Securities Fraud

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.

OmniVision Technologies Investors’ Securities Lawsuit Can Proceed, Says District Court

Published on: April 20, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Northern District of California says that OmniVision Technologies investors can move forward with their securities fraud lawsuit as to two challenged statements that were made by one of the company’s senior officials. The statements pertain to the smart phone sensor maker’s alleged competition with Sony to provide Apple smart phones with image sensors.

The defendants In re OmniVision Technologies Inc. Securities Litigation are senior company officials. The court says that OmniVision was successful in getting its sensors in Apple’s ’09 and ’10 iPhone products. Yet, although OmniVision was contracted by Apple to not disclose their working relationship, the former allegedly was able to let the markets know.

The plaintiffs argued that such statements caused the market to think that OmniVision was Apple’s only image sensor supplier when actually it was Sony that was its dominant supplier. Rumors eventually surfaced that OmniVision had lost business to its rival. This information, along with less than favorable financial results, are what they believe caused OmniVision’s stock price to go down.

Per the district court, it saw two statements that might be “potentially actionable.” The court said that although the remarks don’t mention Apple, they might be viewed as “false or misleading” if Apple had already chosen Sony as its image sensor provider for the iPhone 4S.

The court also said that the securities lawsuit alleges details about Sony that could suggest that OmniVision was losing ground to Sony. It determined that there were allegations that “at least establish an inference” that sometime during the Class Period Apple was seriously considering going with Sony instead of OmniVision for certain parts it wanted to buy. The court denied the defendants’ motion to dismiss.

In re OmniVision Technologies Inc. Securities Litigation (PDF)

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Former Merrill Lynch, Oppenheimer, Deutsche Bank Broker is Ordered by FINRA To Pay Investor $11M Over Alleged Securities Fraud

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

A FINRA arbitration panel is ordering ex-broker Karl Hahn, who previously worked with Bank of America Corp’s (BAC) Merrill Lynch (MER), Oppenheimer & Co. (OPY), and Deutsche Bank AG’s (DB) Deutsche Bank Securities, to pay investor Chase Bailey $11 million because he sustained about $6 million in losses allegedly caused by securities fraud. Bailey contends that Hahn made excessive trades and misrepresented securities related to transactions involving a number of investments, including a variable annuity, approximately $2.3 million in fraudulent real estate financing involving East Coast properties, and covered calls.

In the filmmaker/Internet entrepreneur’s securities arbitration claim, Bailey named the three financial firms where Hahn previously worked. It is during this period that Bailey was allegedly defrauded. (He had moved his funds from one brokerage firm to the other each time Hahn was hired by that employer.) Bailey settled his case with Merrill for $700,000, while claims against Deutsche Bank and Oppenheimer were tossed out.

Per the FINRA arbitration ruling, Bailey is awarded $6.4 million in punitive damages and $4.1 million in compensatory damage. Ordering brokers to pay punitive damages is uncommon.

Securities Fraud Roundup: 6th Circuit Affirms Ruling Affirms Broker’s Liability Over Reverse Merger, Ex-Stockbroker Pleads Guilty to Insider Trading Over IBM’s SPSS Acquisition, & Father and Son Convicted in $50M Real Estate Fraud

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

6th Circuit Affirms Ruling Affirming Broker’s Liability Over Reverse Merger

The U.S. Court of Appeals for the Sixth Circuit says that a district court was correct in granting summary judgment to the Securities and Exchange Commission over its claim that broker Aaron Tsai made disclosure and registration violations related to a “reverse merger” involving a shell company. The lower court had ordered Tsai to pay about $352,000 in disgorgement and prejudgment interest while barring him from future violations. Affirming that court’s decision, the appeals court said that the broker’s transactions in unregistered stock were not exempt, pursuant to 1933 Securities Act Rule 144(k).

Tsai was the former president and CEO MAS Acquisition XI Company, which had a reverse merger and sold shares on the OTCBB in 2000. After his initial filing was turned down, he moved shares from five former directors who were initial company shareholders, to 28 other shareholders via previously signed stock powers. Tsai then obtained approval to finish up the reverse merger with Blue Point. The SEC filed civil enforcement naming him and other defendants while alleging Securities Act and Exchange Act violations, including failure to register securities before their sale or offering and failure to reveal that he had beneficial ownership of the securities.

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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SEC Reaches $600M Insider Trading Settlement with SAC Capital Advisors-Affiliated Hedge Fund Advisory Firm

Published on: March 29, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Calling it its largest insider trading settlement to date, the Securities and Exchange Commission has settled its securities case with CR Intrinsic Investors LLC, an SAC Capital Advisors-affiliated hedge fund advisory firm, for $600 million. The regulator had sued the CR Intrinsic Investors and portfolio manager Matthew Martoma last year, accusing the latter of gaining access to inside information about an Alzheimer’s drug trial that was being developed by pharmaceutical companies Wyeth and Elan Corp. plc. before the results were released to the public.

The advanced information noted that the drug might be ineffective. This allegedly prompted Martoma to liquidate the position of his funds in both companies’ stocks and take on short positions. Martoma and his funds are said to have yielded $276 million in avoided losses (or profits) from the scam. He is now facing related criminal charges.

Earlier this month, the SEC amended its securities lawsuit, adding SAC and four affiliated hedge funds as relief defendants for allegedly receiving ill-gotten games from the insider trading scheme. According to the regulator’s acting director of enforcement George Canellos, the evidence in this case came from “the earth,” meaning that they were obtained from phone records, trading records, business records, and other information (as opposed to wiretaps).

The defendants resolved the securities case without denying or admitting to the claims. They agreed to pay about $275 million in disgorgement, a $275 million penalty, and $52 million in prejudgment interest. A court, however, must approve the settlement.

US v. Martoma (PDF)

SEC v. CR Intrinsic Investors (PDF)

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Institutional Investment Fraud and The Courts: District Court Won’t Stay Derivatives Case Alleging FCPA Violations, Control Person Claims Against Over Revenue Bond Purchases Can Proceed, Ex-Hedge Fund Manager Gets Enhanced Securities Fraud Sentence

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

District Court Won’t Stay Derivatives Case Alleging FCPA Violations

The U.S. District Court for the Eastern District of Louisiana decided not to stay a shareholder derivative lawsuit accusing Tidewater Inc. of violating the Foreign Corrupt Practices Act. Judge Jane Triche Milazzo believes that a stay would burden not just the court but also the defendants. The court threw out the case last year, concluding that shareholder plaintiff Jonathan Strong, who did not make a presuit demand on the Tidewater board, failed to plead with particularity why such a demand was futile.

Per Strong, the offshore energy services provider violated the act when it ignored payments of about $1.76M that a subsidiary made to government officials in Nigeria, allegedly to get around custom regulation to be able to import vessels into that nation’s waters, and Azerbaijan, allegedly as bribes over tax audits. The derivatives lawsuit was filed after the Tidewater and the subsidiary agreed to pay about $15.5 million in a related settlement with the US Department of Justice and the Securities and Exchange Commission.

Demand Notes Used to Help Pay For Ailing Real Estate Business Were Securities, Says District Court

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

In the U.S. District Court for the Eastern District of Michigan, a judge refused to throw out an SEC enforcement action against two men accused o f securities fraud. James Mulholland Jr. and Thomas Mulholland allegedly sold fake demand notes connected to a failing real estate venture. Contending lack of subject matter jurisdiction, and also that, per the law, the notes were not securities, the defendants had sought to have the Michigan securities case dismissed, the court, however, disagreed, pointing out that each note is presumed to be a security unless rebutted by fitting under or sufficiently resembling one of a number of note categories that the US Supreme Court has determined to not be a security.

The two men ran Mulholland Financial Services Inc., which they financed by putting out demand notes that they sold through “word-of-mouth referrals,” as well as to relatives, friends, and clients. When the financial firm started to collapse and it had to be dissolved, James and Thomas allegedly kept using the company to raise investor money, including $2 million in 2009, and selling demand notes to over six dozen investors while promising a 7% return. They also are accused of telling prospective investors that MFSI would make the profits that would lead to the returns, with principal and the interest made to be given within 30 days of any written demand request.

Many of these investors were reportedly retirees who were unseasoned investors. When the Mulhollands filed for bankruptcy protection, these investors lost everything they had placed in the notes.

The court said that it is obvious that the defendants’ main motivation for issuing the notes was to make money, they appeared to have a plan for how they were to distribute the notes, the 7% return that was promised constituted a “reasonable expectation” by the public, the notes were uninsured and uncollateralized, and no regulatory scheme was identified by the defendants that would apply if securities laws weren’t applicable. The court said that all these factors meet the criteria of the Reves test, from the US Supreme Court’s Reves v. Ernst & Young, therefore supporting that the demand notes are securities.

COURT CONCLUDES DEMAND NOTES WERE SECURITIES UNDER FEDERAL ACTS, Bloomberg Law, March 13, 2013

Reves v. Ernst & Young (PDF)

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