Securities Fraud

Goldman Sach’s $550 Million Securities Fraud Settlement Not Tied to Financial Reform Bill, Says SEC IG

Published on: October 27, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According Securities and Exchange Commission Inspector General H. David Kotz, there is no evidence that the SEC’s enforcement action against Goldman Sachs or the $550 million securities fraud settlement that resulted are tied to the financial services reform bill. Kotz also noted that it does not appear that any agency person leaked any information about the ongoing investigation to the press before the case was filed last April. The SEC says that the IG’s report reaffirms that the complaint against Goldman was based only on the merits.

That said, Kotz did find that SEC staff failed to fully comply with the administrative requirement that they do everything possible to make sure that defendants not find out about any action against them through the media. Kotz notes that this, along with the failure to notify NYSE Reg[ulation] before filing the action and the fact that the action was filed during market hours caused the securities market to become more volatile that day. Goldman had settled the SEC’s charges related to its marketing of synthetic collateralized debt obligation connected to certain subprime mortgage-backed securities in 2007 on the same day that the Senate approved the financial reform bill.

Last April, several Republican congressman insinuated that politics may have been involved because the announcement of the case came at the same time that Democrats were pressing for financial regulatory reform. SEC Chairman Mary Schapiro denied the allegation.

Earlier this month, Rep. Darrell Issa (R-Calif.) wrote Schapiro asking to see an unredacted copy of the internal investigative report by the IG. Issa is the one who had pressed Kotz to examine the decision-making process behind the Goldman settlement. Issa’s spokesperson says the lawmaker is concerned that the SEC can redact parts of its IG reports before the public and Congress can see them. However, at a Senate Banking Committee last month, Kotz, said that the SEC redacts information because the data could impact the capital markets.

Related Web Resources:

Goldman Settles With S.E.C. for $550 Million, The New York Times, July 15, 2010

SEC’s Inspector General to Investigate Timing of Suit Against Goldman Sachs, Fox News, April 25, 2010

General H. David Kotz, SEC

$35.2 Million Shareholder Settlement Against DHB Industries Overturned by Circuit Court

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

The U.S. Court of Appeals for the Second Circuit overturned the $32.5 million Shareholder settlement against DHB Industries because the agreement improperly released, under the Sarbanes-Oxley Act, the body-armor maker’s former CEO and CFO from liability. The case involves a shareholder complaint that was filed against DHB and a number of executives in 2005.

Company officers agreed to settle but only on the condition that CFO Dawn M. Schlegel and ex-CEO CEO David H. Brooks be released from liability. A district judge approved the settlement, but then the government objected on the grounds that only the Securities and Exchange Commission can “exempt” executives from requirements under Sarbanes-Oxley. The three-judge panel agreed.

Judge Peter Hall wrote that allowing the settlement to move forward would be “flying in the face of” lawmakers and their efforts to hold senior corporate officers of public companies directly liable for their actions that have “caused material noncompliance with financial reporting requirements.”

Last month, a jury found Brooks and former DHB Industries COO Sandra Hatfield guilty of insider trading, obstruction of justice, and fraud. Brooks was also found guilty of lying to auditors. The two defendants were accused of conspiring to loot DHB for personal gain, falsely inflating inventory at a subsidiary so that reported profits could be artificially boosted, lying to auditors, concealing Brooks’ control of a related company that would then funnel funds toward his thoroughbred horse-racing business, and accounting fraud. The Justice Department say the defendants reaped close to $200 million.

Related Web Resources:
Court Tosses $35.2 Million Body-Armor Settlement, Courthouse News Service, September 30, 2010

David H. Brooks, Founder and Former Chief Executive Officer of DHB Industries, Inc. and Sandra Hatfield, Former Chief Operating Officer, Convicted of Insider Trading, Fraud, and Obstruction of Justice, FBI, September 14, 2010

Oregon Files Securities Fraud Lawsuit Against University of Phoenix Parent Company Apollo Group Inc. of Arizona

Published on: October 19, 2010 | by Shepherd Smith Edwards & Kantas, LLP

This week, Oregon Attorney General John Groger and Treasurer Ted Wheeler announced that the state is suing University of Phoenix’s parent company, Apollo Group Inc. of Arizona, and several of its executives for securities fraud. The state officials claim that the plaintiffs misled investors in the firm’s financial statements about the for-profit college’s revenue.

The alleged misconduct is said to involve the school’s revenue between 2007 and 2010. Because of the misrepresentation, the Oregon Public Employee Retirement Fund lost approximately $10 million. Oregon’s securities lawsuit, which joins a class action case while seeking lead plaintiff status, accuses the defendants of violating securities law with materially false and misleading statements that misrepresented or did not disclose information that could have helped investors determine their investments’ risk levels.

The state contends that Oregonians seeking higher education were also injured by the Apollo Group’s financial practices. For example, the company is accused of not taking the proper steps when handling federal student loans. The firm also is accused of improperly dealing with canceled loans, causing students to be held financially responsible for classes that they didn’t take.

After the company’s alleged misconduct was disclosed in an October 2009 filing and the SEC investigation became publicly known, shares of Apollo dropped 17.7% in one day. With the pre-disclosure price sinking from $72.97/share to $60.06/share, almost $2 billion in market capitalization was wiped out.

Apollo’s stock price continued to drop this year, following calls for greater oversight over the for-profit college industry. Apollo’s improper business practices were also brought to light during Congressional hearings. Recently, a Senate probe and a Government Accountability Office report revealed that Apollo also committed fraud when marketing its services to prospective students. Apollo shares were trading at $38.94 on August 13, 2010.

Related Web Resources:

Oregon Public Employee Retirement Fund

Wall Street Complains Financial Reform Will Mean More Lawsuits. Is This Bad?

Published on: October 16, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Public companies and employers may have to contend with an unlimited number of expensive securities lawsuits under the whistleblower provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which not only includes provisions for an expanded statute of limitations under which employees can sue employers for discriminatory action but also sets up a new Securities and Exchange Commission bounty program. Labor and Employment Attorney Goldsmith recently spoke about this possibility while participating in a Practicing Law Institute panel. Goldsmith also noted that Dodd-Frank extends the whistleblower protections of the 2002 Sarbanes-Oxley Act to companies’ affiliates or subsidiaries and nationally recognized statistical rating organizations’ employees.

Goldsmith contends that by enacting Dodd-Frank, Congress was showing “overt hostility” toward predispute arbitration agreements by not having them apply to whistleblower issues. He notes that while the Dodd-Frank provisions are supposed to make up for the limitations and loopholes of SOX, certain questions have arisen that have yet to be addressed.

Under section 922 of Dodd-Frank, the SEC is allowed to award whistleblowers between 10% and 30% of any penalty that above $1 million. Cases may include those brought by the Justice Department, the SEC, other federal agencies, and state attorneys general. The SEC started getting tips and complaints even before the statute was enacted.

With its new bounty program, the SEC is expected to increase its enforcement efforts. This could result in huge payments to whistleblowers, who can also receive cooperation credit if they were violators. However, former Chief Litigation Counsel Luis Mejia, who recently spoke at a DC bar event, said that he believes that Dodd-Frank’s whistleblower provision is “the most dangerous” of issues and could undermine corporate compliance programs. Rather than reporting problems internally, giving the company a chance to self-remediate or weed out old or unfounded claims, an individual might be more likely to “blow the whistle” because of the financial rewards.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker Fraud Lawyer William Shepherd had a different perspective to offer: “Regulation of Wall Street and business – or the lack of it – has obviously been a disaster over the last decade. Meanwhile the business community clamors for privatization to cure government waste and ineptness. From the birth of this nation lawsuits have been a form of privatization of government power. Why hire more police when lawyers can handle the job much more efficiently and at no cost to the taxpayers? The same is true of whistleblowers. Why use taxpayer dollars to investigate when those on the inside already understand the problem? Believe me, white collar criminals are more afraid of lawyers and whistleblowers than they are of regulators, many of whom they own! That is why they are afraid of the proposed reforms.”

According to a recent Senate report, whistleblowers can take credit for exposing 54.1% of fraud scams in public companies. Meantime, the SEC and auditors reportedly have uncovered just 4.1% of the schemes.

Related Web Resources:
Dodd-Frank Wall Street Reform and Consumer Protection Act (PDF)

SEC Charges Investment Adviser With Allegedly Making Unsuitable Hedge Fund Recommendations to Elderly Clients

Published on: October 15, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has charged investment adviser Neal Greenberg with securities fraud and breach of fiduciary duty related to the making of recommendations and marketing of hedge funds to investors. According to the SEC, Greenberg, who was the CEO of Tactical Allocation Services LLP and also the portfolio manager of Agile Group LLC, made unsuitable recommendations to clients, many of whom were elderly and/or retired or close to retirement, when he suggested that they invest in the hedge funds run by his firms.

The SEC contends that the investment adviser issued misstatements when he said that the hedge funds were suitable for older and conservative clients, many of whom were seeking low-risk investments that came with significant capital protection. For example, Greenberg allegedly “falsely stated that the Agile hedge funds” were low risk, highly diversified, and offered liquidity when in fact, the funds, which held approximately $174 million from over 100 clients, were non-diversified in their holdings and used leverage. Greenberg also is accused of claiming that the Agile funds “used leverage” in a manner that did not “significantly increase” their risk profile. Yet, says the SEC, for 2007 and 2008 the risk disclosures in private placement memoranda for the hedge funds from Agile contradicted the “false and misleading” misrepresentations made by Greenberg.

The SEC is also accusing Greenberg of failing to make sure that adequate compliance procedures and policies were put in place for determining whether certain investments were suitable for clients’ specific needs. The commission says Greenberg failed to tell clients that they were going to have to pay management and performance fees on the leveraged part of their investments. Between 2003 and 2006, investors paid about $2 million in these undisclosed fees.

Related Web Resource:
Read the SEC Order Against Greenberg (PDF)
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Ex-Ferris, Baker Watts, Inc. General Counsel Did Not Fail to Properly Supervise Broker Fraudster, Says SEC Judge

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

According to Securities & Exchange Commission Administrative Law Judge Brenda Murray, former Ferris, Baker Watts, Inc. general counsel Theodore Urban did not fail to reasonably supervise broker, Stephen Glantz, who has admitted to his involvement in a stock market manipulating scheme involving Innotrac Corp. stock. Murray says that Urban performed his job in a “thorough and reasonable manner” and that he was careful and objective.

Urban had been accused of allegedly abdicating his supervisory responsibilities by not responding to red flags related to the Glantz’s alleged misconduct even though prior to the broker’s hiring, he had already been flagged because of several customer complaints and his “questionable reputation in the industry.”

The SEC would later also find that Glantz had been involved in unauthorized, manipulative transactions of TC Healthcare, Inc. stock in February 2005. After pleading guilty to violations of Section 10(b) of the Securities Exchange Act of 1934, in 2007 he was sentenced to 33 months in prison and ordered to pay $110,000 in restitution

When determining whether Urban, who was Glantz’s supervisor, properly supervised him in a manner intended to prevent securities fraud violations, ALJ Murray noted that per the 1934 Securities Exchange Act, a person cannot be held liable for supervisory deficiencies if the proper procedures that should have detected and stopped the violations were applied and the person had no reasonable grounds to believe that the procedures were not being followed.

Related Web Resources:
SEC Judge Finds Investment Bank GC was not Negligent in Supervising Rogue Broker, The Blog of Legal Times, September 8, 2010
Judge: Former general counsel of Ferris, Baker Watts was not responsible for supervising broker convicted of securities fraud, Baltimore Sun, September 9, 2010
Broker Glantz charged with fraud in Innotrac stock scheme, Cleveland.com, September 4, 2007 Continue Reading ›

NJ Settles Municipal Bond Offering Fraud Charges with SEC

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

The state of New Jersey has settled Securities and Exchange Commission charges involving the alleged fraudulent marketing of municipal bonds. This is the first time that the SEC has filed charges against a US state for allegedly violating federal securities law.

The charges, brought by the SEC’s Municipal Securities and Public Pensions Unit, involved $26 billion in approximately 79 bond offerings that were offered between August 2001 and April 2007. The SEC accused New Jersey of concealing from bond investors the fact that the state didn’t have the money to fulfill its obligations under two of its largest pension plans for state employees and teachers. New Jersey also allegedly using accounting tricks to avoid increasing taxes to fund a 2001 benefits increase for both plans and hid this information from investors. As a result, the SEC contends that losses totaling approximately $2.4 billion were covered up.

The SEC says that New Jersey did not have written procedures on how to review bond documents and failed to train employees about its disclosure obligations. A training program regarding disclosures is now in place.

By agreeing to settle, New Jersey is not admitting to or denying the charges. It has, however, agreed to cease and desist from future violations. The SEC did not order a monetary fine or penalty as part of the settlement.

SEC Charges State of New Jersey for Fraudulent Municipal Bond Offerings, SEC.gov, AUgust 18, 2010

Securities Fraud Lawsuit Against Calamos Investments Filed on Behalf of Calamos Convertible Opportunities and Income Fund Shareholders

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

Calamos Asset Management, Inc., the Calamos Convertible Opportunities and Income Fund (NYSE: CHI), Calamos Advisors LLC, current trustees, and one former Fund trustee are now the defendants of a putative class action securities complaint purportedly submitted on behalf of a class of common fund shareholders. The securities fraud lawsuit is alleging breach of fiduciary duty, the aiding and abetting of that breach, and unjust enrichment related to the redemption of auction rate preferred securities (ARPS) after the ARS market collapsed in 2008.

In the securities fraud lawsuit filed by Christopher Brown, Calamos Holdings LLC founder John Calamos Sr. is accused of allowing the investment firm and its management team to benefit from investors’ losses. Brown’s complaint is a refiling of a lawsuit filed in federal court last July. That complaint was withdrawn earlier this month and the claims resubmitted in state court.

Brown contends that Calamos and others were aware they were breaching their fiduciary duty when they let fund advisers benefit while investors sustained financial losses in the “multiple millions of dollars.” Brown wants all losses restored.

He claims that even as the ARS market failed, a burden was not placed on the Calamos Convertible Opportunities and Income Fund, which held auction market preferred shares. However, in June and August, Calamos managers allegedly redeemed some of the funds’ holdings, which were replaced with debt financing that was “less favorable.” Brown says that because this advanced the interests of the managers, the funds’ investment advisors and affiliates but not the interests of common shareholders, it was a breach of fiduciary duty.

Brown is seeking class-action status for any investors in the fund since March 19, 2008. He wants a judge to prevent Calamos trustees from earning fees from the fund or acting as advisers.

Related Web Resources:
Calamos Investments Statement on ARPS Lawsuit for Convertible Opportunities and Income Fund, Centredaily.com, September 15, 2010
Calamos founder sued by investor who claims bad fund management, Chicago Business, September 14, 2010 Continue Reading ›

Former DHB Industries CEO and COO Found Guilty of Nearly $200M Securities Fraud Scam

Published on: September 16, 2010 | by Shepherd Smith Edwards & Kantas, LLP

After two months of deliberation, a jury has found Ex-DHB Industries CEO David Brooks and Ex-DHB Industries COO Sandra Hatfield guilty of committing securities fraud, insider trading, and obstruction of justice. The two defendants allegedly made close to $200 million as a result of their scam. The jury also found Brooks guilty of lying to auditors.

Prosecutors claimed that Brooks and Hatfield manipulated financial records to increase company earnings and profit margins. This resulted in the inflation of stock prices. The defendants are also accused of committing insider trading from when they sold over $72 million of their DHB stock in November 2004 and then another (approximately) $118 million of their shares the following month. The sales occurred as DHB’s stock price went up to over $20/share. Hatfield made over $5 million while Brooks realized over $180 million from the scheme.

Also, Hatfield and Brooks allegedly took part in a scheme to cover up the related party status of Tactical Armor Products, which Brooks’ wife was supposed to be running separate from DHB. In fact, Brooks wholly controlled TAP. According to the Federal of Bureau of Investigation’s New York Division Web site, profits from related party transactions were used to pay for over $16 million in Brooks’ personal expenses. He reportedly doctored internal DHB documents and created fraudulent multi-million dollar transactions to cover up the scheme and fool investors and auditors. Personal expenditures included plastic surgery for his wife, luxury vehicles, pills for his 100 racing horses, his family’s use of the company jet, and other charges.

The two defendants are each facing up to 25 years in prison.

Allegations Against Goldman Sachs in $56M Securities Fraud Lawsuit Meet Morrison Standard, Says Australian Hedge Fund

Published on: September 14, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Basis Yield Alpha Fund says that its $56 million securities fraud lawsuit against Goldman Sachs Group Inc. should go to trial. The Australian hedge fund contends that its securities complaint, which accuses the investment bank of inflating certain collateralized debt obligations’ value, meet the standard recently articulated by the US Supreme Court in Morrison v. National Australia Bank. Goldman, however, contends that the transactions and securities under dispute do not meet the Morrison standard.

In the Supreme Court’s ruling, The judges limited Section 10(b) of the 1934 Securities Exchange Act’s extraterritorial reach by determining that the law was applicable only to transactions involving securities that took place in the United States or were listed on US exchanges. Following the decision, a district court ordered Goldman and Basis to use Morrison for determining whether there is grounds to drop the case. Goldman submitted its motion to dismiss and noted that the securities in the CDOs were not included on any US exchange list and that the underlying agreements were subject to English law and executed in Australia.

Meantime, Basis is arguing that its case is a “quintessential” securities fraud case involving a US sales transaction. The Australian hedge fund, which invested $42 million in “Timberwolf,” an AAA-rated tranche, and $36 million in an AA-rated tranche of CDOs, maintains that the CDO assembled mortgage-backed securities in Timberwolf came from the subprime real estate market in the US and was a New York sales transaction from beginning to end. The hedge fund was forced into insolvency when after investing in Timberwolf the CDOs value dropped dramatically and the fund sustained over $50 million in losses.

Basis contends that Goldman’s effort to make the transaction an Australian one that is not subject to federal securities laws has no legal or factual basis. It argues that adopting Goldman’s theory would nullify US securities law whenever a US seller committed securities fraud when effecting the sale of a security to a foreign buyer.

Related Web Resources:
Basis Yield Alpha Fund v Goldman Sachs Complaint, Scribd

Timberwolf Lawsuit: Goldman Sachs Sued By Australian Hedge Fund Over ‘Sh–ty Deal, Huffington Post, June 9, 2009

Read the Supreme Court Ruling (PDF)