Securities Fraud

Class Action Securities Fraud Lawsuit Accuses SEC of Gross Negligence Related to Bernard Madoff Ponzi Scam

Published on: November 23, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Three individuals, Judith Welling, Robert Mick, and Charles Mederrick, have filed a purported securities class action against the Securities and Exchange Commission over financial losses related to investments they made in Bernard L. Madoff Investment Securities LLC. In their amended complaint, the plaintiffs are seeking damages sustained because of the “grossly negligent acts of the Defendant in connection with the SEC’s deficient review of complaints and information” that Madoff was running a Ponzi scheme. Mick, Welling, and Mederrick contend that their investments, which they made over a 16-year period, caused them to suffer “catastrophic” consequences.

In their complaint, the plaintiffs accuse the SEC of “repeatedly and grossly failing to adequately apprise itself” of the facts related to the Madoff Ponzi scam allegations despite the fact that for years there had been numerous complaints. Last year, the SEC’s Inspector General put out a 457-page report detailing the agency’s failure to detect Madoff’s fraud scheme despite the signs.

The class action lawsuit is on behalf of those who invested in Madoff Investment Securities between November 1992 and December 2008 and have filed administrative damage claims seeking to recover damages for the SEC’s alleged negligence. The class could be comprised of more than 100 victims. The plaintiffs’ securities fraud lawyer says that to his firm’s knowledge, this is the first class action filed against the SEC over its handling of Madoff.

Madoff’s $50 billion Ponzi scam defrauded many institutional and individual investors. Some of these investors lost everything.

Related Web Resources:
SEC Hit With Class Action Alleging Gross Negligence in Oversight of Madoff, BNA Securities Law Daily

Madoff Investors Sue SEC for Incompetence, Daily FInance, November 12, 2010

Bernie Madoff’s $50 Billion Ponzi Scheme, Forbes, December 12, 2008

SEC Proposes Antifraud Derivatives Rule Related to Securities-Based Swaps

Published on: November 22, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Commission has agreed to propose an antifraud rule that deals with the issue of security-based swaps-related fraud, manipulation, and deception. The proposed Rule 9j-1 would bar fraud and manipulation in the offer, sale, and purchase of the swaps. Unlike regular securities transactions, securities-based swaps involve ongoing payments and deliveries between when they are bought and sold. The issues of payments, deliveries, and other rights and obligations are also tackled.

SEC Chairman Mary Schapiro says that the proposed rule would be an important way to make sure that the swap market is run with integrity while allowing the Commission the chance to target potential fraud or other misconduct through enforcement. The relevant change with this proposed rule from current antifraud provisions Section 17(a) of the 1933 Securities Act and Section 10(b) of the 1934 Act is that the proposed rule is applicable to ongoing rights and activities.

The Dodd-Frank Wall Street Reform and Consumer Protection Act has given oversight of security-based swaps to the SEC, while the Commodity Futures Trading Commission is charged with overseeing non-security-based swaps. The CFTC had already proposed its anti-manipulation rule amendments dealing with manipulative and fraudulent conduct of swaps under its jurisdiction.

The SEC has also agreed to propose rules to effect a whistleblower bounty program.

Related Web Resources:

Securities and Exchange Commission

Non-Customers of Wachovia Cannot Bring Stock Loan Related Claim to FINRA, Says Court

Published on: November 21, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Northern District of California has ruled that a married couple and their investment vehicles are not Wachovia “customers” and, therefore, they are not entitled to bring their stock loan related claims against Wachovia Securities Financial Network LLC and financial adviser George Gordon III to Financial Industry Regulatory Authority arbitration. Judge Saundra Brown Armstrong granted Wachovia and Gordon’s request for a preliminary injunction.

Per the statement of claim submitted to FINRA, Gregory and Susan Raifman initiated arbitration as trustees of a family trust, as Gekko Holdings Inc. members, and as the beneficial owners and assignees in interest of Helicon Investments Ltd. The Raifmans accused Wachovia and Gordon of committing securities fraud, breach of fiduciary duties, and violations of the California Securities Act and the rules of both the New York Stock Exchange and National Association of Securities Dealers.

The Raifmans contended that Gekko and Helicon each went into three separate stock loan transactions that Derivium Capital LLC, a third party, had promoted so they could borrow up to 90% of their stock holdings’ value without triggering capital gain on the stock sale. After the three-year loan term ended, the Raifmans were to pay the loan balance and get back or surrender their collateral or renew their loan.

To execute their plan, the Raifmans opened a Wachovia account for the trust in 2003 and transferred nearly $3 million in ValueClick (VLCK) shares into an account owned by a Derivium affiliate. Almost 12 months later, Helicon placed 300,000 ValueClick shares into another Derivium affiliate’s Wachovia account under a 90 percent stock loan agreement. Gekko later deposited 200,000 ValueClick shares in the same account (and also under a 90 percent stock loan agreement).

It wasn’t until 2007 that the Raifmans found out that their Value Click shares had been sold as soon as they were placed in the Derivium affiliates’ accounts. They also had not known that the sales proceeds had been loaned back to them while Wachovia and Derivium kept 10 – 14% of the sales proceeds.

The Raifmans attempted to start the arbitration process in July but Gordon and Wachovia filed their complaint seeking enjoinment against the couple, Helicon, and Gekko. They also requested a stay of the arbitration proceedings. The financial firm and investment adviser contended that they did not have an agreement with the defendants, who were not their customers and therefore not entitled to FINRA arbitration. The district court agreed.

Related Web Resources:
Wachovia Securities LLC v. Raifman

Arbitration and Mediation, FINRA Continue Reading ›

Business Man Pleads Guilty Plea in Florida Microcap Market Fraud Case

Published on: November 17, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Federal officials say that Jean “Richard” Charbit has pleaded guilty to one count of conspiracy to commit securities fraud in connection with a South Florida stock scam involving the microcap market that was under investigation by an undercover FBI sting. Charbit is facing a maximum 5 years in prison.

He and defendant Tzemach David Netzer Korem are accused of trying to pay kickbacks to a stockbroker so they could use client accounts to buy shares from the defendants’ company. This made it look as if there was a demand for the instruments, which allowed the defendants to dump their holdings at inflated prices.

Charbit and Korem controlled or owned about 5.6 million shares of ZNext Mining Corp. (ZNXT). Charbit offered the “broker,” who was actually an FBI agent, $100,000 to misappropriate $300,000 from discretionary accounts to purchase common stock in ZNXT. Per the criminal complaint, the goal was to raise the individual common share price from 4 cents to 50 cents.

Eight other microcap stock promoters and market insiders have been charged with securities fraud related to this scheme. Some also are facing criminal charges. One of the persons charged in the microcap market fraud case is Larry Wilcox, the former star of the TV show “CHiPs.” As part of his plea agreement, he admitted to conspiring to defraud a pension plan of $40,000.

Related Web Resources:
SEC v. Jean R. Charbit and Tzemach David Netzer Korem, Civil Action No. 1:10-cv-23604-CMA (U.S. District Court for the Southern District of Florida), SEC.gov
Stock scammer pleads guilty, South Florida Business Journal, November 1, 2010
Institutional Investor Securities Blog
Continue Reading ›

Investment Manager Accused of Securities Fraud Must Pay Defrauded Clients Over $20 Million

Published on: November 10, 2010 | by Shepherd Smith Edwards & Kantas, LLP

In a default judgment, The U.S. District Court for the Western District of Washington is mandating that investment adviser Enrique Villalba and affiliated entities pay investors over $20 million. The 47-year-old has been sentenced to almost 9 years in prison for defrauding clients of over $30 million.

Most of the funds that were taken from investors were lost in unauthorized, high risk investments in futures contracts. Villalba also used some of the funds to run Rico Latte coffee shops and purchase property. Among his victims was one woman who lost almost $12 million. Another man, former ER doctor David Ernst, lost his life savings. Tom Mulgrey, 56, lost $4 million.

Villalba has not been in touch with the plaintiffs of this securities fraud lawsuit since September 2009. His investment fraud victims are located in different US states. In their securities complaint, the plaintiffs are alleging claims under the Washington Securities Act and the 1934 Securities Exchange Act.

In granting the plaintiffs’ motion to obtain a default judgment, the court noted that per the two statutes, rescission is the way to calculate damages. In this case, the court deemed rescission appropriate because it “undoes the transactions” while returning the plaintiffs to their original state had they never invested their funds with the defendants.

Also, under the Washington Securities Act, the court determined that not only are the plaintiffs entitled to interest on the damages amount beginning the date of each deposit, but also they are entitled to recover lawyers’ fees and costs. The Washington Consumer Protection Act also entitles them to legal fees. Per the default judgment, the plaintiffs have been awarded $20,080,637.89, which includes the principal amount of $13,393,650.67, $6,669,053.22 in interest, and $17,934 in lawyers’ fees and costs.

Related Web Resources:
Court Orders Investment Manager To Pay Defrauded Clients Over $20 million, BNA/Alacrastore.com, November 5, 2010
Investment adviser caught in $30 million fraud sent to prison for almost 9 years, Cleveland.com, September 8, 2010
Read the Order

Securities Act of Washington
Continue Reading ›

“Flash Crash” – Why is This So Hard to Understand?

Published on: November 9, 2010 | by Shepherd Smith Edwards & Kantas, LLP

“On May 6, 1010, the New York Stock Exchange was intentionally shut down for 90 seconds by those in charge,” recounts Shepherd Smith Edwards and Kantas Founder and Securities Fraud Lawyer William Shepherd. “When this happened there was no market (bid and ask quotes) for many large cap stocks, except on small exchanges and the ‘third market.’ Meanwhile trading programs continued to submit market orders.” Shepherd continued, “Market orders in a ‘thin’ market are always a recipe for disaster. The question people should be asking is: Who decided to stop trading on the NYSE without warning and why? Imagine how much money could have been made by anyone who knew of this shutdown in advance!”

Shepherd’s observations come in the wake of NYSE Euronext chief executive officer Duncan Niederauer’s address to attendees at a recent National Association of Corporate Directors conference. Niederauer acknowledged that there is more that needs to be done to understand the events leading up to the flash crash. He said that while the Commodity Futures Trading Commission and the Securities and Exchange Commission had put out a “very well done” report that explained why markets dropped 4 or 5% that day, the reason why prices for some individual stocks plummeted by almost 100% remain unclear.

The Dow Jones Industrial Average dropped by over 573 points during five minutes of trading that day before taking 90 seconds to reverse and regain 543 points. Although the CFTC and the SEC have determined that the flash crash was started by a mutual fund complex that used computer algorithms to quickly sell $4 billion in futures contracts, Niederauer has said that there is still both information and misinformation. He contends that to bar high-speed electronic trading is impractical despite the fact that the US market structure is “more vulnerable than we thought.” He said the NYSE stands behind a model that comes with market maker obligations that are clearly outlined and that this can be used to determine whether the market maker is “doing a good job.” More market structure rules are expected in January.

Related Web Resources:
Flash crash’ shows need for price discovery and safeguards, NYSE
CFTC And SEC Release “Flash Crash” Report, FuturesMag.com
Read the SEC and CFTC Report (PDF)
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San Diego Officials Settle SEC Municipal Bond Charges for $80,000

Published on: November 3, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Four ex- San Diego officials will pay $80,000 in fines to resolve municipal bond charges by the US Securities and Exchange Commission for allegedly misleading investors. Never before has the SEC obtained financial penalties against a city’s officials for municipal securities fraud. By agreeing to settle, ex-San Diego City Manager Michael Uberuaga, ex-Deputy City Manager for Finance Patricia Frazier, ex-Auditor and Comptroller Edward Ryan, and ex-City Treasurer Mary Vattimo are not denying or admitting to the charges. There are still charges pending against San Diego’s ex-Assistant Auditor and Comptroller Teresa Webster.

The SEC filed its securities fraud charges against the former city officials in 2008. The officials are accused of knowing that the city of San Diego had purposely underfunded its pension obligations to increase benefits will deferring costs. The SEC also contends that the ex- officials understood that without cuts to city services, employee benefits, or new revenues, it would be difficult to fund future retirement obligations. Yet the former officials allegedly did not let investors know about the serious funding problems and made false and misleading statements in 2002 and 2003.

Regulators contend that when San Diego sold over $260 million in bonds, city officials did not disclose that the pension deficit was expected to hit $2 billion in 2009. According to Rosalind Tyson, the director of the SEC’s Los Angeles Regional Office, municipal officials are obligated to make sure that investors get accurate and full information about the financial condition of an issuer.

Related Web Resources:

Former San Diego officials settle with SEC, The San Diego Union Tribune, October 26, 2010.

Former San Diego Officials to Pay Penalties in SEC Municipal Bond Fraud Case, Asset International October 29, 2010
More Municipal Bond Blog Posts Continue Reading ›

Should Global Securities Fraud Lawsuits By Private Litigants Be Allowed? The SEC Wants To Know

Published on: November 3, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is seeking comments on whether amendments should be made to federal securities laws so that private litigants can file transnational securities fraud lawsuits. Comments are welcomed until February 18, 2011. The SEC says to refer to File No. 4-617.

In its request, the SEC points to the US Supreme Court’s ruling in Morrison v. National Australia Bank. The decision placed significant limits on Section 10(b) antifraud proscriptions’s extraterritorial reach. That said, Congress, through Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 929Y, gave back to the government its ability to file transnational securities fraud charges. It is under the new financial reform law that Congress has ordered the SEC to determine whether a private remedy should apply to just institutional investors or all private actors and/or others.

Included in what the study will analyze are how this right of action could impact international comity, the economic benefits and costs of extending such a private right of action, and whether there should be a narrow extraterritorial standard. The SEC also wants to know if it makes a difference whether:

• The security was issued by a non-US company or a US firm.
• A firm’s securities are traded only outside the country.
• The security was sold or bought on a foreign stock exchange or a non-exchange trading platform or another alternating trading system based abroad.

Related Web Resources:
Morrison v. National Australia Bank (PDF)

US Securities and Exchange Commission

Dodd-Frank Wall Street Reform and Consumer Protection Act, SEC (PDF)

Securities Claims Against Goldman Sachs Over Mortgage-Backed Certificates are Partially Dismissed by Court Due to Lack of Injury

Published on: October 30, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York has ruled that without an injury, a mortgage-backed certificates holder cannot maintain a securities claim against MBS underwriter Goldman Sachs & Co. (GS) and related entities for allegedly misstating the risks involved in the certificates in their registration statement. Judge Miriam Goldman Cedarbaum says that plaintiff NECA-IBEW Health & Welfare Fund knew that the investment it made could be illiquid and, therefore, cannot allege injury based on the certificates hypothetical price on the secondary market at the time of the complaint. The court, however, did deny Goldman’s motion to dismiss the plaintiff’s claims brought under the 1933 Securities Act’s Section 12(a)(2) and Section 15.

The Fund had purchased from Goldman a series of MBS certificates with a face value of $390,000 in the initial public offering on Oct. 15, 2007. The fund then bought another series of MBS certificates with a $49,827.56 face value from Goldman, which served as underwriter, creator of the mortgage loan pools, sponsor of the offerings, and issuer of the certificates after securitizing the loans and placing them in trusts.

Per the 1933 Act’s Section 11, the Fund alleged that in the resale market the certificates were valued at somewhere between “‘between 35 and 45 cents on the dollar.” However, instead of alleging that it did not get the distributions it was entitled to, the plaintiff contended that it was exposed to a significantly higher risk than what the Offering Documents represented. The court said that NECA failed to state any allegation of an injury in fact. The court granted the defendants’ motion to dismiss.

Following the court’s decision, Shepherd Smith Edwards and Kantas Founder and Securities Fraud Attorney William Shepherd said, “It is sad that large and small investors have little clout in the processes of selecting judges. Thus, Wall Street continues to gain advantages in court—especially federal court.”

Related Web Resources:

NECA-IBEW

Imperia Invest IBC’s Assets are Frozen Following SEC Allegations of British Viatical Settlements Scam That Targeted Deaf Investors

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

A district court issued an emergency order this month to freeze the assets of Imperia Invest IBC. The order came after the Securities and Exchange Commission accused the internet-based investment company of operating a securities scam involving the British version of viatical settlements.

According to the SEC, Imperia Invest IBC had raised over $7 million from more than 14,000 investors located in different parts of the world with the promise that they would earn returns of just above 1% a day. More than half of the money raised came from deaf investors in the US. The agency is seeking disgorgement of fraudulent gains, penalties, an injunction from future violations, and emergency relief for investors.

The SEC claims that the investment company solicited investors through its Web site, which stated that returns could only be accessed through a Visa credit card and purchased from Imperia for a few hundreds dollars. The company, however, did not have a business tie with the credit card company. Imperia also listed bogus addresses in Vanuatu and the Bahamas.