Securities Fraud

UBS Financial Services Fined $2.5M and Ordered to Pay $8.25M Over Lehman Brothers-Issued 100% Principal-Protection Notes

Published on: April 12, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is fining UBS Financial Services, Inc. $2.5 million and ordering it to pay $8.25 million in restitution for allegedly misleading investors about the “principal protection” feature of 100% Principal-Protection Notes. Lehman Brothers Holdings Inc. issued the PPNs Holdings Inc. before it filed for bankruptcy in 2008.

FINRA contends that even as the credit crisis was getting worse, between March and June 2008 UBS advertised and described the notes as investments that were principal-protected while failing to make sure clients knew that they PPNs were unsecured obligations of Lehman and that the principal protection feature was subject to issuer credit risk. UBS also allegedly failed to:

• Properly notify its financial advisers of the impact the widening of credit default swaps was having on Lehman’s financial strength
• Sufficiently analyze how appropriate the Lehman-issued PPNs were for certain clients
• Set up a proper supervisory system for the sale of the Lehman-issued PPNs
• Provide proper training or appropriate written supervisory procedures and policies
• Provide adequate suitability procedures for determining who should invest

FINRA also says that UBS developed and used advertising collateral about the PPNs that misled certain clients, such as the suggestion that a return of principal was certain as long as clients held the product until it matured. FINRA claims that the reason that some UBS financial advisers gave incorrect information to customers was because they themselves didn’t fully understand the product.

FINRA says that because UBS’s suitability procedures were inadequate and certain PPN’s lacked risk profile requirements, the product was sold to investors who were not willing or shouldn’t have been allowed to take on the risks involved. More often than not it was these investors who were likely to depend on the Lehman PPNs’ “100% principal protection” feature that were “risk averse.”

By agreeing to settle, UBS is not denying or admitting to the charges.

UBS to shell out $10.75M to settle Lehman-related row, Investment News, April 11, 2011

More Blog Posts:
UBS to Pay $2.2M to CNA Financial Head for Lehman Brothers Structured Product Losses, Stockbroker Fraud Blog, January 4, 2011

UBS Must Pay Couple $530,000 for Lehman Brothers-Backed Structured Notes, Institutional Investors Securities Blog, November 5, 2010

Lehman Brothers’ “Structured Products” Investigated by Stockbroker Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LLP, Stockbroker Fraud Blog, September 30, 2008

Wells Fargo Settles SEC Securities Fraud Allegations Over Sale of Complex Mortgage-Backed Securities by Wachovia for $11.2M

Published on: April 7, 2011 | by Shepherd Smith Edwards & Kantas, LLP

For a payment of $11.2 million, Wells Fargo & Co. will settle US Securities and Exchange Commission allegations that Wachovia Capital Markets LLC misled investors and improperly sold two collateralized debt obligations in 2007 and 2006. Wachovia was bought by Wells Fargo in 2008.

Wells Fargo Securities now manages Wachovia. By agreeing to settle, the investment bank is not admitting to or denying the findings.

According to the SEC, Wachovia Capital Markets LLC, now called Wells Fargo Securities, violated securities law anti-fraud provisions when it sold the complex mortgage-backed securities to investors despite the red flags indicating that there was trouble brewing with the US housing market.

The SEC says that Wachovia charged excessive markups in the sale of part of a $1.5 billion CDO called Grand Avenue II. Unable to sell the CDOs $5.5 million equity portion in October 2006, it kept the shares on the trading desk while dropping their value to 52.7 cents on the dollar. Wachovia later sold the shares for 90 and 95 cents on the dollar to an individual investor and the Zuni Indian tribe. Both did not know that they had purchased the shares at a price that was 70% above their accounting value. The transaction went into default in 2008.

The SEC claims that in 2007, Wachovia Capital Markets misrepresented to investors in Longshore 3, a $1.3 billion CDO, that assets had been acquired from Wachovia affiliates on an “arms’-length basis” when actually, 40 residential mortgage-backed securities were transferred at $4.6 million over market prices. The SEC contends that Wachovia was trying to avoid sustaining losses by transferring the assets at “stale” prices.

Related Web Resources:

Wells Fargo-Wachovia settles CDO claim with SEC for $11 million, Housing Wire, April 5, 2011

CDO News, New York Times

Mortgage-Backed Securities, SEC.gov

More Blog Posts:

Houston Man Indicted in Alleged $17M Texas Securities Fraud, Stockbroker Fraud Blog, December 23, 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

SEC Securities Settlements Often Don’t Come with Admission of Wrongdoing

Published on: March 29, 2011 | by Shepherd Smith Edwards & Kantas, LLP

As Bloomberg News columnist Ann Woolner points out, in most US Securities and Exchange Commission where a settlement is reached, the defendant usually ends up not having to admit to doing anything wrong. Instead, the securities fraud agreement is accompanied by the boilerplate caveat that says that by settling, the plaintiff is doing so without “without admitting or denying” wrongdoing.

Granted, there are certain cases where a conviction or guilty plea in a related criminal case makes it clear that a wrongful action did take place. One might also say that by agreeing to settle and pay a huge financial sum, the plaintiff is admitting to the wrongdoing without actually admitting to doing anything wrong. However, as Woolner points, not all defendants of US Securities and Exchange Commission cases are also charged in criminal court over the alleged securities fraud. Even when a settlement is reached, without an admission, the exact nature of the fraud is often left unclear.

SEC spokesperson John Nestor says that of the over 600 securities lawsuits filed every year, only about 20 of them ever go to trial. Nestor notes that the SEC’s primary objective in any civil case is to secure the proper sanctions against wrongdoers and not making them admit wrongdoing is a way to get this done. Many violators will give up a great deal to avoid being held liable in civil court. They also have little incentive to confess because this could help the securities fraud lawsuits of plaintiffs.

U.S. District Judge Jed Rakoff says that letting securities defendants get away with not admitting what they have done is a “disservice to the public.” Meantime, SEC commissioner also says that he wants defendants to “take accountability” and “issue mea culpas.” He also wants companies to stop putting out press releases suggesting that the SEC overreacted.

Related Web Resources:
Uncle Sam Wants Your Cash, Not Confession: Ann Woolner, Bloomberg, March 24, 2011

US Securities and Exchange Commission

More Blog Posts:
Bank of America to Pay $137M Over Alleged Investment Scam To Pay Municipalities Low Interest Rates on Investments and $9M Over Alleged Bid-Rigging Scheme to Nonprofits, Institutional Investors Securities Blog, December 16, 2010

NJ Settles Municipal Bond Offering Fraud Charges with SEC, Institutional Investors Securities Blog, September 30, 2010

Federal Judge to Approve Citigroup’s $75M Securities Settlement with SEC Over Bank’s Subprime Mortgage Debt Reporting to Investors, Institutional Investors Securities Blog, September 29, 2010

FINRA Panel Orders Wedbush Securities to Pay $233,000 in Securities Fraud Damages

Published on: March 28, 2011 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority (FINRA) arbitration panel says Wedbush Securities Incorporated must pay Karen E. Ray $233,000 in damages. Ray had accused the brokerage firm of numerous causes of action, including negligence, purposely negligent misrepresentations, and violating FINRA Rules of Fair Practices.

Rays case isn’t the first one against the broker-dealer. FINRA’s broker report on the financial firm noted that Wedbush has been at the center of a number of customer complaints and over 40 regulatory inquiries brought by the Securities and Exchange Commission, FINRA (previously NASD), the NYSE Division of Enforcement, as well as regulatory bodies in Colorado, Washington, New Jersey, Georgia, Idaho, and Oregon.

Among the allegations are those involving supervisory failures and market timing. The broker report also noted that Wedbush had received over 40 securities arbitration claims by customers alleging unsuitability, negligence, excessive margin, churning, misrepresentation, and/or breach of fiduciary duty. Their cases involved different kinds of securities, such as mutual funds, bonds, stocks, municipal securities, annuities, and options.

Prison Term for Broker Accused of Investment Fraud Affirmed by 7th Circuit Even Though Sentence Exceeds Guidelines

Published on: March 26, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Seventh Circuit has affirmed broker Scott Schlueter’s 48-month prison sentence even though it exceeds sentencing guidelines. Schlueter is accused of conducting an investment scam that resulted in over $300,000 in financial losses for investors, who also happened to be friends of his.

Schlueter has admitted that rather than placing investors’ money in no-risk investments, he kept the funds while paying out interest from time to time. He has pleaded guilty to securities fraud, wire fraud, and mail fraud.

Although sentencing guidelines call for 33 to 41 months behind bars, the district court judge sentenced Schlueter to 48 months. The judge contends that the serious impact of the rogue broker’s actions was not accounted for in the sentencing guideline range and that an above-range sentence was “more than adequate” considering that Schlueter not just bilked investors of money they needed during “critical stages of their lives,” but he also took advantage of his friendships with investors to defraud them.

For example, one 75-year-old man ended up having to go back to work. Another investor, a widow, had to get a second job after she lost her insurance money.

Schlueter, who argued that he should only sentenced for two year because he had a tough childhood and suffered from alcoholism, contested the above-range sentenced. The appeals court, however, turned down his request down and affirmed the four-year sentence.

More Blog Posts:
Wall Street Targeting Older Investors With Structured Product Sales, Reports AARP, Stockbroker Fraud Blog, March 11, 2011
Increase of Structured Notes with Derivatives Sales Seduces Retirees, Reports Bloomberg, Stockbroker Fraud Blog, September 25, 2010
Combatting Elder Financial Fraud: SEC, NASAA, & FINRA Update Their Best Practices to Protect Senior Investor, Stockbroker Fraud Blog, August 29, 2010 Continue Reading ›

Juno Mother Earth Asset Management LLC and Its Founders Face SEC Securities Fraud Lawsuit Over Alleged $1.8M Looting of Hedge Fund Assets

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

The US Securities and Exchange Commission has filed a securities fraud complaint accusing Juno Mother Earth Asset Management LLC and its founders Arturo Rodriguez and Eugenio Verzilli of looting over $1.8 million in assets from a hedge fund.

The two hedge fund managers allegedly used the assets to cover Juno’s operating expenses, including rent, payroll, entertainment, and travel. They also are accused of submitting false SEC filings, including telling the SEC that it managed $40 million more than what it in fact did.

The SEC says that Juno’s partners falsely claimed that they had placed $3 million of their own capital in a client fund, when in fact, they never used their own money. In addition to selling securities in client brokerage and commodity accounts, Juno allegedly directed 41 separate transfers of cash to Juno’s bank account and made false claims that they were expense reimbursements for costs incurred on the client fund’s behalf. Rodriguez and Verzilli then issued false promissory notes to cover up the fraud and make it seem as if the fund had invested money in Juno.

The SEC further contends that the three defendants marketed investments in the Juno fund but did not reveal that the hedge fund advisor was having financial problems. When offering and selling the securities, Juno would misrepresent and inflate its assets, even claiming at one point that it was managing up to $200 million.

The government is trying to crack down on hedge fund managers who make it appear as if they’ve invested more personal money than what they’ve actually put in. The agency is seeking disgorgement plus prejudgment interests, permanent injunctions, and civil monetary penalties.

Related Web Resources:
SEC Charges Two Hedge-Fund Managers, The Wall Street Journal, March 16, 2011

Read the SEC Complaint (PDF)

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3 Hedge Funds Raided by FBI in Insider Trading Case, Stockbroker Fraud Blog, November 3, 2010

FINRA Chief Ketchum Says Securities Regulators Worried Whether Investors Betting on High-Yield Corporate Bonds Really Know What They Are Getting Into

Published on: March 21, 2011 | by Shepherd Smith Edwards & Kantas, LLP

At a Financial Industry Regulatory Authority fixed income conference earlier this month, FINRA CEO and Chairman Rick Ketchum says securities regulators are questioning whether investors looking at risky investment, including high-yield corporate bonds, fully understand what they are getting into when they delve into the high-yield market. Last year, approximately $200 billion in high-yield debt were sold-a significant increase from the $49 billion that were sold in 2008. Also, during the first six weeks of 2010, about $6.7 billion in junk bond mutual funds were sold.

However, with all this activity in the past year, Ketchum says regulators are asking if registrants are fully familiar with the risks and complexities of the products they are selling and whether clients’ understand the risks involved. For example, he asked, “In a lower interest rate environment, are investors chasing yield, or being led to chase yield?”

As a result of such concerns, FINRA, for its compliance programs, is focusing on the areas of commodity-based exchange-traded funds, municipal securities, disclosure practices, and investor suitability. Ketchum says to expect several formal actions that will tackle “deficient procedures for disclosing material information” and other actions related to “failure to deliver official statements during the primary offering disclosure period” and insufficient “time-of-trade disclosures of material information.”

Ketchum also says that in addition to taking a closer look at municipal bond underwriters to ensure the fairness of new-issue pricing practices and fees, regulators will be checking for any inappropriate efforts by ratings agency officials to favorably affect how municipal securities issues are rated.

Our securities fraud lawyers represent clients who were inappropriately advised about where to put their funds and as a result sustained significant investment losses.

Related Web Resources:
FINRA

FINRA looks into muni-bond practices, Chicago Breaking Business News/Reuters, March 7, 2011 Continue Reading ›

Michael Kenwood Capital Management, LLC Principal Pleads Guilty to Securities Fraud Involving Ponzi Scam

Published on: March 17, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Last month, our stockbroker fraud lawyers reported on a Securities and Exchange Commission order to freeze the assets of Michael Kenwood Capital Management, LLC and its principal Francisco Illarramendi for their alleged misappropriation of $53 million in investor funds. This month, Illarramendi pleaded guilty to securities fraud, wire fraud, conspiracy to obstruct justice, and investment adviser fraud.

Per the US Department of Justice’s release, a hedge fund that Illarramendi was advising sustained losses in the millions. He had been tasked with investing the money. However, instead of telling clients about their failed investments, the DOJ says that Illarramendi decided to cover up this information by taking part in a securities fraud scam. The hedge funds and other entities that he advised ended up with “outstanding liabilities” far beyond their assets’ values. U.S. Attorney David B. Fein says this securities case this is the largest white-collar prosecution that the office has ever pursued.

Two other men have been detained and criminally charged over their alleged involvement in the hedge fund scam and of aiding Illaramendi. Juan Carlos Horna Napolitano and Juan Carlos Guillen Zerpa are charged with investment adviser fraud and conspiracy to obstruct justice.

Meantime, the SEC says it has amended its civil complaint against Illaramendi and MK Capital Management, LLC. The agency is now alleging that the “breadth” of the securities fraud may be in the “hundreds of millions.”

Our institutional investment fraud law firm represents clients in arbitration and litigation with claims against investment advisers, broker-dealers, brokers, and others in the financial industry. We are dedicated to recovering investor losses.

Related Web Resources:

Order to Freeze Assets in $53M Fund Fraud Allegedly Involving Michael Kenwood Asset Management LLC Obtained by SEC, Stockbroker Fraud Blog, February 21, 2011

SEC adds new charges Connecticut-based hedge fund manager in Ponzi scheme, SEC, March 7, 2011

Morgan Keegan & Co. Inc. Must Pay $250K to Couple that Lost Investments in Hedge Fund with Ties to Bernard L. Madoff Investment Securities

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

Financial Industry Regulatory Authority says that Morgan Keegan & Co, Inc. must pay over $250,000 in punitive and compensatory damages to Jeffrey and Marisel Lieberman. The couple suffered financial losses after investing in Greenwich Sentry LLP, a hedge fund whose assets were funneled to Bernard L. Madoff Investment Securities. FINRA contends that the brokerage firm failed to due enough due diligence on the Madoff feeder fund, and was “grossly negligent.”

The Lieberman, who are accusing the Regions Financial unit of fraudulent misrepresentation, negligence breach of fiduciary duty, and violations of Florida and Tennessee statutes, claim that Morgan Keegan and Julio Almeyda, one of its registered representatives, invested $200,000 of their money with Greenwich Sentry. The fund ended up filing for bankruptcy last November.

Per Morgan Keegan’s internal compliance rules, investors should only be allowed to place money in hedge funds if “speculation” is one among their main objectives when opening an account. “Speculation” was the last objective on the couple’s list. FINRA says that not only must the broker-dealer repay the couple’s entire loss of $200,000, but also they must also give them 6% annual interest from when the investment was made, $50,000 in punitive damages, and $14,000 in expert witness fees.

Meantime, the FINRA panel cleared Almeyda of wrongdoing, finding that he did not know that Morgan Keegan had not provided sufficient due diligence nor was he aware that he had given the Lieberman’s false and misleading information about their investments’ risks.

Over the last year, Morgan Keegan has found itself dealing with hundreds of arbitration cases nvolving mutual fund investors alleging securities fraud related to the significant losses they sustained during the subprime mortgage crisis.

Related Web Resources:
Morgan Keegan Fined $250,000 Over Madoff Fund, Reuters, March 7, 2011

More Blog Posts:
Morgan Keegan to Pay $9.2M to Investors in Texas Securities Fraud Case Involving Risky Bond Funds, Stockbroker Fraud Blog, October 6, 2010
Morgan Keegan & Co., Inc., Morgan Asset Management, and Two Employees Face Subprime Mortgage Securities Fraud Charges by SEC, Stockbroker Fraud Blog, April 8, 2010
Morgan Keegan Ordered by FINRA Panel to Pay Investor $2.5 Million for Bond Fund Losses, Stockbroker Fraud Blog, February 23, 2010 Continue Reading ›

SEC Files Securities Charges Against DHB Industries and Three Ex-Board Members

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

The Securities and Exchange Commission has filed and settled securities charges against DHB Industries Inc. without the US defense contractor receiving any penalty. The maker of bulletproof vests for US law enforcement and military agencies, now called Point Blank Solutions, has consented to not committing the alleged violations in the future. SEC charges, however, are still pending against ex-DHB Industries board members Gary Nadelman, Cary Chasin, and Jerome Krantz.

The SEC claims that between 2003 and 2005, the three men let senior managers overstate data in financial reports. The federal agency also contends that as a result of the ex-board members’ “willful blindness,” ex-DHB Industries CEO David Brooks was able to take $10 million from the company and move the funds into another company under his control. Brooks, who is also accused of using another $4.7 million for personal expenses, and ex-DHB Industries COO Sandra Hatfield, were convicted of securities fraud and other charges in criminal court last year.

The SEC wants restitution and civil fines from Krantz, Chasin, and Nadelman. According to the New York Times, it is surprising that the federal regulator has actually filed civil charges against the three men. Save for perhaps a tarnished reputation, corporate directors tend to remain unscathed in cases of securities fraud. For example, no financial firms’ outside directors were named as defendants in SEC cases related to the credit crisis.

While some are expressing hope that the SEC is charting a new course with this case, it is difficult to discern at this point whether this is a one-time deal or the start of a new trend. For a while, there were concerns that the independent director post, assigned specific duties under the Sarbanes-Oxley law in 2002, might be harder to fill because of fear of liability. However, the SEC has only filed cases against them in incidents of alleged severe recklessness. Also, in an attempt to bring in good directors, companies have been offering better pay.

Are board directors held to too low of a standard that allows them to get away with too much?

Related Web Resources:

SEC charges defense contractor, 3 ex-directors, Bloomberg, February 28, 2011

For Directors at DHB Securities, SEC Keeps the Bar Low, New York Times, March 3, 2011

More Blog Posts:
Former DHB Industries CEO and COO Found Guilty of Nearly $200M Securities Fraud Scam, Stockbroker Fraud Blog, September 16, 2010