Articles Posted in Securities Fraud

Houston Securities Arbitration: FINRA Panel Orders Penson Financial Services, Inc. to Pay Boushy North Investments, Ltd. $500,000

Published on: June 11, 2011 | by Shepherd Smith Edwards & Kantas, LLP

In Houston, a FINRA arbitration panel has awarded Boushy North Investments, Ltd. $500,000 in its securities arbitration case against Penson Financial Services, Inc. Boushy North Investments had initially sought $4M in punitive damages and more than $3.8M in compensatory damages for negligence, unauthorized trading, breach of fiduciary duty, and gross negligence. At the Texas securities arbitration hearing, however, the Claimant amended and reduced its compensatory damages and withdrew punitive damages and legal fees.

Boushy North Investments accused Penson of failing to prevent an unsuitable and unauthorized day-trading strategy for its family limited-partnership account. Meantime, Penson denied the allegations, asserted specific defenses, and submitted a Third-Party Complaint against Thomas Cooper and Second Mile Wealth Management, Inc., which asserted causes of action over crack of contract, indemnification, and rascal linked to the Third-Party Respondents’ purported element representations about the trade and the direction of the trading in Claimant’s account. Penson eventually discharged its Third-Party Claim’s result of action for fraud.

The claim for unauthorized trading hadn’t been included in the Original Statement of Claim submitted in September 2009. The first effort to amend that was February. However, FINRA denied it because different or new pleadings cannot be turned in after a panel has been chosen and if a leave to amend hasn’t been granted. Last month, however, after the proper motions were submitted, the panel granted the unauthorized trading count.

Penson Faced Multi-Million Dollar Day-Trading Claim in FINRA Arbitration, Broke and Broker, June 1, 2011
Multi-Million Dollar Day-Trading Claim Hits Penson in FINRA Arbitration, Forbes, May 31, 2011

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District Court in Texas Decides that Credit Suisse Securities Doesn’t Have to pay Additional $186,000 Arbitration Award to Luby’s Restaurant Over ARS, Stockbroker Fraud Blog, June 2, 2011
Texas Securities Commissioner’s Emergency Cease and Decease Order Accuses Insignia Energy Group Inc. of Misleading Teachers, Stockbroker Fraud Blog, May 23, 2011
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US Supreme Court Declines Review of Appeals Court Rulings Involving Issues of Antifraud Liability and Institutional Investment Managers’ Disclosure Obligations

Published on: June 11, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The nation’s highest court has decided not to review three federal appeals court rulings that brought up the securities law issues of disclosure obligations and antifraud liability. The cases are Amorosa v. Ernst & Young LLP, Pacific Investment Management Co. v. Mayer Brown LLP, and Full Value Advisors LLC v. SEC.

In the liability case against Ernst & Young, the U.S. Court of Appeals for the Second Circuit held that the district court was correct in turning down the investor’s lawsuit, which alleged fraudulent accounting practices at America Online and later at AOLTime Warner. The court had found that the plaintiff failed to adequately allege loss causation.

The appeals court also affirmed the dismissal of the second liability-related securities fraud case, this one against Mayer Brown LLP, over the latter’s alleged involvement in the fraud at Refco Inc. The court concluded that secondary actors can only be held liable for false statements that they made at the time it issued them (this finding rejected the SEC’s broader view of liability for secondary actors in securities fraud cases) and that without attribution the plaintiffs cannot demonstrate that they depended on the defendants’ false statements. The court also said that “participation in the creation of those statements amounts, at most, to aiding and abetting securities fraud.”

In Full Value Advisors LLC v. SEC, the U.S. Court of Appeals for the District of Columbia Circuit had found that the hedge fund adviser’s constitutional challenge to the SEC’s disclosure requirements for large investment advisers was not ripe for judicial review. This ruling prevented the plaintiff from receiving a ruling on the merits of its claims unless the SEC puts together a report that is accessible to the public and includes the allegedly proprietary information.

Pacific Investment Management Co. v. Mayer Brown LLP

Full Value Advisors LLC v. SEC (PDF)

More Blog Posts:
SEC Securities Settlements Often Don’t Come with Admission of Wrongdoing, Institutional Investors Securities Blog, March 29, 2011

CalPERS Files Securities Fraud Lawsuit Against Lehman Brothers, Institutional Investors Securities Blog, February 10, 2011

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

New Bill Would Strengthen the US Justice Department’s Ability to Prosecute Fraud

Published on: May 30, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The 2011 Fighting Fraud to Protect Taxpayers Act is a new bill that would enhance the ability of the US Justice Department to fight fraud. The legislation would channel part of the money recovered from fines and penalties toward the prosecution and investigation of mortgage fraud, financial fraud, foreclosure fraud, and health care fraud.

In a joint release put out by Senate Judiciary Committee Chairman Patrick Leahy (D-Vt.) and Sen. Charles Grassley (R-Iowa), who is a ranking committee member, the Justice Department collected more than $6 billion in penalties and fines over the last fiscal year. The proposed bill would up the percentage of funds that the agency can retain in its Working Capital Fund from 3% to 3.5%. That additional 5% would go toward fraud enforcement. This would give the DOJ approximately another $15 million to investigate and prosecute fraud. It would also lead to greater accountability and transparency at DOJ.

In addition, bill would authorize more funds to DOJ that would go toward the prosecution and investigation of False Claims Act violations. It would also expand the Secret Service’s authority to use funds to advance under cover operations.

Grassley also recently submitted a separate action to FINRA Chairman Richard Ketchum talking about how insider trading is “alive and well” in the US financial markets. He noted the recent criminal charges against hedge fund SAC Capital Advisors LP employees Noah Freeman and Donald Longueuil, who are among those that the Securities and Exchange Commission filed charges against over the alleged $30 million insider trading scheme involving at least six public companies. Grassley wants FINRA to provide more information about any referrals from self-regulatory organizations involving SAC Capital Advisors.

Related Web Resources:
Leahy, Grassley Roll Out New Anti-Fraud Legislation, May 5, 2011

S. 890: Fighting Fraud to Protect Taxpayers Act of 2011

More Blog Posts:
SEC to Propose Rule Banning “Felons and Bad Actors” From Involvement in Private Offerings, Institutional Investors Securities Blog, May 29, 2011

FINRA Chief Ketchum Says Securities Regulators Worried Whether Investors Betting on High-Yield Corporate Bonds Really Know What They Are Getting Into, Stokbroker Fraud Blog, March 21, 2011

SEC Staff Wants an SRO to Oversee Investment Advisers, Stokbroker Fraud Blog, January 31, 2011

Winell Associates Inc., Maxi Partners GP, and Howard Winell Settle CTFC Charges Accusing Them of Misappropriating Funds and Unauthorized Trading of Over $5.2M

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

Howard Winell, Winell Associates Inc., and Maxie Partners GP LLC have agreed to pay over $5.2 million to settle Commodity Futures Trading Commission charges accusing them of taking part in unauthorized trading and misappropriating funds related to a commodity futures and options pool. By settling, the respondents are not denying or admitting the allegations. They have, however, agreed to a permanent ban from both trading and registering with the CFTC.

The agency says that in 2005, Winell and the two firms solicited and pooled about $20 million from approximately 25 participants to trade commodity futures and options on commodity futures through Maxie Partners LP, which is a commodity pool. In May 2007, one of the largest participants in the pool asked to redeem about $7 million. The agency says that while the respondents segregated that amount to meet this request, before the redemption was issued the pool suffered substantial losses and had margin calls of about $4 million issued by futures commission merchants that held the pool’s trading accounts. The CFTC says that to keep on trading and meet the margin calls, Winell had to transfer those segregated funds back to the pool’s trading accounts. About $3.8 million of the participant’s money was lost.

It is wrong for brokers and financial advisers to misappropriate funds when doing their job. If you believe that you have suffered financial losses because of broker misconduct, do not hesitate to contact our stockbroker fraud lawyers immediately.

Related Web Resources:
Howard Winell and Winell Associates fined USD5.2m for fraud, HedgeWeek, May 3, 2011
CFTC Sanctions New York Resident Howard Winell and His Companies, Winell Associates, Inc., and Maxie Partners GP, LLC, More than $5.2 Million for Fraud, CFTC, May 2, 2011
Commodity Futures Trading Commission

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Commodity Options Fraud Charges by CFTC Prompts District Court to Freeze Assets and Records of 20/20 Trading Co. Inc. & 20/20 Precious Metals Inc., Stockbroker Fraud Blog, May 6, 2011
Commodities Industry Fears being held to Regulatory Standards of Securities Industry, Stockbroker Fraud Blog, February 4, 2011
CFTC Files Charges in Alleged California Ponzi Scam Involving the Fraudulent Solicitation of $14 million in Commodity Futures, Stockbroker Fraud Blog, January 18, 2011 Continue Reading ›

Five Ex-Brooke Executive Settle SEC Fraud Charges Accusing Them of Concealing Financial Firm’s Deteriorating Finances

Published on: May 19, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Five of the six former Brooke executives accused of securities fraud have settled the charges filed by the US Securities and Exchange Commission. According to the SEC, the defendants misrepresented the deteriorating financial condition of Brooke, which eventually filed for bankruptcy. The agency says they employed “virtually any means necessary” to hide Brooke’s financial state, which included liquidity crises that occurred almost every week. The SEC also contends that Aleritas’s loan losses, which was in the hundreds of millions of dollars, caused a number of regional banks to fail.

Among those that settled are brother Robert and Leland Orr. Robert formerly served as Brooke Corp. chairman, while Leland was chief executive. The other three who settled were former Aleritas executives Michael S. Lowry and Michael S. Hess and former Brooke Capital and Brooke Corp. CFO Travis W. Vrbas. A sixth executive, former Brooke executive Kyle Garst, is contesting the securities fraud allegations.

By agreeing to settle the ex-Brooke executives are not admitting to or denying the allegations. The Orr brothers have consented to disgorge profit and pay fines, but the court has yet to determine the figures. Lowry has agreed to $214,500 in disgorgement, $24,004 in prejudgment interest, and a $175,000 penalty. Hess is to pay a $250,000 penalty. Vrbas has consented to a $130,000 penalty.

The SEC has also accused two Brooke affiliates, insurance agency franchisor Brooke Capital Corp. and lender Aleritas Capital Corp., of securities fraud. The fallout from the alleged fraud has had a “devastating” effect on the livelihood of “hundreds of insurance franchisees.”

Related Web Resources:
Five former Brooke execs settle SEC fraud charges, Reuters, May 4, 2011
Financial Firm Execs Misled Investors,  SEC Contends; Five of Six Settle Charges, BNA Securities Law Daily, May 5, 2011

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SEC ALJ Finds Several Brokers Liable for Unlawful Penny Stock Sales

Published on: May 9, 2011 | by Shepherd Smith Edwards & Kantas, LLP

A Securities and Exchange Commission administrative law judge has found several brokers liable for their alleged involvement in the unlawful sale of penny stocks to investors. In re Bloomfield, the SEC had filed securities charges against Robert Gorgia, Ronald S. Bloomfield, Victor Labi, John Earl Martin Sr. and Eugene Miller. Labi, Martin, and Bloomfield were Leeb Brokerage Services registered representatives, while Miller and Gorgia were president and chief compliance officer. Leeb is no longer in operation.

The SEC contends that the defendants let customers regularly deliver blocks of privately obtained penny stocks shares into their Leeb accounts. The clients would then sell the securities to the public through unregistered securities transactions.

While Martin, Labi, and Bloomfield allegedly did not conduct reasonable inquiry prior to allowing the public sale of the stock and violated securities law registration requirements, the other two men are accused of failing to reasonably supervise the registered representatives. The SEC claims that the men let the unlawful penny stock sales occur without doing enough to investigate whether they were “facilitating illegal underwriting.” As a result, the defendants allegedly caused Leeb’s failure to submit Suspicious Activity Reports that are mandated under the Bank Secrecy Act.

ALJ Brenda P. Murray noted that the securities fraud resulted in significant financial losses for the investing public. She ordered the three stockbrokers to pay $1.39M in disgorgement. The three brokers were also ordered to pay a $100,000 civil penalty and cease and desist from future misconduct. Miller, who settled the securities charges against him last year, has agreed to supervisory suspension, a cease and desist order, and a $50,000 penalty.

Related Web Resources:
SEC Litigation (PDF)

Brokers Found Liable on Charges They Aided Unlawful Penny Stock Sales, BNA – Securities Law Daily, Alacra Store, April 28, 2011

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FINRA Orders Charles Schwab to Pay $18M to Fair Fund for YieldPlus Investors, Stockbroker Fraud Blog, March 12, 2011
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SEC Securities Settlements Often Don’t Come with Admission, Institutional Investor Securities Blog, March 29, 2011 Continue Reading ›

Tribune Bondholders Can Sue Shareholders for Over $8.2B

Published on: April 30, 2011 | by Shepherd Smith Edwards & Kantas, LLP

A bankruptcy court judge has cleared the way for Tribune Co. (TRBCQ) bondholders to file securities complaints in state court against ex-shareholders who made money from the 2007 leveraged buyout that is thought to have caused the media giant’s demise. They contend that for real estate magnate Sam Zell to raise the money to pay off the shareholders and gain control of the Tribune, the company ended up taking on level of debt that it could not sustain and which resulted in bankruptcy in 2008.

The bondholders claim that the 2007 buyout was made at their expense and they want to get back the over $8.2 billion that was paid out to ex-shareholders. Unfortunately, seeing as there are billions of dollars in secured debt, it is not likely that bondholders will recover all of the over $2 billion in notes that the media giant issued before the buyout unless creditors prevail in their lawsuits against shareholders, Zell, lenders, and other parties.

The bondholders needed to get permission to file their lawsuits outside the bankruptcy court. Led by Aurelius Capital Management, they say the action was necessary because the statute of limitations for pursuing such claims under state laws in Illinois and Delaware ends in June, when it will have been four years since the buyout. The bondholders are worried that Tribune, which is based in Illinois, won’t get out of bankruptcy by then. Possible securities lawsuit targets are the Robert R. McCormick Foundation, which sold $1.5 billion in company stock for a $963 million profit for the buyout and Stark Investments, a hedge fund that invested in Tribune.

Related Web Resources:

Bondholders Can Sue Over Tribune, The Wall Street Journal, April 27, 2011

More Blog Posts:

SEC is Finalizing Its Whistleblower Rules, Says Chairman Schapiro, Stockbroker Fraud Blog, April 28, 2011

Securities Lawsuits Expected to Reach Record High in ’11, Says Advisen Ltd. Report

Published on: April 23, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Per Advisen Ltd’s latest quarterly report on securities litigation, the number of securities lawsuit filings will likely set a new record high for yet another year in a row. Records were set in 2008, 2009, and 2010 following the credit crisis. Advisen’s quarterly report was sponsored by ACE.

John Molka III , the report’s author, says that even with the credit crisis has eased up, the submission of securities lawsuits has not. 1,293 securities lawsuits were filed in 2010. Now, Advisen is saying that based on the number of securities complaints filed during the first quarter of 2011, you can expect the number of lawsuits for this year to beat that number. Molka speculates that this “elevated level of filings” could be the “new normal.”

During Q1 2011, 362 securities lawsuits were filed—a 47% jump from the number of complaints that were submitted in Q1 2010. Compare this first quarter to last year’s last quarter when 342 securities complaints were filed. Also, with 1,448 new filings as this year’s first quarter annualized rate, that’s already12% more than last year’s total filings. The complaints include those for breach of fiduciary duty, shareholder derivative cases, securities fraud, and securities class actions.

Although securities fraud complaints comprised the greatest portion of filings for the first quarter, breach of fiduciary duties lawsuits, which include merger objection complaints, are the real cause of securities lawsuit growth. Meantime, 18% of new filings were securities class action complaints, which in the past made up over 1/3rd of securities lawsuits. Securities class action lawsuits, however, still make up for the majority of the largest settlements. During this first quarter, the average securities class action case settled for $54.6 million.

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Class Members of Charles Schwab Corporation Securities Litigation Can Still Opt Out to File Individual Securities Claim, Stockbroker Fraud Blog, December 6, 2010

Securities Fraud Lawsuit Against Calamos Investments Filed on Behalf of Calamos Convertible Opportunities and Income Fund Shareholders, Stockbroker Fraud Blog, September 17, 2010

SEC Charges Subprime Auto-Loan Provide Inofin Inc. with Securities Fraud

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

The U.S. Securities and Exchange Commission has filed securities fraud charges against Inofin Inc. and three of its executives. The SEC contends that they diverted millions of investor funds’ for their personal use and misled investors. For example, the agency contends that Kevin Mann and Michael Cuomo used about third of the investors’ money to start several real-estate property developments and open four used car dealerships.

The agency claims that Mann, Cuomo, & Melissa George acted illegally when the raised $110 million from hundreds of investors in the District of Columbia and 25 states. They allegedly did this with unregistered notes that they told investors were going to be used only for funding subprime auto loans. Meantime, the subprime auto-loan provider’s clients were told that 9-15% returns could be expected because Inofin charged 20% interest rates on average to subprime borrowers.

Inofin is accused of misrepresenting its financial performance between 2006 and 2010, while its executives allegedly prepared and submitted false financial statements to the Massachusetts Division of Banks. SEC says that Inofin’s worsening financial state was caused by the company’s failure to disclose its business activities and because management decided to sell part of its auto loan portfolio at a considerable discount to deal with cash shortages. Meantime, Inofin and its key officers kept selling Inofit securities while allowing investors to keep believing that it was a profitable business and a solid investment.

The SEC has also charged two sales agents, Thomas K. (Kevin) Keough and David Affeldt, because they allegedly offered to sell company securities even though they were not SEC-registered broker-dealers. The agency says that between 2004 and 2009 the men were unjustly enriched by referral fees of over $500,000.

Related Web Resources:
SEC Charges Subprime Auto Loan Lender and Executives with Fraud, SEC, April 14, 2011
Mass. auto lender, executives charged with fraud, Businessweek/Bloomberg, April 14, 2011
Massachusetts Division of Banks

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Goldman Sachs Group Made Money From Financial Crisis When it Bet Against the Subprime Mortgage Market, Says US Senate Panel

Published on: April 15, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Senate’s Permanent Subcommittee on Investigations says that because Goldman Sachs Group Inc. bet billions against the subprime mortgage market it profited from the financial crisis. The panel’s findings come following a two-year bipartisan probe and were released in a 639-page report on Wednesday.

The subcommittee released documents and emails that show executives and traders attempting to get rid of their subprime mortgage exposure, which was worth billions of dollars, and short the market for profit. Their actions ended up costing their clients that purchased the financial firm’s mortgage-related securities.

The panel says that Goldman allegedly deceived the investors when failing to tell them that the investment bank was simultaneously shorting or betting against the same investments. The subcommittee estimates that Goldman’s bets against the mortgage markets in 2007 did more than balance out the financial firm’s mortgage losses, causing it to garner a $1.2 billion profit that year in the mortgage department alone. Also, when Goldman executives, including Chief Executive Lloyd Blankfein appeared before the committee in 2010, the panel says that they allegedly misled panel members when they denied that the financial firm took an a position referred to as being “net short,” which involves heavily tilting one’s investments against the housing market.

It was just last year that the Securities and Exchange Commission ordered Goldman to pay $550 million to settle securities fraud charges over its actions related to the mortgage-securities market. The allegations in this report go beyond the claims covered by the SEC case. The report also names mortgage lender Washington Mutual, credit rating firms, the Office of Thrift Supervision, and a federal bank regulator as among those that contributed to the financial crisis.

Goldman is denying many of the subcommittee’s claims and says its executives did not mislead Congress.

Related Web Resources:
Goldman Sachs shares drop on Senate report, Reuters, April 14, 2011

Senate Panel: ‘Goldman Sachs Profited From Financial Crisis’, Los Angeles Times, April 14, 2011

Senate Permanent Subcommittee on Investigations

More Blog Posts:
Goldman Sachs Sued by ACA Financial Guaranty Over Failed Abacus Investment for $120M, Institutional Investor Securities Blog, January 10, 2011

Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million, Stockbroker Fraud Blog, July 30, 2010

Goldman Sachs COO Says Investment Firm Shorted 1% of CDOs Mortgage Bonds But Didn’t Bet Against Clients, Stockbroker Fraud Blog, July 14, 2010