Securities Fraud

SEC Focuses More Attention On Accounting Fraud, Variable Annuities, & Market-Maker Risk

Published on: June 26, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Commission Chairman Mary Jo White says that the agency will direct more resources toward going after financial fraud and accounting fraud. She was, however, clear to point out that this did not mean that a new accounting and financial fraud unit would be created, despite calls for one by some industry members. White spoke at the CFO Network 2013, where she also announced that the Commission was modifying its “neither admit, nor deny” settlement practice. This is an announcement that our stockbroker fraud law firm addresses in a different blog post.

The Commission is currently assessing its Enforcement Division’s specialized units, and this review is expected to result in certain size refinements and mandates, as well as the establishment of maybe one or more new units. Enforcement Division co-director George Canellos, however, said that the same reason why such a unit wasn’t set up three years ago when five specialized units (focusing on market abuse, asset management, the Foreign Corrupt Practices Act, public pensions, and municipal securities) were established still holds.

The SEC said then that nearly every regional office has attorneys and experienced accountants they believed are able to handle such cases. That said, the Commission will give over more resources to surveillance and become even more proactive about identifying where there are risks in accounting issues. This will include the Division of Economic and Risk Analysis’s development of an “Accounting Quality Model” that would let the SEC identify financial statement outliers. There also will be more partnering between the Enforcement Division’s Office of the Chief Accountant and the Division of Corporation Finance to come up with more accounting leads.

Cayman Islands LLC Must Replead CLO Securities Case Against Deutsche Bank

Published on: June 24, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York says that Arco Capital Corp. a Cayman Islands LLC, has 20 days to replead its $37M collateralized loan obligation against Deutsche Bank AG (DB) that accuses the latter of alleged misconduct related to a 2006 CLO. According to Judge Robert Sweet, even though Arco Capital did an adequate job of alleging a domestic transaction within the Supreme Court’s decision in Morrison v. National Australia Bank, its claims are time-barred, per the two-year post-discovery deadline and five-year statute of repose.

Deutsche Bank had offered investors the chance to obtain debt securities linked to portfolio of merging markets investments and derivative transactions it originated. CRAFT EM CLO, which is a Cayman Islands company created by the bank, effected the transaction and gained synthetic exposure via credit default transactions. For interest payment on the notes, investors consented to risk the principal due on them according to the reference portfolio. However, if a reference obligation, which had to satisfy certain eligibly requirements, defaulted in a way that the CDS agreements government, Deutsche Bank would receive payment that would directly lower the principal due on the notes when maturity was reached.

Arco maintains that the assets that experienced credit events did not meet the criteria. It noted that Deutsche Bank wasn’t supposed to use the transaction as a repository for lending assets that were distressed, toxic, or “poorly underwritten.”

Former Millennium Global Investments Portfolio Manager Accused of Fraud Involving Nigerian Sovereign Debt Markups

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

According to prosecutors, Michael Balboa, an ex-Millennium Global Investments Ltd. portfolio manager, took part in a 10-month financial scam that involved marking up the Nigerian sovereign debt in funds he oversaw.

The federal government contends that Balboa and three unnamed co-conspirators engaged in a scheme in which he provided bogus mark-to-market quotes to a valuation agent that then inflated the market prices at month-end for Nigerian warrants. As a result, one fund’s total valuation for the Nigerian warrants was able to go from over $12 million at the start of 2008 to over $84 million in August of that year. Balboa’s Millennium Global Emerging Credit Fund is now insolvent.

He allegedly overstated the value of the securities positions and illiquid securities in the funds, which caused him to earn performance and management fees that were not legitimate. Balboa also purportedly lied to investors repeatedly about how the funds were faring.

Dismissal of $44M International Boiler Room Scam Claims Raises Issue of SEC Extraterritorial Enforcement Authority

Published on: May 21, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Pointing to the US Supreme Court’s ruling in Morrison v. National Australia Bank Ltd., the U.S. District Court for the Northern District of Illinois dismissed the SEC’s allegations that a group of entities and persons violated broker-dealer registration requirements in an alleged $44 million international boiler room scam. The broker fraud case is SEC v. Benger.

Claiming the transactions were extraterritorial and not within the scope of the regulator’s reach, defendants sought summary judgment even though a lot of the allegedly fraudulent activity is said to have happened in the US. The district court, however, found that investors became irrevocably bound in their countries upon submission of buying offers even though they turned those offers in to escrow agents in this country. Moreover, the issuer became irrevocably bound in Brazil when accepting the purchase offers, and when the sale went through the titled passed either there or the countries where investors got the stock certificates regardless that the agents that served as middlemen were located here.

In Morrison, the Supreme Court determined that the 1934 Securities Exchange Act’s key federal securities antifraud provision is only applicable to securities transactions that can either be found on U.S. exchanges or that took place domestically. Following that decision, and seeking to give back exterritorial reach to both Justice Department and the SEC, Congress issued the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 929P, which gives federal courts jurisdiction over enforcement actions involving conduct that took place in the US that played a part in significantly furthering a violation/behavior taking place abroad that will have a likely effect domestically.

Ex-NY Governors Pataki and Cuomo Tell AG Schneiderman to Ease Off On Former AIG Head

Published on: May 18, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In a joint op-ed, ex-New York governors George Pataki and Mario Cuomo are asking NY Attorney General Eric Schneiderman to reconsider his efforts to seek remedies, including injunctive relief, against Maurice “Hank Greenberg,” the former American International Group (AIG) chief. The former governors believe that not only will such a pursuit waste “time and money,” but also, they say that it is “morally wrong.”

It was just last month that Schneiderman told the New York State Court of Appeals that the state was dropping its claim seeking possibly billion of dollars in financial fraud damages in an eight-year-old case against Greenberg and another ex-executive but that he would continue to hold the defendants responsible by pursuing other remedies, including bans on serving as a public company director/officer and involvement in the securities industry. Greenberg, who ran AIG for almost 40 years, resigned in 2005 in the wake of an investigation into the insurer’s accounting practices. He denies wrongdoing.

Last year, a federal judge approved a $115 million settlement with shareholders over the accounting issues that were at the heart of the state’s lawsuit. (Meantime, investors have also filed related securities fraud against Greenberg and other former AIG executives.) However, despite dropping the claim for fraud damages, Schneiderman has remained adamant about proceeding with a trial against Greenberg. He believes that individuals who commit fraud must be held publicly accountable. Replying to the former NY governors, a spokesperson for the attorney general said as much, all the while noting Schneiderman’s respect for the two men and their “longstanding ties” to Greenberg.

State Courts Securities Litigation: Va. County Can Sue Over Bond Offering Advice, Plaintiff’s Breach Claim Against Brother to Go to Jury, & Ruling Affirms that Investment Bank’s Offer to Buy Minority Shares Triggered Company’s First Refusal Rights

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

Fluvanna County, VA Can Sue Over Bond Offering Advice, Says Supreme Court of Virginia

Virginia’s highest court has reinstated a securities fraud lawsuit filed by Fluvanna County, Virginia Board of Supervisors against Davenport & Co. The county claims that the investment concern gave it faulty bond offering advice about the building of a new high school.

The Board said that it depended on this investment advice when deciding to put out standalone bonds that caused it to incur $18 million in excess payments. It then sued Davenport in circuit court, making numerous contentions, including breach of fiduciary duty, gross negligence, and Virginia securities law violations. That court ‘sustained the demurrer with prejudice’ and would not let the board make amendments to pleadings. It said that the separation of powers doctrine won’t let the court resolve the securities case because then it would have to look into the Board’s motives. The latter then appealed.

Controversial Democratic Appointee Pushes SEC for Less Talk About Investor and Securities Market Protections and More Action

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

According to Securities and Exchange Commissioner Luis Aguilar, the growing number of registered investment advisers, the increasing complexity of the financial instruments they use, and the recent trends in securities examinations show that there is a need for the regulator to up the vigorousness of its investment adviser examinations and enforcement activities. He noted that even as the SEC is working to give the regulated community best practices and guidance to enhance compliance, it also intends to increase its scrutiny of advisers, including more exams (especially for private fund advisers). Alternative investment managers will also get more attention.

Aguilar pointed out that with the number SEC registered investment advisers having gone up about 50% to over 10,000 last year, the value of the assets that they manage also increasing from about $22 trillion in 2002 to approximately $44 trillion in 2011, as well as a rise in the number of complex financial instruments that advisers use, there are more chances for “mischief” to happen. Hence, there is the need for more robust enforcement.

Also, as our securities fraud law firm mentioned in a previous blog post, the SEC commissioner wants there to be an end to mandatory arbitration agreements. Per the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC now can prohibit or limit pre-dispute arbitration agreements, which have become standard fare for brokerage firms. Aguilar is concerned that they are also becoming routine for investment advisory firms. He wants the government to ponder the possibility of adopting rules that would stop or limit broker-dealers and investment advisers from mandating that customers sign clauses in their agreements with one another that prevents them from filing securities fraud lawsuits and instead only resolve their disputes via arbitration.

Just Because Supreme Court’s Rulings in Amgen and Halliburton Give Defendants Less Tools to Beat Weak Class Certifications But Doesn’t Mean Plaintiffs Can Rest Easy

Published on: April 27, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The US Supreme Court’s ruling earlier this year in Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds (and also in Erica P. John Fund, Inc. v. Halliburton Co.) decreases the tools that defendants of federal securities fraud lawsuits have to win against the class certification of weak claims. In Amgen, the Court found that plaintiffs don’t have to prove an alleged misrepresentation’s materiality to certify a class under the fraud-on-the-market theory, while in Halliburton, the Court held that plaintiffs don’t have to prove loss causation to garner class certification.

That said, although the Court’s rulings in recent years often have been considered “pro-plaintiff,” it actually has given securities defendants help in getting rid of the weaker securities fraud cases early on. For example, Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal mandate for plaintiffs to demonstrate that their interpretation of specific facts are plausible and beyond merely possible. Also, even with Amgen and Halliburton decreasing the chances of class certification being defeated on the grounds of loss causation or materiality, these issues can still be addressed in motions for partial summary judgment early on. Such a motion might even be submitted simultaneously as one opposing certification.

Our securities fraud law firm represents institutional and individual investors throughout the US. We believe that filing your own securities case increases your chances of recovering as much of your lost investment back. Over the years, Shepherd Smith Edwards and Kantas, LTD LLP has helped thousands of investors recoup their losses.

Lehman Brothers Australia Wants Federal Court to Approve $248M Settlement Payment Plan to Creditors

Published on: April 23, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The liquidators of Lehman Brothers Australia want the Federal Court there to approve their plan that would allow the bank to pay $248M in securities losses that were sustained by 72 local charities, councils, private investors, and churches. Although the court held Lehman liable, no compensation has been issued because the financial firm went bankrupt.

Per that ruling, the Federal Court found that Lehman’s Australian arm misled customers during the sale of synthetic collateralized debt obligations. The court also said that Lehman Brothers subsidiary Grange Securities was in breach of its fiduciary duty and took part in deceptive and misleading behavior when it put the very complex CDOs in the councils’ portfolio. (Lehman had acquired Grange Securities and Grange Asset Management in early 2007, thereby also taking charge of managing current and past relationships, including the asset management and transactional services for the councils.) The court determined that the council clients’ “commercial naivety” in getting into these complex transactions were to Grange’s advantage.

Via the liquidators’ plan, creditors would get a portion of a $211 million payout. This is much more than the $43 million that Lehman had offered to pay. The payout would include $45 million from American professional indemnity insurers to Lehman, which would then disburse the funds to those it owes.

SEC Commissioner Aguilar Calls For the Abolishment of Mandatory Arbitration Agreements

Published on: April 21, 2013 | by Shepherd Smith Edwards & Kantas, LLP

U.S. Securities and Exchange Commission member Luis Aguilar is pressing the government to think about adopting rules that would limit or bar investment advisers and brokers from making customers sign away their right to file a securities fraud case. He made his statements in front of the he North America Securities Administrators Association’s yearly conference.

Aguilar spoke about how it was important to advocate for investor choice. He said that by giving investors the chance to choose how they wish to protect their legal rights and file their legal claims, the government would be enhancing federal securities laws while creating better investor protections.

The 2010 Dodd-Frank Act gives the Commission new powers to strengthen investor protections, including the authority to restrict pre-dispute arbitration agreements, which brokers routinely use. The agreements bar an investor from being able to sue the financial firm should a disagreement arise. Meantime, corporations generally remain in favor of arbitration as a venue for resolution because they believe this is less costly.