Articles Posted in Securities Fraud

The 11th Circuit Revives SEC Fraud Lawsuit Against Morgan Keegan Over Auction-Rate Securities

Published on: May 8, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The 11th U.S. Circuit Court of Appeals has revived the US Securities and Exchange Commission’s fraud lawsuit against Morgan Keegan & Co. accusing the financial firm of allegedly misleading investors about auction-rate securities. The federal appeals court said that a district judge was in error when he found that alleged misrepresentations made by the financial firm’s brokers were immaterial. The case will now go back to district court. Morgan Keegan is a Raymond James Financial Inc. (RJF) unit.

The SEC had sued Morgan Keegan in 2009. In its complaint, the Commission accused the financial firm of leaving investors with $2.2M of illiquid ARS. The agency said that Morgan Keegan failed to tell clients about the risks involved and that it instead promoted the securities as having “zero risk” or being “fully liquid” or “just like a money market.” The SEC demanded that Morgan Keegan buy back the debt sold to these clients.

In 2011, U.S. District Judge William Duffey ruled on the securities fraud lawsuit and found that Morgan Keegan did adequately disclose the risks involved. He said that even if some brokers did make misrepresentations, the SEC had failed to present any evidence demonstrating that the financial firm had put into place a policy encouraging its brokers-dealers to mislead investors about ARS liquidity. Duffey pointed to Morgan Keegan’s Web site, which disclosed the ARS risks. He said this demonstrated that there was no institutional intent to fool investors. He also noted that a “failure to predict the market” did not constitute securities fraud and that the Commission would need to show examples of alleged broker misconduct before Morgan Keegan could be held liable.

Global Investing Round Up: SEC Sues Chinese Company for Overstating Asset Values, 11th Circuit Reinstates Investor Claims Over Alleged Financial Scam in Involving India Entities, EC Calls for Delay in Imposing U.S. Swap Regulations, and Switzerland Propos

Published on: May 2, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In SEC v. SinoTech Energy Ltd., Securities and Exchange Commission is suing SinoTech Energy Ltd. (CTESY), a Chinese oil field services company, for securities fraud. According to the Commission, SinoTech allegedly made misrepresentations about how its IPO proceeds were used, as well as misrepresented its assets’ value. The company also is accused of repeatedly deceiving both investors and the SEC, the latter with filings it submitted to the Commission in 2010 and 2011.

Per the SEC’s complaint, SinoTech claimed that $120 million of its IPO proceeds would be used to purchase lateral hydraulic drilling units when it spent less than $17 million to buy them. Also, its chairman, Qingzeng Liu, has admitted to skimming $40 million from a company bank account. This monetary withdrawal allegedly was not noted in SinoTech’s records or books. The Commission wants injunctive relief, disgorgement, and penalties from SinoTech and its chairman.

In other Global investment news, the 11th Circuit Appeals Court has decided to reinstate the unjust enrichment and racketeering claims made by investors over an alleged financial fraud involving City Group, which is based primarily in India, and the company’s affiliates in the US. The plaintiffs, Virendra Rajput and Mansingh Rajput, are claiming that they suffered financial losses after investing in a network of firms with ties to the Masood family. Rajput and Rajput are accusing the family of keeping the investments, running a financial racket, and never having intended to issue the payouts of high return rates that they promised investors. The two of them are also alleging that City Group’s US branches were set up to launder money from the scam in India.

District Court Won’t Dismiss Securities Fraud Lawsuit Over Alleged Oral Misrepresentations

Published on: April 30, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Middle District of Florida has decided not to throw out a securities fraud lawsuit filed by a couple of unsophisticated investors contending that allegedly false oral misrepresentations were made to them causing them to think that their money would be placed in low risk, conservative investments when, in fact, the financial instruments recommended for them were very volatile and speculative. The case is Hemenway v. Bartoletta.

Plaintiff Jason Hemenway had received about $13.8 million in a lump sum after winning the Florida lottery in 2007. He and his wife then opened up an investment account at Capital City Bank Trust Co. Although they expressed a preference for investments with low risks, two of the financial firm’s representatives, private equity group High Street Capital Management LLC managers John Bartoletta and Erick Arnett, convinced the couple to move their money to a hedge fund limited partnership. High Street was that fund’s general partner.

Arnett and Bartoletta allegedly told the Hemenways that the investment was conservative and safe even though it wasn’t really appropriate for unsophisticated investors. The two men also failed to mention that the interests of the limited partnership were a lot risker than traditional equities and bonds and weren’t in line with the couple’s risk tolerance or investment goals.

Over 14 months the couple lost about $1.2 million. That is when they filed a federal securities fraud lawsuit against Bartoletta, Arnett, and High Street Capital Management, LLC, High Street Financial, LLC, and High Street Group, LLC.

The defendants sought to have the federal securities case dismissed on the grounds of failure to state a claim. Not only did they want the other allegations dropped due to lack of subject matter jurisdiction, but also they argued that the alleged misrepresentations and omissions could be countered because the plaintiffs had been given written documents that contradicted the statements made to them. Countering the defendants’ reasons for why the case should be dismissed, the plaintiffs argued that even though they were given written materials to counter any alleged misrepresentations (and omissions), they still had a valid claim under the 1934 Securities Exchange Act Section 10(b) and Rule 10b-5.

Explaining its decision to reject the defendants’ dismissal motion, the district court noted that although per “usual presumption” a plaintiff has no justification for depending on oral representation rather than what is written, a previous decision issued by an appeals court in another case, Bruschi v. Brow, had found that there are circumstances that warrant a departure from this presumption. That ruling took into consideration the plaintiff’s sophistication regarding financial matters (or lack thereof), whether the defendant and plaintiff have a longstanding relationship and if it is a fiduciary one, how much access the plaintiff had to material information, if the plaintiff was the one that sought the transaction, and the specifics of the alleged misrepresentations.

Now, in Hemenway v. Bartoletta, this court has found that “no single factor” was “dispositive” and that all factors must be considered when deciding whether reliance is merited. Therefore, the defendants’ motion to dismiss is denied.

Hemenway v. Bartoletta

Reliance Issues Bar Dismissal Of Suit by Unsophisticated Investors,Bloomberg/BNA, April 19, 2012

More Blog Posts:
FINRA Bars Former Wells Fargo Advisors Broker that Bilked Child with Cerebral Palsy, Stockbroker Fraud Blog, April 26, 2012
Texas Broker-Dealer Pinnacle Partners Financial is Expelled by FINRA Hearing Officer Over Allegedly Fraudulent Sales of Unregistered Securities and Private Placements of Oil and Gas, Stockbroker Fraud Blog, April 25, 2012
SEC to Make Sure Rule Writing Process Incorporates Better Cost-Benefit Analysis, Stockbroker Fraud Blog, April 25, 2012 Continue Reading ›

Silicon Valley Man Faces SEC Securities Fraud Charge After Allegedly Bilking Internet Start-Up Investors of the “Next Google” of Millions

Published on: April 19, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has charged Benedict Van with investment fraud. The San Jose, California man is accused of making false promises to get investors to put their money into two of his Internet companies that he claimed would become the “next Google.”

The names of the start-ups: eCity, Inc. and hereUare, Inc. Van allegedly falsely told prospective investors that the companies were to go public soon, which would result in millions of dollars in fast returns. However, according to the SEC, Van had no intention of taking his companies public and he used the money given to him by investors to stay in operation. About 100 investors gave funds to Van.

The Silicon Valley local would allegedly travel to cities in Northern California to visit potential investors in their own homes. Per the Commission’s complaint, investors gave Van over $6.2 million in 2007 and 2008 for hereUare. He was able to collected $880,000 in investor funds for eCity.

Principals of Global Arena Capital Corp. and Berthel, Fisher & Company Financial Services, Inc. Settle FINRA Securities Allegations

Published on: April 6, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Harry Friedman, a principal of Global Arena Capital Corp. has agreed to a bar that prevents him from associating with any Financial Industry Regulatory Authority member. Although he has not admitted to or denied the allegations against him, Friedman has consented to the sanction and the entry of findings accusing him of not properly supervising a number of employees who used improper markups in a fraudulent trading scheme that, as a result, denied clients of best execution and the most favorable market price.

It was Friedman’s job to make sure that the head trader provided accurate disclosure on order tickets, such as when they were received and executed, the role that the broker-dealer played, and how much compensation the financial firm would get from each securities transaction. According to FINRA, Friedman either knew or should have known that order tickets were not being marked properly.

FINRA also found that Friedman, whose job it was to supervise and review trading activity involving his firm, failed to reconcile daily positions and trades in principal accounts. Also, per the SRO, Global Arena Capital Corp., through Friedman, did not set up, maintain, and enforce supervisory control policies and procedures that were supposed to ensure that registered representatives and others were in compliance with securities regulations and laws. Also, for three years, Friedman allegedly falsely certified that the financial firm had the necessary processes in place and that they had been evidenced in a report that the CCO, CEO, and other officers had reviewed.

In other FINRA-related news, Berthel, Fisher & Company Financial Services, Inc. registered principal Marsha Ann Hill has been suspended from associating with any Financial Industry Regulatory Authority member for a year. She also will pay a $20,000 fine.

Hill is accused of allegedly making unsuitable recommendations to a customer regarding the purchase of a variable annuity for $110,418.97 and two private placement offerings for $10,000 each. Per the findings, the transactions were not suitable because over 90% of the client’s liquid net worth had been placed in the variable annuity, which was illiquid and had a seven-year surrender period. (The SRO says that the private placement offerings were not only high risk, but also they failed to meet the client’s investment objectives.) Hill is accused of misusing the customer’s funds when she delayed the investments, resulting in her firm violating SEC Rule 15c3-3.

She also allegedly sold a private placement to an unaccredited investor. When her supervisor noted that this was an accredited-only investment, Hill erased certain information on the Account Information Form and put different yearly income, liquid net worth, and net worth amounts without letting her client know. Hill is settling the securities fraud allegations against her without deny or admitting to them.

Broker-Dealers are Making Reverse Convertible Sales That are Harming Investors, Says SEC, Stockbroker Fraud Blog, July 28, 2011
Despite Reports of Customer Satisfaction, Consumer Reports Uncovers Questionable Sales Practices at Certain Financial Firms, Stockbroker Fraud Blog, January 7, 2012
SIFMA Wants FINRA to Take Tougher Actions Against Brokers that Don’t Repay Promissory Notes, Institutional Investor Securities Blog, January 17, 2012 Continue Reading ›

FINRA Bars Registered Representatives Accused of Securities Misconduct and Negligence

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

Registered representative Erick Enrique Isaac has turned in a Letter of Acceptance, Waiver and Consent that affirms his agreement to be barred from associating with any Financial Industry Regulatory Authority member. Although he isn’t denying or admitting to the findings, Isaac has consented to the described sanction and the entry of findings that claims he became affiliated with a member firm at the behest of a relative, a former registered representative who needed access to a broker-dealer to make trades for his clients.

While registered with the financial firm, Enrique allegedly gave trading directions from this relative to another firm representative, who then made the trades. He also allegedly started sending over hundreds of thousands of dollars in commissions on those securities transactions to the relative.

FINRA’s findings contend that Isaac knew that his relative was controlling the trading in at least some of the client accounts that resulted in commission fees. He also kept sending the commission funds to the relative even after finding out that the latter was barred by the SRO from associating with a member firm.

Also submitting a Letter of Acceptance, Waiver and Consent in another FINRA case is First Merger Capital, Inc. registered principal Mark SImonetti who is not allowed to associate with any FINRA member for three months.

FINRA accused Simonetti of knowing that registered representatives at First Merger Capital were paying the operators and co-owners of a branch of the financial firm (a foreign-based publicly traded company) $350,000 for unspecified services. Even though this should have indicated to Simonetti that the financial firm’s COO was not appropriately discharging his compliance and supervisory duties, he still allegedly failed to properly supervise the brokers to make sure that everyone disclosed all material information about this consulting agreement when soliciting clients to buy stock in the company.

Also, per FINRA, when the counsel for another foreign-owned publicly traded company referred clients, who were current and former company employees, to First Merger Capital, no one at the financial firm spoke to these new clients to make sure that the information they provided when opening the accounts was accurate.

The customers deposited more than 3.8 million shares of company stock. The company’s CEO, who was given control of the sales of the stock, then gave the order for company shares to be sold. More than $23 million of company stocks were sold. These were the only transactions in the clients’ accounts. Also, a number of branch owners and operators who took part in securities transactions netted commission as a result. FINRA says that SImonetti should have monitored, analyzed, and investigated these transactions to figure out whether they warranted a Suspicious Activity Report. As part of the settlement, Simonetti has agreed to participate in the FINRA Department of Enforcement’s investigation into this matter and to testifying truthfully.

FINRA Fines AXA Advisors $100,000 For Allegedly Not Firing Broker who Ran Ponzi Scam Sooner, Stockbroker Fraud Blog, March 16, 2012

FINRA May Surrender Proprietary BrokerCheck Lock, Stockbroker Fraud Blog, March 8, 2012

Citigroup Ordered by FINRA to Pay $1.2M Over Bond Markups and Markdowns, Institutional Investor Securities Blog, March 27, 2012 Continue Reading ›

Institutional Investor Fraud Roundup: SEC Seeks Approval of Settlement with Ex-Bear Stearns Portfolio Managers, Credits Ex-AXA Rosenberg Executive for Help in Quantitative Investment Case; IOSCO Gets Ready for Global Hedge Fund Survey

Published on: March 29, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is seeking district court approval of its proposed securities fraud settlement with two ex-Bear Stearns & Co. portfolio managers. The SEC presented its second plea to the U.S. District Court for the Eastern District of New York earlier this month.

In a letter to the court, the SEC cited the Second Circuit Appeals Court’s decision earlier this month to stay a district court judge’s ruling turning down the Commission’s proposed $285M settlement with Citigroup Global Markets Inc. It said that the order in that matter “supports approval and entry” of this pending consent judgment.

If the settlement is approved, former Bear Stearns portfolio managers Matthew and Tannin and Ralph Cioffi would settle SEC charges accusing them of misleading bank counterparties and investors about the financial condition of two hedge funds that failed because of subprime mortgage-backed securities in 2007. Per the terms of the proposed settlement, Tannin would pay $200,000 in disgorgement plus a $50,000 fine and Cioffi would pay $700,000 in disgorgement and a $100,000 fine.

This is the second attempt by the SEC and the defendants to the court for settlement approval after District Court Judge Frederic Block cited concerns made by Judge Rakoff, who is the one who threw out the proposed $285M settlement in the SEC-Citigroup case and ordered both parties to trial. The Second Circuit has since stayed those proceedings. (In the securities case between the SEC and Citigroup, the regulator had accused the financial firm of misrepresenting its involvement in a $1 billion collateralized debt obligation that the latter and structured and marketed five years ago.)

In other SEC news, the Commission has honored its commitment to providing greater transparency when it comes to cooperation credit by notifying the public that it credited an ex-AXA Rosenberg senior executive for his substantial help in an enforcement action against the quantitative investment firm. AXA Rosenberg is accused of concealing a material error in the computer code of the model it used to manage client assets.

The SEC said it would not take action against the former executive not just because of the help he provided, but also because the alleged misconduct in question was one that mattered so much. Fortunately, the SEC was able to give clients back the $217 million they lost, as well is impose penalties of $27.5 million. This was the Commissions first case over mistakes in a quantitative investment model.

Meantime, the International Organization of Securities Commissions’ Technical Committee says it has updated the data categories for information it plans to collect in a global survey of hedge funds that will take place later this year. Modified reporting categories include general information about firms, funds, and advisors, geographical focus, market and product exposure for strategy assets, leverage and risk, trading and clearing.

According to IOSCO, responses to the survey will bring together an array of hedge fund information that regulators can look at to determine systemic risk. The committee believes that having securities regulators regularly monitor hedge funds for systemic risk indicators/measures will be beneficial and provide necessary insight into possible issues hedge funds might create for the global financial system. This will be IOSCO’s second survey on hedge funds.

SEC Credits Former Axa Rosenberg Executive for Substantial Cooperation during Investigation, SEC, March 19, 2012

More Blog Posts:
Securities Fraud: Mutual Funds Investment Adviser Cannot Be Sued Over Misstatement in Prospectuses, Says US Supreme Court, Stockbroker Fraud Blog, June 16, 2011

Janus Avoids Responsibility to Mutual Fund Shareholders for Alleged Role in Widespread Market Timing Scandal, Stockbroker Fraud Blog, June 11, 2007

Citigroup Ordered by FINRA to Pay $1.2M Over Bond Markups and Markdowns

Published on: March 27, 2012 | by Shepherd Smith Edwards & Kantas, LLP

FINRA says that Citigroup Inc. subsidiary Citi International Financial Services LLC must pay over $1.2M in restitution, fines, and interest over alleged excessive markdowns and markups on agency and corporate bond transactions and supervisory violations. The financial firm must also pay $648,000 in restitution and interest to over 3,600 clients for the alleged violations. By settling, Citi International is not denying or admitting to the allegations.

According to FINRA, considering the state of the markets at the time, the expense of making the transactions happen, and the value of services that were provided, from July ’07 through September ’10 Citi International made clients pay too much (up to over 10%) on agency/corporate bond markups and markdowns. (Brokerages usually make clients that buy a bond pay a premium above the price that they themselves paid to obtain the bond. This is called a “markup.”) Also, from April ’09 until June ’10, the SRO contends that Citi International did not put into practice reasonable due diligence in the sale or purchase of corporate bonds so that customers could pay the most favorable price possible.

The SRO says that during the time periods noted, the financial firm’s supervisory system for fixed income transactions had certain deficiencies related to a number of factors, including the evaluation of markups/markdowns under 5% and a pricing grid formulated on the bonds’ par value rather than their actual value. Citi International will now also have to modify its supervisory procedures over these matters.

In the wake of its order against Citi International, FINRA Market Regulation Executive Vice-President Thomas Gira noted that the SRO is determined to make sure that clients who sell and buy securities are given fair prices. He said that the prices that Citi International charged were not within the standards that were appropriate for fair pricing in debt transactions.

If you believe that you were the victim of securities misconduct or fraud, please contact our stockbroker fraud law firm right away. We represent both institutional and individual investors that have sustained losses because of inadequate supervision, misrepresentations and omissions, overconcentration, unsuitability, failure to execute trades, churning, breach of contract, breach of promise, negligence, breach of fiduciary duty, margin account abuse, unauthorized trading, registration violations and other types of adviser/broker misconduct.

Before deciding to work with a brokerage firm that is registered with FINRA, you can always check to see if they have a disciplinary record by using FINRA’s BrokerCheck. Last year, 14.2 million reviews of the records of financial firms and brokers were conducted on BrokerCheck.

FINRA BrokerCheck®

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

Bank of America’s Merrill Lynch Settles for $315 million Class Action Lawsuit Over Mortgage-Backed Securities, Institutional Investor Securities Blog, December 6, 2011

JP Morgan Chase To Pay $150M to Settle Securities Lawsuit Over Lending Program Losses of Union Pension Funds

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

To settle a securities lending lawsuit filed by the AFTRA Retirement Fund, the Investment Committee of the Manhattan and Bronx Surface Transit Operating System, and the Imperial County Employees’ Retirement System, JPMorgan Chase & Co. will pay $150 million. The union pension funds are blaming the financial firm for losses that they sustained through its securities lending program. A district court will have to approve the settlement.

JPMorgan had invested their money in Sigma Finance Corp. medium term notes, which is a financial instrument that has since failed. However, billions of dollars of repurchase financing was extended to Sigma in the process.

The securities claims accused JPMorgan of violating the Employee Retirement Income Security Act and its state-imposed fiduciary obligations when it invested in Sigma. The plaintiffs contend that financial firm should have known that the investment was a poor one.

Per the union pension funds’ contracts with JPMorgan, the investment bank is only supposed to put their money in investment vehicles that are low-risk and conservative. They believe that the Sigma vehicle did not meet that standard.

The consolidated class action alleges that JPMorgan foresaw Sigma’s impending failure, took part in predatory repo arrangements with significant discounts in order to pick the best of Sigma’s assets in its portfolio, and reduced the quality and quantity of these assets by taking title to assets in an amount that was nearly a billion dollars more than the financing it gave.

The Board of Trustees of the American Federation of Television and Radio Artists (AFTRA) Retirement Fund, which initially brought the class action case, contended that JPMorgan made close to $2 billion profit, even as the notes were left with almost no value. Last year, a year after the court certified the class action case, a judge gave partial summary judgment to the financial firm.

The plaintiffs believe that the securities lawsuit brought up a number of key factual and legal matters under New York common law and ERISA and that this made the case very hard to litigate. They say the $150 million proposed settlement is a representation of 30 – 100% of the potential provable losses if liability were to be set up for a certain breach date. Therefore, seeing as a trial could have led to a wide range of potential damage results, the settlement figure represents an appropriate range of recovery

JPMorgan Agrees to Pay $150M To Settle Securities Lending Lawsuit, Bomberg, March 20, 2012

JPMorgan to pay $150 million over failed Sigma SIV, Reuters, March 20, 2012

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

JP Morgan Chase Agrees to Pay $861M to Lehman Brothers Trustee, Stockbroker Fraud Blog, June 28, 2011

Investors Want JP Morgan Chase & Co. To Explain Over $95B of Mortgage-Backed Securities, Institutional Investor Securities Blog, December 17, 2011 Continue Reading ›

Some Former Pro-Athletes Regain the Spotlight But This Time For Financial Fraud

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

A number of former professional athletes have been accused of parlaying their hero/celebrity status and the credibility built on their names to commit securities fraud. According to USA Today, the adulation of celebrities, including sports heroes, in our culture makes high-profile athletes “naturals” for investment fraud.

“Success in too many occupations is more about who you know than what you know. The best talent for selling investments involves getting clients through the front door. Sports stars have a greater opportunity than most to do that,” said Shepherd Smith Edwards and Kantas, LTD, LLP Founder and Stockbroker Fraud Lawyer William Shepherd.

Among the famous ex-athletes to be targeted by the US Securities and Exchange Commission over financial fraud allegations is Willie Gault, the former National Football League member of the Chicago Bears. Known as one of the fastest wide receiver ever and for playing a key part in his team’s victory over the New England Patriots during the 1986 Super bowl, Gault was also a former member of the US Olympic team.