Securities Fraud

Securities Roundup: Lawmaker Presses SEC to Tackle High-Frequency Trading, Approval of Nasdaq’s Plan to Payback FB IPO Investors is Delayed, & Less Investors Filed Securities Lawsuits Against Corporate Firms in 2012

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

Lawmaker Presses SEC to Tackle High-Frequency Trading
Rep. Edward Markey (D-Mass.) is pressing the Securities and Exchange Commission to help stop the allegedly harmful impact of high-frequency trading. Writing to SEC Chairman Elisse Walter and her predecessor Mary Schapiro, Markey talked about how the Market Reform Act of 1990 gives the regulator the power to “crack down on program trading.”

He noted that the law has a provision that lets the agency forbid or limit activities that can cause great volatility. Originally intended to place limits on program trading, Markey said the provision can be applied to ban or place restrictions on high-frequency trading.

Approval of Nasdaq’s Plan to Payback FB IPO Investors is Delayed
The SEC is now giving itself until March 29 to decide whether or not to approve Nasdaq’s proposal to set up a $62 million fund to pay back those that lost money due to technical problems during the initial public offering of Facebook Inc. (FB). The regulator says it needs more time to look at comment letters about the proposal and see to other matters.

Facebook’s May 2012 IPO was beleaguered by technical snafus that led to lawsuits by investors. Regulators and lawmakers have been seeking more information about what went wrong. In July, Nasdaq proposed accommodating members for losses they suffered from the IPO because of the system glitches. It says it would pay back $62 million in cash.

Number of Investors Suing Corporate Firms for Securities Fraud Down in 2012
According to a recent report, the number of federal securities lawsuits seeking for class-action status went down significantly in 2012. Unlike in 2011 when 188 such securities cases were filed, there were only 152 submitted last year, reports Stanford University Law School and Cornerstone Research. This was the second-lowest number of filings in over a decade and a half. The report credits the drop in cases to a decline in federal complaints submitted over acquisition and merger issues and less allegations against financial firms over Chinese reverse-mergers.
13 federal merger and acquisition lawsuits were submitted last year-down significantly from the year before when there were 43. Also, investors with cases did not name US companies found in the S & P 500 as often. Only one in 29 of these large institutions were accused of securities fraud last year. There also didn’t appear to be any trend among the new cases.

House Democrat Urges SEC to Take On High-Frequency Trading With 1990 Law, Bloomberg/BNA, January 23, 2013

Nasdaq’s Facebook IPO proposal ruling delayed by SEC, Silicon Valley Business Journal, October 30, 2012

Fewer U.S. investors sued corporate firms for fraud in 2012, USA Today, January 23, 2013

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Investment Fraud Lawsuit Against BlackRock Over Exchange-Traded Funds Could Shed More Light on Securities Lending

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

In a recent securities case, manager BlackRock is accused of self-dealing and pilfering from iShares exchange-traded funds’ securities lending revenues. The plaintiffs are pension funds Plumbers and Pipefitters Local No. 572 Pension Fund of Nashville and Laborers’ Local 265 Pension Fund of Cincinnati. They contend that a number of the iShares ETFs put money towards compensation that was “grossly excessive” to pay agents, including those with affiliations to the funds. iShares Chairman Michael Latham and BlackRock President Robert Kapito are also defendants.

The plaintiffs contend that BlackRock’s iShares ETFs violated fiduciary duties and created an fee structure was excessive in order to avail of returns from securities lending that should have been paid to investors. They believe that iShares ETFs and officials at Blackrock perpetuated a scam that allowed them to get their hands on at minimum 40% of revenues from securities lending at cost to investors.

However, BlackRock, which is the largest ETF manager, is arguing that the securities case is without merit. The company claims that its program for securities lending has generated returns that exceed the average to ETF shareholders and it believes that its lending policies shouldn’t be compared with others in its field. BlackRock has pointed out that while it has profited from the program, investors do get their high returns “over time.” It intends to fight the ETF lawsuit.

Former Jeffries Director Charged with Securities Fraud Crimes and Sued By SEC Over Alleged Residential Mortgage-Backed Securities

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

The US Justice Department has filed criminal charges against ex-Jefferies & Co. Inc. Director Jesse Litvak, who is accused of defrauding investors in residential mortgage-backed securities. The former senior trader allegedly also defrauded a federal bank bailout program and private and public funds when he falsified sellers’ identities and prices to try to make more money for his employer.

Investigators contend that Litvak was able to generate over $2.7 million from his securities scam. He has pleaded not guilty to 16 criminal charges. The case against him is the first under a law that bans major fraud against the US through TARP (the Troubled Asset Relief Program.)

Meantime, the Securities and Exchange Commission has filed a civil case against Litvak over the same alleged RMBS fraud. The SEC says that the former Jefferies director would lie about the buying price of mortgage-backed securities that he would purchase from one client and sell to another. He is accused of making up a fictional seller to make it seem like he was putting together an RMBS trade between customers when he was actually just selling securities from the inventory of the firm at a high price.

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.

Reviving Antifraud Lawsuit Over Alleged Market-Timing Practices From Over Five Years Ago is Not the Answer, Say Ex-SEC Officials

Published on: December 22, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In their amicus curiae brief, a number of ex-SEC Commissioners and top officials told the U.S. Supreme Court that the decision by the U.S. Court of Appeals for the Second Circuit to revive the agency’s antifraud cases against investment advisory officials Bruce Alpert and Marc Gabelli was a mistake. The men, who are Gabelli Funds LLC’s COO and portfolio manager, respectively, are accused of taking part in allegedly questionable market-timing practices involving the selling and buying of mutual fund shares to take advantage of short-term price swings.

Per the SEC’S 2008 securities case, Alpert and Gabelli committed these alleged violations between September 1999 and August 2002. While the district court threw out most of the lawsuit, finding that the majority of allegations were either untimely or not legally sufficient, the appeals court disagreed and reversed that ruling. It said that the defendants failed to fulfill the burden of demonstrating that a reasonably diligent plaintiff would have identified the alleged fraud more than five years before the SEC submitting its action.

Amicus curiae brief: A brief is a statement of the law and the impact on the law or other persons if a case if decided a certain way. “Amicus curiae,” is Latin for “friend of the court.” This “friend” can be any non-party to the lawsuit that has an opinion about it. Feasibly, there could be 100 such briefs, but the court would only be interested in those from credible groups, persons or lawyers.

Investment Advisor Securities Roundup: Two Firms Settle SEC Claims That They Impeded with Examinations, FINRA Defends SRO Model, IA Allegedly Duped Private Equity Investors, & CDO Misrepresentation Accusations Against GSCP Executive Are Dismissed

Published on: December 10, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Investment advisory firms EM Capital Management and Barthelemy Group have settled SEC administrative charges that they got in the way of Commission staff examinations. Both cases were settled without the parties involved denying or admitting to the allegations.

According to the SEC, Barthelemy Group and Evens Barthelemy allegedly misled examiners by inflating claimed assets under management to make it appear as if the firm qualified for SEC legislation. To settle the claims, Barthelemy has consented to a securities industry bar. He can reapply for admission again in two years. His firm consented to a censure.

As for the proceedings against Em Capital Management and Freeman, they allegedly waited a year and a half to produce the records and books for the firm’s mutual fund advisory business. Both have consented to pay a $20,000 penalty and be censured.

Securities Fraud Roundup: FINRA Examiners See Rise in Brokers Engaging in Improper Activities, SEC Chairman Backs Stronger Enforcement of Civil Penalties Act, & About 800 Investor Fraud Scam Defendants Accounted for Since 2011

Published on: November 26, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to Financial Industry Regulatory Authority EVP Susan Axelrod, the SRO’s examiners are reporting an increase in how many brokers appear to be taking part in questionable actions outside their firms or improperly selling securities. Speaking at the Securities Industry and Financial Markets Association’s complex products forum, she pressed brokerage firms to make sure its compliance programs will sniff out such violations.

Axelrod also said that FINRA examiners are noticing issues with the firms’ complex product sales, including those involving reverse convertibles and non-traded real estate investment trusts. For example, several firms did not conduct reasonable due diligence before selling non-traded REITs or make sure they were suitable for the investors. As for the reverse convertibles, examiners reportedly discovered an overconcentration of products in certain investor portfolios primarily due to poor recommendations. Failure to detect such problems appeared to have played a factor in this happening. Other problems discovered included inadequate training regarding products, product misrepresentation via sales and advertising, and failure to notify investors well in advance that products’ per-share estimated values had been repriced at figures significantly lower than the offering price.

In other securities news, Securities and Exchange Commission Chairman Mary Schapiro wants Congress to grant the SEC the power to impose penalties that are more reflective of the losses sustained by investors. Right now, the agency can only pursue ill-gotten gains’ disgorgement and impose per-violation penalties. Schapiro said that the Stronger Enforcement of Civil Penalties Act of 2012, which was introduced by Senators Jack Reed and Charles Grassley, would give the Commission the authority it needs to make violators “think twice” about abusing investors’ funds while allowing the regulator to recover significantly more for victims. She expressed her views at the New England Securities Conference last month.

Securities Roundup: BP Settles for $525M SEC Lawsuit Over Deepwater Horizon Spill Disclosures, Ex-OIG Official Says He Was Fired for Exposing Misconduct, Ex-Merrill Lynch Advisor Accused of Defrauding Elderly Client, & Trader Pleads Guilty to $28M Fraud

Published on: November 22, 2012 | by Shepherd Smith Edwards & Kantas, LLP

BP Plc. has consented to settle for $525 million Securities and Exchange Commission allegations that it gave the agency and investors misleading information about the 2010 Deepwater Horizon oil spill. If approved, this would be the third biggest penalty in SEC history.

According to the Commission, during the crisis the oil giant issued fraudulent statements about how much oil was flowing on a daily basis from the Deepwater Horizon rig into the Gulf of Mexico, including underestimating this rate by up to 5,000 oil barrels a day even though it allegedly had internal data noting that possible flow rates could be up to 146,000 barrels daily. Even after a government task force later determined that 52,700 to 62,200 oil barrels were flowing out a day, BP allegedly never modified the omissions or misrepresentations it made in SEC filings.

In other SEC news, David Weber, one of its ex-Office of Inspector General officials, is suing the agency and Chairman Mary Schapiro for allegedly getting back at him for disclosing misconduct that had been taking place at the Commission. Weber contends that SEC staff spoke about him to the media in a “malicious and defamatory” manner and leaked his personal information because he not only disclosed that ex-SEC Inspector General H. David Kotz had engaged in misconduct that placed several OIG investigations at peril, but also he revealed that there were cyber security breaches at the agency.

UBS ‘Rogue Trader’ Convicted of Fraud that Caused $2.3B Loss

Published on: November 22, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Kweku Adoboli, an ex-UBS (UBS) trader, has been convicted of fraud over bad deals he made at the Swiss Bank that resulted in $2.2 billion in losses. He has been sentenced to 7 years behind bars.

Adoboli, who had pled not guilty to the criminal charges, is accused of booking bogus hedges and storing profits in a secret account to hide the risks related to his trades and dealings involving exchange-traded funds, commodities, bonds, and complex financial products that track stocks. Not only did he go beyond his trading limits but also he did not cover his losses.

Meantime, the ex-UBS trader had argued in his defence that the trading losses happened not because of fraudulent or dishonest conduct on his part but because he and other traders were asked to accomplish too much without sufficient resources and in a very volatile market.

MassMutual Settles for $1.625M SEC Charges Over Failure to Disclose Allegations Related to Complex Investments’ “Cap”

Published on: November 20, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In the wake of Securities and Exchange Commission charges accusing
Massachusetts Mutual Life Insurance Company of securities law violations, the insurance company has agreed to settle the allegations by paying a $1.625M penalty. The SEC contends that the insurer did not adequately disclose the potential negative impact of a “cap” it had placed on certain complex investments.

Per the Commission, MassMutual placed a cap feature that could potentially impact $2.5B of its variable annuities in specific optional riders that were offered to investors. However, sales materials and prospectuses did not properly explain that if they cap were reached, the GMIB (guaranteed minimum income benefit) value would cease to accrue interest. Instead, the disclosures appeared to infer that interest would keep growing after the GMIB value hit the cap while investors would still have the option for dollar-for-dollar withdrawals. Not only did several MassMutual sales representatives become confused by the disclosure content, but also clients were not properly apprised of how making withdrawals could hurt them financially were the cap to be reached about 10 years from now. MassMutual has since taken out the cap to make sure that no investors suffer financial harm.

Specifically, says the SEC order, between 2007 and 2009 the insurer offered investors GMIB 5 and 6 riders as an option on specific variable annuity instruments. The GMIB riders were presented as giving “Income Now” if withdrawals were made during the accumulation phase. “Income Later” could occur if investors opted to get annuity payments. (MassMutual’s sales material noted the guarantee in the riders, which state that even if a contract were to hit a 0 in value, an investor could still apply the GMIB value to a variable or fixed annuity.)

The riders came with a maximum GMIB value-a cap that would investors would not be able to hit until 2022. However, if the cap were reached by the GMIB value, every dollar taken out would lower the GMIB value by a pro-rata figure linked to the percentage drop on the contract value. After a number of these types of withdrawals-market conditions pending-the GMIB value and the contract value would go down and adversely impact how much a customer could apply to the future income stream and an annuity.

However, contends the SEC, several MassMutual sales agents did not fully comprehend all of this and they thought that if the GMIB value hit the cap, investors could still take withdrawals with the GMIB value staying at the cap. The sales force was also suffering from other misconceptions, such as wrongly believing that investors would be able to maximize benefits if they waited until the cap was reached by the GMIB value, take yearly withdrawals of 5 or 6 percent, and annuitize contracts to get an income stream linked to the maximum GMIB value. In fact, this type of investment strategy was actually more harmful than beneficial.

The Commission says that MassMutual should have identified the signs indicating that sales argents and others didn’t fully comprehend how post-cap withdrawals might impact the GMIB value and realized that its disclosures were not adequate enough. The insurer has agreed to settle without admitting to or denying the SEC’s findings.

Read the Administrative Proceeding (PDF)

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