Securities Fraud

Ex-Portfolio Managers to Pay $700K to Settle SEC Charges that They Defrauded the Tax Free Fund for Utah

Published on: January 22, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to the US Securities and Exchange Commission, while working at Aquila Investment Management LLC, ex-portfolio managers Thomas Albright and Kimball Young allegedly defrauded the Tax Free Fund for Utah (TFFU)-a mutual fund that was heavily invested in municipal bonds. Now, the two men have settled the securities fraud charges for over $700,000. However, by agreeing to settle, Young and Albright are not admitting to or denying the allegations.

The SEC claims that without notifying the TFFU’s board of trustees or Aquila management, the two men started making municipal bond issuers pay “credit monitoring fees” on specific private placement and non-rated bond offerings. The fees, which were as high as 1% of each bond’s par value, were charged to supposedly compensate Albright and Young for additional, ongoing work that they say was required because the bonds were unrated. The SEC says that credit monitoring was actually part of the two men’s built-in job responsibilities and that although deal documents made it appears as if the fees (totaling $520,626 from 2003 to April 2009) had to be paid and would go to TFFU, they actually end up in a company that Young controlled and that Albright owned equal shares in.

The SEC says that after management at Aquila found out in 2009 that Young and Albright were charging these unnecessary fees, the financial firm suspended the two men right away and reported them to the agency. The agency says the two men violated their basic responsibilities as investment advisers of mutual funds when they failed to act in the fund’s best interests.

Related Web Resources:
The SEC Order Against Young (PDF)

The SEC Order Against Albright (PDF)

Tax Free Fund for Utah

Municipal Bonds, Stockbroker Fraud Blog Continue Reading ›

CFTC Files Charges in Alleged California Ponzi Scam Involving the Fraudulent Solicitation of $14 million in Commodity Futures

Published on: January 18, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Commodity Futures Trading Commission is charging Increase Investments Inc., Spirit Investments, and Scott Bottolfson with securities fraud. The CFTC contends that the defendants solicited about $14 million from 30 individuals for investments in two commodity trading pools that traded options on commodity futures and commodity futures contracts. Increase and Spirit allegedly ran the pools. The commission is seeking restitution for the investment fraud victims, fines, the return of ill-gotten gains, trading and registration bans, and permanent injunctions against future violations of federal commodities laws.

The CFTC contends that from 2002 through August 2010, Bottolfson made false and misleading statements to draw in prospective investors. He is accused of promising a 20% fixed-rate return and making it appear as if the commodity futures investments were not only guaranteed, but also that they protected, risk-free, and profitable.

Investors went on to sustain about $845,000 in trading losses. About $2.97 million had been placed in the commodity pool trading accounts. The CFTC is accusing Bottolfson of allegedly misappropriating about $11 million of investors’ money to pay pool participants their “profits,” as well as cover some of his personal expenses.

Schwab Settles for $119M SEC Charges It Allegedly Misled YieldPlus Fund Investors

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

The Charles Schwab Corp. has agreed to settle for $119 million Securities and Exchange Commission securities fraud charges that it misled investors about the risks involved in its Schwab YieldPlus Fund. By agreeing to settle, Schwab is not denying or admitting wrongdoing.

In 2008, the YieldPlus Fund dropped to $1.8 billion in assets after a peak of $13.5 billion in 2007. The decline happened because, rather than sticking with its stated policy, the fund invested over 25% of assets in private-issuer mortgage-backed securities. According to SEC Division of Enforcement Associate Director Antonia Chion, Schwab promoted the fund as a cash alternative that was supposed to be just slightly riskier than a money market fund even though at one point half the assets were in securities with credit quality and maturity that were very different from the type of investments that money market funds make.

Per the fund’s 1999 registration statement, YieldPlus was to only invest no more than 25% of its assets in one industry. The SEC contends that without obtaining shareholder approval, in 2006 Schwab changed the statement to say that it no longer thought of mortgage-backed securities as an industry. Last year, Schwab agreed to pay $200 million to settle with plaintiffs over the Schwab YieldPlus Fund.

The SEC has also filed a securities fraud complaint against Schwab executives Randall Merk and Kimon Daifotis over the offering, managing, and selling of the Schwab fund. Both men say that they will contest the allegations.

Related Web Resources:
Schwab to Pay $119 Million to Settle SEC Probe Over Misleading Statements, Bloomberg, January 11, 2011
Schwab Settles SEC Charges Over Allegations it Misled YieldPlus Fund Investors for $119M, ThirdAge, January 12, 2011
Class Members of Charles Schwab Corporation Securities Litigation Can Still Opt Out to File Individual Securities Claim, Stockbroker Fraud Blog, December 6, 2010
Read the SEC Complaint against Merk and Daifotis (PDF) Continue Reading ›

Securities Fraud Lawsuit Against UBS Securities LLC by Detroit Pension Funds Won’t Be Remanded to State Court, Says District Court

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

The U.S. District Court for the Eastern District of Michigan says it won’t be remanding the securities fraud lawsuit accusing UBS Securities LLC and related entities of inducing two Detroit pension plans into taking an equity position in a collateralized loan obligation and then breaching their fiduciary duties through the improper liquidation of the securities. As a result of the alleged defrauding, the Detroit Police and Fire Retirement System of Detroit and the Detroit General Retirement System, also known together as the “Systems,” claim they were deprived of their $40 million investment.

The securities fraud lawsuit, which seeks rescission of contracts and damages, alleges violations of the Michigan Uniform Securities Act and numerous Michigan statutory and common law wrongs. The plaintiffs contend that the $20 billion in CLOs that UBS had obtained through subsidiary Dillon Read Capital Management had deteriorated so badly by May 2007 that UBS sought to unload them. They claim that the broker-dealer not only misrepresented the risks involved with CLOs and its ability to control them, but also, the misrepresentations were part of a scam to get rid of the loans.

While the defendants sought to remove the action to federal district court on the grounds of diversity jurisdiction, the plaintiffs wanted to remand the case to state court. They argued that diversity jurisdiction was lacking. The court, however, refused to send the securities lawsuit back.

Related Web Resource:

Securities Fraud Attorneys

Broker Settles SEC Charges He Defrauded Elderly Nuns

Published on: January 13, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Broker Paul Chironis has agreed to settle charges that he defrauded the Sisters of Charity. The US Securities and Exchange Commission is accusing the broker of churning of millions of dollars in mortgage-backed securities in the congregation of elderly nuns’ two accounts. One account supports the nuns’ charitable efforts. The other helps take care of nuns living in nursing homes.

The SEC says that Chironis defrauded the nuns between January 2007 and January 2008. The accounts that he allegedly churned held mostly mortgage-backed securities that Freddie Mac, Fannie Mae, and Ginnie Mae had issued, as well as closed-end bonds. The SEC contends that the broker charged the nuns’ account undisclosed and excessive markups and markdowns in riskless principal transactions.

The federal agency says that Chironis’s actions violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 17(a) of the Securities Act of 1933. By agreeing to settle, Chironis is not admitting to or denying the charges. He has, however, consented to a permanent bar from the securities industry. He also has agreed to disgorge $250,000 in illegal gains and pay a $100,000 civil penalty. The money, which will be put in a Fair Fund, will be distributed to the congregation of nuns.

Churning
Churning is an act of securities fraud that involves a broker making excessive trades to make commissions and other revenue regardless of whether such transactions fulfills the clients’ investment objectives. Our securities fraud lawyers can help you determine whether you were a victim of churning.

Related Web Resources:
SEC Settles With Broker for Allegedly Defrauding Bronx Nuns, Wall Street Journal, January 6, 2011
Broker Accused of Defrauding Elderly Nuns Settles Case With SEC, SEC, January 6, 2011
Read the SEC Litigation (PDF)
Continue Reading ›

School Districts Files Securities Fraud Lawsuit San Mateo County Over Lehman Brothers-Related Investment Losses

Published on: January 6, 2011 | by Shepherd Smith Edwards & Kantas, LLP

12 San Mateo County school districts have filed a $20 million securities fraud lawsuit against the county and its former treasure Lee Buffington. The securities complaint says that the plaintiffs lost approximately that amount in school district funds when Lehman Brothers filed for bankruptcy in 2008. The school districts contend that Buffington should have made smarter investments to protect their money. Instead, they claim that San Mateo County put too much of its pulled investment funds in the Lehman Holdings. The county lost approximately $155 million in the funds.

According to county schools Superintendent Anne Campbell, who is also a plaintiff of the securities case, the intention is to recover the $20 million, which has exacerbated the districts’ financial problems, and make the county change its investment policy so that it gets “specific” about the terms of the portfolio’s diversification. The plaintiffs are accusing Buffington and other county investment managers of negligent management and breach of fiduciary duty.

Meantime, Stuart Gasner, the county’s attorney, has called his client a “victim of Lehman Brothers’ nondisclosures.” He contends that the county did not do anything wrong. Also, not only is he accusing the school districts of failing to follow proper procedures when filing their securities complaint, but he also says that the complaint is not beneficial to taxpayers because it won’t “bring in any new money” while costing funds for the county’s defense.

School districts who are plaintiffs of the securities lawsuit against San Mateo County include Woodside Elementary School District, Belmont-Redwood Shores Elementary School District, San Mateo Union High School District, Burlingame Elementary School District, San Carlos Elementary School District, Cabrillo Unified School District, San Bruno Park Elementary School District, Jefferson Elementary School District, Ravenswood City Elementary School District, Las Lomitas Elementary School District, Portola Valley Elementary School District, and Menlo Park City Elementary School District.

Bank of America and Countrywide Financial Sued by Allstate over $700M in Bad Mortgaged-Backed Securities

Published on: December 29, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Allstate has filed a securities fraud lawsuit against Bank of America (NYSE: BAC) and its subsidiary Countrywide Financial. The insurer claims that it purchased over $700 million in toxic mortgage-backed securities that quickly lost their value. Also targeted in the securities complaint are former Countrywide CEO Anthony Mozilo and other executives. Allstate is alleging negligent misrepresentation and securities violations.

The insurance company purchased its securities between March 2005 and June 2007. According to the federal lawsuit, as far back as 2003 Countrywide let go of its underwriting standards, concealed material facts from Allstate and other investors, and misrepresented key information about the underlying mortgage loans. The insurer contends that Countrywide was trying to boost its market share and sold fixed income securities backed by loans that were given to borrowers who were at risk of defaulting on payments. Because key information about the underlying loans was not made available, Allstate says the securities ended up appearing safer than they actually were. Allstate says that in 2008, it suffered $1.69 billion in losses due largely in part to investment losses.

It was just this October that bondholders BlackRock and Pimco and the Federal Reserve Bank of New York started pressing Band of America to buy back mortgages that its Countrywide unit had packaged into $47 billion of bonds. The bondholder group accused BofA, which acquired Countrywide in 2008, of failing to properly service the loans.

Meantime, BofA says it is looking at Allstate’s lawsuit, which it says for now appears to be a case of a “sophisticated investor” looking to blame someone for its investment losses and a poor economy.

Related Web Resources:
Countrywide Comes Between Allstate And BofA, Forbes, December 29, 2010
Allstate sues Bank of America over bad mortgage loans, Business Times, December 28, 2010 Continue Reading ›

Ex-Financial Adviser Pleads Guilty to Unauthorized Trading Involving Disabled Children’s Assets

Published on: December 28, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Charles Winitch has pleaded guilty to involvement in a securities fraud scam that victimized disabled children. In the U.S. District Court for the Southern District of New York, the ex-financial adviser and “wealth manager” entered a guilty plea to the charge of wire fraud involving unauthorized trading for commissions. While federal prosecutors and United States Attorney for the Southern District of New York Preet Bharara did not name the financial firm that Winitch had been working for at the time, The New York Daily News identified him in 2008 as a stockbroker with Morgan Stanley.

WInitch is accused of taking $198,784 from a trust held by the guardians of disabled children called the Guardian Account. The trust, which is supposed to provide children with long-term income and comes from the youths’ medical malpractice settlements, was only supposed to invest in New York Municipal Bonds or US Treasury Bonds. However, Winitch made unauthorized trades in 11 accounts in the millions of dollars to generate higher commissions even though he lacked the authority or consent to take such actions. According to Bharara, Winitch and co-conspirators made about $198,000 in ill-gotten commissions. Meantime, the fund lost somewhere between $400,000 and $1 million.

Winitch’s criminal defense lawyer says that the former stockbroker did not know that the accounts contained the money of disabled kids. The ex-Morgan Stanley broker is facing up to 63 months behind bars, hefty fines, forfeiture of ill-gotten gains, and restitution. Continue Reading ›

US Supreme Court Declines to Review Finding that Investor is Bound to Arbitration Agreement Over Disputes with Questar Capital Corp.

Published on: December 24, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The US Supreme Court says that it won’t review a federal appeals court’s finding that even though an investor’s English was limited, he is still bound by a broker-customer agreement that any disputes over the handling of his account must be resolved through arbitration. The U.S. Court of Appeals for the Seventh Circuit had concluded that the issue isn’t about, per the investor’s contentions, enforceability. Rather, it is about whether a contract was formed, which it was.

Plaintiff Alfred Janiga, who is originally from Poland, had signed an agreement containing an arbitration clause when he started investing with Questar Capital Corp. (STR). Janiga’s brother Weislaw Hessek, a registered Questar representative who runs Hessek Financial Services LLC, arranged the investment relationship.

A year after he started investing with Questar, Janiga sued his brother, Questar, and Hessek Financial. While the defendants moved to have the district court stay proceedings and order arbitration, the court said mandating immediate arbitration was not possible because it was unsure whether Janiga and Questar ever had a contract.

The appeals court found that it was up to the court to first determine whether a contract existed before it could stay the complaint and order arbitration. While the district court expressed concern over whether Janiga understood the agreement he had signed, the appeals court noted that the plaintiff had voluntarily signed the contract, which includes an arbitration clause.

Janiga, in his certiorari petition, argued that his case poses a “question of federal law” of whether an arbitration agreement clause is enforceable when he never received the actual document and the terms included were never conveyed to him and that this is a matter that the US Supreme Court should resolve.

Related Web Resource:
Janiga v. Questar Capital Corp., 7th Circuit
Arbitration, FINRA Continue Reading ›

Wells Fargo & Co. May Have to Pay Another $15M to Minnesota Nonprofits For Securities Fraud

Published on: December 24, 2010 | by Shepherd Smith Edwards & Kantas, LLP

A district court judge in Minnesota has ruled that Wells Fargo & Co. must pay four Minnesota nonprofits $15 million or more in costs, fees, and interests for breach of fiduciary and securities fraud. The investment bank has already been slapped with a $29.9 million verdict in this case against plaintiffs the Minnesota Medical Foundation, the Minneapolis Foundation, the Minnesota Workers’ Compensation Reinsurance Association, and the Robins Kaplan Miller & Ciresi Foundation for Children.

Judge M. Michael Monahan, in his order filed on Wednesday, scolded Wells Fargo for its “management complacency, if not hubris” that led to investment losses for clients of its securities-lending investment program. He said that he agreed with the jury’s key findings that the financial firm failed to fully disclose that it was revising the program’s risk profile, impartially favored certain participants, and advanced the interest of borrowing brokers. Monahan said that it was evident that Wells Fargo knew of the increased risks it was adding to the securities lending program and that its line managers did not reasonably manage these, which increased the chances that plaintiffs would suffer financial huge harm.

Monahan noted that because Minneapolis litigator Mike Ciresi provided a “public benefit” by revealing the investment bank’s wrongdoing, Wells Fargo has to pay plaintiffs’ legal fees, which Ciresi’s law firm says is greater than $15 million. Also, the financial firm has to give back to the Minnesota nonprofits an unspecified figure in fees (plus interest) that it charged for managing the investment program, in addition to interest going as far back as 2008 on the $29.9 million verdict.

Monahan also overturned the part of the jury verdict that was in Wells Fargo’s favor and is ordering a new trial regarding allegations that the investment bank improperly seized $1.6 million from a bond account of children’s charity as the lending program was failing. The district judge, however, denied the plaintiffs’ motion for a new trial to determine punitive damages.

Judge unloads on Wells Fargo with order on investment program, Poten.com, December 24, 2010

Wells Fargo ordered to pay $30 million for fraud, Star Tribune, June 2, 2010

Wells Fargo to Pay $30M in Compensatory Damages to Four Nonprofits for Securities Fraud, Stockbroker Fraud Blog, June 3, 2010