Arbitration Rulings

Goldman Sachs Execution and Clearing Must Pay $20.5M Arbitration Award in Bayou Ponzi Scam, Upholds 2nd Circuit

Published on: July 14, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Second Circuit is allowing a $20.5M award issued by a Financial Industry Regulatory Authority arbitration panel against Goldman Sachs Execution & Clearing LP to stand. The court turned down Goldman’s claim that the award should be vacated because it was issued in “manifest disregard of the law” and said that the clearing arm must pay this amount to the unsecured creditors of the now failed Bayou hedge fund group known as the Bayou Funds, which proved to be a large scale Ponzi scam.

Goldman was the prime broker and only clearing broker for the funds. After the scheme collapsed in 2005, the Bayou Funds sought bankruptcy protection the following year. Regulators would go on to sue the fund’s funders over the Ponzi scam and the losses sustained by investors. Meantime, an Official Unsecured Creditors’ Committee of Bayou Group was appointed to represent the debtors’ unsecured debtors. Blaming Goldman for not noticing the red flags that a Ponzi fraud was in the works, the committee proceeded to bring its arbitration claims against the clearing firm through FINRA. In 2010, the FINRA arbitration panel awarded the committee $20.58M against Goldman.

In affirming the arbitration award, the 2nd Circuit said that in this case, Goldman did not satisfy the manifest disregard standard. As an example, the court pointed to the $6.7M that was moved into the Bayou Funds from outside accounts in June 2005 and June 2004. While the committee had contended during arbitration that these deposits were “fraudulent transfers” and could be recovered from Goldman because they were an “initial transferee” under 11 U.S.C. §550(a), Goldman did not counter that the deposits weren’t fraudulent or that it was on inquiry notice of fraud. Instead, it claimed the deposits were not an “initial transferee” under 11 U.S.C. §550 and the panel had ignored the law by finding that it was.

Institutional Investor Roundup: Evergreen Ultra Short Investor Lawsuit Settled for $25M, FINRA Launches Pilot Program for Huge Claims, Ex-AmeriFirst Funding Manager’s Conviction Appeal is Rejected, & EU Regulator Examines Credit Raters’ Bank Downgrade

Published on: July 12, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Evergreen Investment Management Co. LLC and related entities have consented to pay $25 million to settle a class action securities settlement involving plaintiff investors who contend that the Evergreen Ultra Short Opportunities Fund was improperly marketed and sold to them. The plaintiffs, which include five institutional investors, claim that between 2005 and 2008 the defendants presented the fund as “stable” and providing income in line with “preservation of capital and low principal fluctuation” when actually it was invested in highly risky, volatile, and speculative securities, including mortgage-backed securities. Evergreen is Wachovia’s investment management business and part of Wells Fargo (WFC).

The plaintiffs claim that even after the MBS market started to fail, the Ultra Short Fund continued to invest in these securities, while hiding the portfolio’s decreasing value by artificially inflating the individual securities’ asset value in its portfolio. They say that they sustained significant losses when Evergreen liquidated the Ultra Short Fund four years ago after the defendants’ alleged scam collapsed. By settling, however, no one is agreeing to or denying any wrongdoing.

Meantime, seeking to generally move investors’ claims forward faster, the Financial Industry Regulatory Authority has launched a pilot arbitration program that will specifically deal with securities cases of $10 million and greater. The program was created because of the growing number of very big cases.

Merrill Lynch to Pay Brokers Over $10M for Alleged Fraud Over Deferred Compensation Plans

Published on: April 5, 2012 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Arbitration panel has ordered Merrill Lynch (BAC) to pay over $10 million to two brokers who claim the financial firm wrongly denied their deferred compensation plans to vest. Per the FINRA arbitration panel, senior management at Merrill purposely engaged in a scam that was “systematic and systemic” to prevent its former brokers, Tamara Smolchek and Meri Ramazio, from getting numerous benefits, including the ones that they were entitled to under the financial firm’s deferred-compensation programs, so that it wouldn’t be liable after the acquisition. The panel accused Merrill of taking part in “delay tactics” and “discovery abuses.”

Some 3,000 brokers left Merrill after Bank of America Corp. (BAC) acquired it in 2008. A lot of these former employees are now claiming that they were improperly denied compensation.

Smolchek and Ramazio alleged a number claims related to their deferred compensation plans’ disposition. Causes of action against Merrill included breach of duty of good faith and fair dealing, breach of contract, breach of fiduciary duty, unjust enrichment, constructive trust, conversion, defamation, unfair competition, tortious interference with advantageous business relations, violating FINRA Rule 2010, fraud, and negligence.

Broker employment contracts usually mandate that an employee stay with a financial firm for several years before they are entitled to vest the money they are earning in their tax-deferred accounts. However, several of Merrill’s deferred compensation programs allow brokers that have left the firm for “good reason” to have their money vest.

The FINRA panel expressed shock that after the departure of 3,000 Merrill advisers following the Bank of America acquisition, the firm did not approve a single claim for vesting that cited a “good reason” under the deferred compensation programs. Per Merrill’s own analysis, had it approved the vesting requests, the financial firm might have paid anywhere from the hundreds of millions to billions of dollars in possible liability.

Per the compensation ruling, Merrill has to pay Ramazio $875,000 and Smolchek $4.3 million in compensatory damages for unpaid deferred compensation, unpaid wages, lost wages, lost book, lost reputation, and value of business. The FINRA panel also awarded $1.5 million in punitive damages to Ramazo and $3.5 million to Smolchek.

The same day that the decision was issued, Merrill filed an appeal. The financial firm wants the ruling overturned, claiming that it never received a fair hearing and that panel chairwoman Bonnie Pearce was biased. Merrill contends that Pearce did not disclose that her husband is a plaintiff’s lawyer who sued the financial firm for customers and brokers in at least five lawsuits. Merrill is accusing Pearce of “overt hostility.”

Merrill Lynch Loses $10 Million Compensation Ruling, The Wall Street Journal, April 4, 2012

Merrill Lynch Savaged by FINRA Arbitrators in Historic Employee Dispute, Forbes, April 4, 2012

More Blog Posts:
Securities Claims Accusing Merrill Lynch of Concealing Its Auction-Rate Securities Practices Are Dismissed by Appeals Court, Stockbroker Fraud Blog, November 30, 2011

Merrill Lynch Faces $1M FINRA Fine Over Texas Ponzi Scam by Former Registered Representative, Stockbroker Fraud Blog, October 10, 2011

Merrill Lynch, Pierce, Fenner & Smith Ordered to Pay $1M FINRA Fine for Not Arbitrating Employee Disputes Over Retention Bonuses, Institutional Investor Securities Blog, January 26, 2012

Oppenheimer & Co. Must Buyback $6M in Auction-Rate Securities from Investor, Says FINRA Arbitration Panel

Published on: January 11, 2012 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority arbitration panel has ordered Oppenheimer & Co. to repurchase the $5.98 million in New Jersey Turnpike ARS that it sold Nicole Davi Perry in 2007. The investor reportedly purchased the securities through Oppenheimer Holdings Inc. (OPY).

Perry, who, along with her father, filed her ARS arbitration claim against the financial firm in 2010, accused Oppenheimer of negligence and breach of fiduciary duty. She and her father, Ronald Davi, were reportedly looking for liquidity and safety, but instead ended up placing their funds in the auction-rate securities. They contend that they weren’t given an accurate picture of the risks involved or provided with a thorough explanation of the securities’ true nature.

Oppenheimer disagrees with the panel’s ruling. In addition to buying back Perry’s ARS, the financial firm has to cover her approximately $134,000 in legal fees.

It was just in 2010 that Oppenheimer settled the ARS securities cases filed against it by the states of New York and Massachusetts. The brokerage firm consented to buy back millions of dollars in bonds from customers who found their investments frozen after the ARS market collapsed and they had no way of being able to access their funds.

Oppenheimer is one of a number of brokerage firms that had to repurchase ARS from investors. These financial firms are accused of misrepresenting the risks involved and inaccurately claiming that the securities were “cash-like.” A number of these brokerage firms’ executives allegedly continued to allow investors to buy the bonds even though they already knew that the market stood on the brink of collapse and they were selling off their own ARS.

ARS
Auction rate securities are usually corporate bonds, municipal bonds, and preferred stock with long-term maturities. Investors receive interest rates or dividend yields that are reset at each successive auction.

ARS auctions take place at regular intervals—either every 7 days, 14 days, 28 days, or 5 days. The bidder turns in the lowest dividend yield or interest rate he or she is willing to go to purchase and hold the bond during the next auction interval. If the bidder wins at the auction, she/he must buy the bond at par value.

Failed auctions can happen when there are not enough bidding buyers available to acquire the entire ARS block being offered. A failed auction can prevent ARS holders from selling their securities in the auction.

There are many reasons why an auction might fail and why there is risk involved for investors. It is important that investors are notified of these risks before they buy into the securities and that they only they get into ARS if this type of investment is suitable for their financial goals and the realities of their finances.

Oppenheimer settles with Massachusetts, NY, Boston, February 24, 2010

More Blog Posts:
Oppenheimer Funds Investors Can Proceed with Their Securities Fraud Lawsuit, Stockbroker Fraud Blog, November 19, 2011

Raymond James Settles Auction-Rate Securities Case with Indiana Securities Division for $31M, Stockbroker Fraud Blog, August 27, 2011

Citigroup Request to Overturn $54.1M Municipal Bond Arbitration Ruling Denied by Judge

Published on: December 27, 2011 | by Shepherd Smith Edwards & Kantas, LLP

A US judge has denied Citigroup’s request that the $54.1M Financial Industry Regulatory Authority arbitration award issued to investors that sustained losses in municipal bond funds be overturned. This is one of the largest securities arbitration awards that a broker-dealer has been ordered to pay individual investors. Brush Creek Capital, retired lawyer Gerald D. Hosier, and investor Jerry Murdock Jr. are the award’s recipients. However, these Claimants are not the only investors to come forward contending that they were told the funds were suitable for investors that wanted to preserve their capital.

The investor losses were related to several leveraged municipal bond arbitrage funds that saw their value significantly drop between 2007 and 2008. Citigroup Global Markets had sold the municipal bond funds through MAT Finance LLC. Proceeds were invested in longer-term muni bunds while borrowing took place at low, short-term rates. The strategy proved to be unsuccessful, resulting in investors losing up to 80% of their money.

According to The Wall Street Journal, when it issued its ruling the arbitration panel appeared to reject three defenses that financial firms usually make:

• The financial crisis, and not the financial firm, is to blame for the losses.
• Sophisticated, rich investors should have known what risks were involved.
• The prospectus had warned in advance that investors could lose everything.

The Claimants alleged fraud, failure to supervise, and unsuitability. They had sought no less than $48 million in compensatory damages, fees, lost-opportunity costs, commission, lawyers’ fees, and interest.

The FINRA arbitration panel awarded $21.6 million in compensatory damages, plus 8% per annum, to Hosier, $3.9 million in compensatory damages, plus 8% per annum, to Murdock, Jr, and $8.4 million in compensatory damages, plus 8% per annum, to Brush Creek Capital LLC.

All Claimants were also awarded $3 million in lawyers’ fees, $17 million in punitive damages, $33,500 in expert witness fees, $13,168 in court reporter expenses, and $600 for the Claimant’s filing fee.

Following the FINRA ruling, Citigroup contended that the arbitration panel had ignored the law when arriving at the award. The brokerage firm also claimed that investors could not have depended on verbal statements that the financial firm had expressed about purchases because the clients had acknowledged through signed agreements that they could lose everything they invested. By denying Citigroup’s request to throw out the arbitration award, Judge Christine Arguello, however, said that the court found Citigroup’s “argument wholly unpersuasive.”

A Crack in Wall Street’s Defenses, New York Times, April 24, 2011

Citigroup Slammed With $54 Million Award by FINRA Arbitrators in MAT / ASTA Case, Municipal Bond, April 12, 2011

Citigroup loses suit to overturn $54-million ruling, Reuters, December 22, 2011

More Blog Posts:
JPMorgan Chase to Pay $211M to Settle Charges It Rigged Municipal Bond Transaction Bidding Competitions, Stockbroker Fraud Blog, July 9, 2011

Citigroup Ordered by FINRA to Pay $54.1M to Two Investors Over Municipal Bond Fund Losses, Stockbroker Fraud Blog, April 13, 2011

Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rakoff, Institutional Investor Securities Blog, November 9, 2011

Wedbush Ordered By FINRA Panel To Pay $3.5M to Trader Over Withheld Compensation

Published on: July 16, 2011 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulator Authority Panel has ordered WedBush Securities Inc. to pay one of its traders over $3.5 million for refusing to properly compensate him. According to claimant Stephen Kelleher, he worked for the financial firm for years without consistently getting the incentive-base compensation that he was promised as a municipal sales trader. Kelleher started working for Wedbush in 2007 until right before the arbitration ruling was made.

Kelleher claims that Wedbush withheld nearly $5 million from him. While he regularly received his base salary, the bulk of his income, which was incentive-based compensation, was unevenly distributed and issued to him in May 2008, October 2009, and April 2010. Even then Kelleher contends that he did not receive everything he was owed.

In his FINRA arbitration claim, Kelleher alleged violation and failure to pay per labor laws, breach of contract, unfair business practices, and fraud. He sought over $6.1 million, including $4.17 million in compensation owed, close to $878,000 in interest, and penalties of $1 million and $2,100 over labor code violations. He also sought damages for civil code law violations, as well as punitive damages.

During the FINRA hearing, witnesses testified that it was Wedbush president and founder Edward W. Wedbush who made decisions about paying and withholding incentive compensation. Another Wedbush employee said that there were two years when he too didn’t get the incentive-based compensation that he was owed. The FINRA panel blamed Wedbush’s “corporate management structure” that required that Edward Wedbush, as majority shareholder, approve bonus pay at his discretion.

In addition to the $3.5 million, the FINRA panel also told Wedbush it has to give Kelleher the vested option to purchase 3,750 Wedbush shares at $20/share and another $375 shares at $26/share. Wedbush also must pay the Claimant for the $200 part of the FINRA filing fee that is non-refundable.

Wedbush intends to appeal the securities arbitration ruling.

Related Web Resources:
Wedbush ordered to pay $3.5M for ‘morally reprehensible failure’, Investment News, July 11, 2011

More Blog Posts:
FINRA Panel Orders Merrill Lynch Professional Clearing Corporation to Pay $64M Over Losses Sustained by Rosen Capital Institutional LP and Rosen Capital Partners LP, Institutional Investors Securities Blog, July 14, 2011

FINRA Panel Orders Merrill Lynch Professional Clearing Corporation to Pay $64M Over Losses Sustained by Rosen Capital Institutional LP and Rosen Capital Partners LP

Published on: July 14, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Merrill Lynch Professional Clearing Corporation must pay hedge funds Rosen Capital Partners LP and Rosen Capital Institutional LP $63,665,202.00 in compensatory damages plus interest (9% from October 7, 2008). A Financial Industry Regulatory Authority arbitration panel issued the order which found the respondent liable.

In their statement of claim, made by the claimants in 2009, the hedge funds accused Merrill Lynch of reach of contract, fraud, breach of the duty of good faith and fair dealing (the New York Uniform Commercial Code), and negligence related to the allegedly unexpected margin calls that caused the claimants to sustain financial losses.

Rosen Capital Partners and Rosen Capital Institutional had originally sought at least $90 million in compensatory damages, as well as punitive damages and other costs. Meantime, Merrill Lynch had sough to have the entire matter dismissed and that it be awarded all costs incurred from the suit and other relief as deemed appropriate.

Raymond James Must Pay $925,000 Over Auction-Rate Securities Dispute

Published on: September 1, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority panel says that Raymond James and financial advisor Larry Milton must pay Sherese and Rex Glendenning $925,000 over an auction-rate securities dispute. This is the third time this summer that Raymond James Financial Inc. (NYSE: RFJ) subsidiaries have been involved in an ARS dispute that was decided in FINRA arbitration. Since July 1, independent broker-dealer Raymond James Financial Services Inc. and brokerage firm Raymond James & Associates have been ordered to repurchase $3.5 million in ARS from clients.

The Glendennings set up their account with Raymond James in January 2008 before the market meltdown. Milton placed the couple’s $1.4 million in an ARS that contained sewer revenue bonds while failing to tell them about the risk involved.

The couple contends that Milton’s behavior wrongly gave them the impression that their investment was highly liquid and could be easily sold. However, Raymond James turned down their request to buy the ARS back at full value.

According to the Glendennings’ securities fraud attorney, the timing of the purchase was key to winning the award. The securities that they bought came up for auction for the first time thirty five days after they made the purchase. The auction failed and the couple were never able “ to go to auction.”

At the time of the ARS market crash in February 2008, Raymond James Financial clients held $1.9 billion in auction rate debt—now down to $600 million. To date, none of the securities regulators have sued the firm over ARS sales. Other financial firms, including Oppenheimer & Co. Inc. and Charles Schwab & Co. haven’t been as lucky.

Related Web Resources:
Raymond James pays more auction rate claims, Investment News, August 26, 2010

FINRA rules against Raymond James in auction rate securities case, Tampa Bay Business Journal, August 26, 2010

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