of the traders involved.

According to the newly issued enforcement actions, the internal controls of the bank did not succeed in spotting and preventing specific trading involving credited derivatives that Chief Investment Office Ina Drew conducted and this led to the losses. The OCC says that per investigations that were conducted, there had been certain deficiencies, such as poor risk management procedures and processes, insufficient governance and oversight for proper material risk protection, inadequate control of trade valuation, models that were not properly developed or implemented, and insufficient internal audit processes. Meantime, the Fed pointed to deficiencies of senior management letting the board of directors know about certain issues.

While JPMorgan Chase doesn’t have to pay a fine, there are steps it is going to have to take to enhance its risk management and improve its anti-money laundering procedures. The OCC says that the financial firm’s controls for anti-money laundering have key deficiencies related to the reporting of suspicious activity, the monitoring of transactions, risk assessment, customer due diligence, independent testing, and the proper placement of adequate internal control systems.

Morgan Stanley & Goldman Sachs Settle Federal Homeowner Foreclosure Complaints for $557 Million

Published on: January 16, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Goldman Sachs (GS) and Morgan Stanley (MS) have agreed to collectively pay $557M to settle complaints accusing them of wrongfully foreclosing on homeowners. Under their respective agreements with the Federal Reserve, Morgan Stanley will pay $227M while Goldman will pay $330M.

Approximately 220,000 people who lost their homes due to “robo-signing” and other abuses could receive compensation as a result. Per the agreement with the two investment banks, they will pay $232 million in cash to compensate homeowners. This will conclude the loan files review against the two banks that were ordered in 2011. Cash payments will vary and may go as high as $125,000 to borrowers whose homes foreclosed in 2009 and 2010. $325M will go toward lowering mortgage balances and forgiving outstanding principal on home sales that made less than what borrowers owed on mortgages.

The deals stuck by Morgan Stanley and Goldman Sachs is similarly structured to the $8.5B one reached last week with JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), PNC Financial Services (PNC), MetLife Bank (MET), SunTrust (STI), Sovereign (SOV), Aurora, and US Bank. They are paying 3.8 million homeowners approximately $3.3 billion to conclude the foreclosure review. $5.2 billion is for forgiveness of principal and mortgage modifications. Ally Financial and HSBC are in talks to work out similar settlements. The Fed reports that now, over 4 million borrowers will receive cash compensation.

Credit Suisse Must Face ARS Lawsuit Over Subsidiary Brokerage’s Alleged Misconduct, Says District Court

Published on: January 11, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York has rejected Credit Suisse Group’s (CS) motion to dismiss Elbit Systems Ltd. v. Credit Suisse Group, the auction-rate securities lawsuit filed by an investor claiming that alleged misconduct took place at a Credit Suisse Group brokerage firm subsidiary Credit Suisse Securities (USA) LLC. The court said that the investor did an adequate job of alleging that the subsidiary acted with actual power of authority as Credit Suisse Group’s agent.

The plaintiff, Elbit Systems Ltd., contends that it invested in ARS because it was told that these were liquid, safe, and backed by the US government-backed. However, the Israeli electronics company claims that even as the market started failing in 2007, cash managers started to replace the government-backed ARS with more risky ARS backed by credit-linked note securities and collateralized debt obligations, and its Corporate Cash Management account began to fail, it was never informed that these problems were happening. Instead, its holdings in these risky investments were allegedly increased.

As of the complaints filing, Elbit’s securities have not been sold while its ARS investments had allegedly lost about $16 million. Also, a Credit Suisse Securities executive is accused of telling the plaintiff that brokers Eric Butler and Julian Tzolov were too busy to handle its account when actually, the two of them were no longer at the firm because they had been accused of securities fraud.

Despite Her Involvement in Dozens of Securities Cases, Brokerage Firms Continue to Clear Trades of Newport Coast Securities Broker Bambi I. Holzer

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

Three years after Forbes magazine wrote an article exposing broker Bambi Holzer as someone whose investment advice to clients had resulted in more than $12M in securities settlements, brokerage firms continue to clear her trades. Over the years there have been dozens of complaints filed against her for improper broker activities-more than nearly anyone that we here at Shepherd Smith Edwards and Kantas, LTD, LLP have ever seen.

Holzer is currently a Newport Coast Securities broker, but her employment history with different broker-dealers within the industry has involved numerous financial firms. According to the Financial Industry Regulatory Authority, she was previously registered with Wedbush Morgan Securities Inc., Brookstreet Securities Corporation, and Sequoia Equities Securities. Holzer also worked with UBS (UBS), where she and the firm were compelled to pay at least $11.4 million to settle securities claims that she had allegedly misrepresented variable annuities by misrepresenting that they came with guaranteed returns. Following her time there, Holzer went to go work at AG Edwards (AGE), where she was fired in 2003 for engaging in business practices allegedly not in line with the policies of the firm.

Later, while at Brookstreet, Holzer allegedly made misrepresentations during a 2005 presentation in Beverly Hills about how trusts had allowed a fictional couple to defer $732,000 in taxes and make $9 million. She would later say on her website that 500 people watched her that day. However, a court document says that there were actually just 33 people in attendance.

Also while at Brookstreet, NASD, FINRA’s predecessor suspended Holzer for 21 days and ordered her to pay a $100,000 fine for negligent misrepresentations she allegedly made about certain product features related to variable annuities when she worked at PaineWebber. And an example of one complaint still pending against Holzer is the FINRA arbitration claim filed in early 2010 by a Wedbush Morgan Securities customer who is contending that account mishandling, breach of fiduciary duty, and breach of contract allegedly resulting in $824,000 in damages.

Holzer’s record on FINRA’s Central Registration Depository is 105 pages long, and the lawsuits and regulatory disciplinary actions against her span over 90 of these pages. Allegations include:

• Violations of the Illinois Securities Act • Negligent representations related to variable annuities
• Fraud • Misrepresentations of fees • Unsuitable investments
• Private placement-related fraud • Churning • Variable annuity-related fraud • Inadequate supervision • Elder abuse
• Negligent sale/recommendation of Provident Royalties, LLC • Negligent recommendation/sale of unsafe products, including the Behringer Harvard Security Trust

Many of the FINRA claims against Holzer involve private placement and variable annuity instruments. A lot of these arbitration cases have resulted in substantial settlements.

Beware of Your Broker, Forbes, March 25, 2009

FINRA Central Registration Depository

More Blog Posts:
Ernst &Young Auditor Suspended Over Part Played in Botched 2004 Audit of AA Investors Management LLC, Stockbroker Fraud Blog, January 7, 2013

SEC Roundup: Massachusetts Investment Adviser Gets $1.78M Judgment and Allianz to Pay $12.3M to Settle Foreign Corrupt Practices Act Lawsuit, Stockbroker Fraud Blog, January 7, 2013

Clearing House Association Wants Greater Protections for Clearing Members, Institutional Investor Securities Blog, December 31, 2012

Pension Plans’ Shareholder Derivative Claims Against UBS is Reinstated by 1st Circuit Appeals Court

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

The U.S. Court of Appeals for the First Circuit has reinstated the shareholder derivative claims filed by two Puerto Rican pension funds against UBS Financial Services Inc. (UBS) Judge Kermit Lepez said that following de novo review—a district court had dismissed the case on the grounds that a failure to properly plead demand futility was subject to such an examination—it seemed to him that the plaintiffs’ allegations sufficiently show reasonable doubt about six fund directors’ ability to assess the former’s demand to bring this action with the independence and disinterest mandated by Puerto Rican law.

The two pension funds are the owners of shares in closed-end funds that made investments, which were not successful, through UBS entities. Their investment adviser and fund administrator is UBS Trust, which is a UBS Financial affiliate.

According to the court, UBS Financial, which has been Puerto Rico’s Employee Retirement System (ERS) financial adviser for more than five years, underwrote $2.9B of ERS-issued bonds. Meantime, the UBS Trust bought approximately $1.5B of the ERS bonds and then sold them to funds. At issue is about $757M in bonds that the two Puerto Rican funds purchased.

Morgan Stanley Must Pay Ex-Manager $1M

Published on: January 3, 2013 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority arbitration panel says that Morgan Stanley (MS) Smith Barney has to pay Gregory Carl Torretta $1 million. The financial firm’s ex-manager claims that he was forced to unfairly resign.

Torretta had sought $8 million to $9 million for what he claims were wrongful termination and the breach of his employment contract. Torretta contends that Morgan Stanley had accused him of criticizing the performance of a branch manager, whom he was about to fire, and that he was going to take that person with him to another firm. The allegations surfaced after the branch manager, who was unhappy with the oversight, wrote Torretta implying that the latter had talked about leaving the brokerage firm and suggested that he also leave with him. The branch manager cc’ed Torretta’s boss on the email.

Torretta says that the firm then told him he could either resign or be fired, so he resigned. He is now employed with Ameriprise Financial Services Inc. (AMP). The branch manager was letter let go.

Stockbroker Fraud Headlines: Wells Fargo Banker Charged Over $11M Insider Trading, Morgan Stanley to Resolve Facebook IPO Action for $5M, & SEC Accuses Canadian Broker of Inadequate Day Trader Supervision

Published on: December 28, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Wells Fargo Banker and 8 Others Accused of Alleged $8M Insider Trading Scam

The U.S. Attorney for the Western District of North Carolina is charging Wells Fargo (WFC) investment banker John Femenia and eight alleged co-conspirators with involvement in an alleged $11 million insider trading scam. Femenia is accused of stealing confidential data from his employer and its clients about acquisitions and mergers that were pending. He then either directly or via others tipped his co-conspirators, receiving kickbacks in return.

According to the N.C. government, the insider trading scam resulted in $11M in profits. While six of the co-conspirators opted to plead guilty to conspiracy to commit insider trading, Femenia and the other two have been indicted on multiple charges of conspiracy and insider trading. The same defendants, and another person, are also named in the SEC lawsuit over the scheme.

Stockbroker Fraud Headlines: Securities Claims Against Lehman Underwriters Are Dismissed, NYSE Euronext Works on Kill-Switches Plan, and SEC Calls for Structured Products Ratings Roundtable

Published on: December 24, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Securities Claims Against Lehman Brothers Holdings Inc. Underwriters Are Dismissed

The U.S. District Court for the Southern District of New York has thrown out the California Corporations Code claims made against the underwriters of two offerings of Lehman Brothers Holdings Inc. debt securities per the precluding of the 1998 Securities Litigation Uniform Standards Act. This, despite the fact that the securities case was brought by one plaintiff and lacks class action allegations.

The SLUSA’s enactment had occurred to shut a 1995 Private Securities litigation Reform Act loophole that let plaintiffs filing lawsuits in state courts circumvent the Act’s tougher securities fraud pleading requirements. It generally allows for federal preemption of state law class actions contending misrepresentations related to the buying or selling of a covered security. However, the court granted the motion to dismiss noting that even though the securities case was brought only on the State Compensation Insurance Fund’s behalf, it is still a covered class action within the act’s meaning.