Securities Fraud

John Gardner Black Responds to Stories Recently Published Concerning His Role in an SEC Securities Fraud Action.

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

On August 19, 2010, along with other news sources, we published a story regarding investment fraud victims of John Gardner Black. Mr. Black subsequently protested that ours and other stories published concerning him were inaccurate.

Below are the inaccuracies he reports, verbatim, regarding ours and apparently other publications which concern him. We do not purport to have confirmed the accuracy of Mr. Black’s response at this time, but felt it fair to publish the corrections he claims should be made.

1.) I did not plead guilty to securities fraud. If I had, do you really think the SEC would have reinstated me? My guilty plea was to not informing my customers of the liquidation value of securities they did not own.

Investment Fraud Victims of John Gardner Black May Be Due Tax Refunds

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

John Gardner Black, who spent three years in prison after pleading guilty to 21 counts of securities fraud, two counts of false documents, and three counts of mail fraud in 2001, says he doesn’t think that he should have to pay $61.3 million in restitution.

Prosecutors had accused Black of investing approximately $233 million for about 48 school districts while using a risky investment that Pennsylvania law doesn’t allow for school districts. Black hid from his clients both the transfers to the high risk investments and the $71 million loss when the investments’ value declined.

Black is now contending that he was prosecuted based on a Securities and Exchange Commission determination that he “materially” overstated the assets’ value by providing the school districts’ investments’ security. Last year, however, the SEC and the Financial Accounting Standard Board ended up adopting the same valuation method that he’d applied during the 90’s. Black is arguing that because he was sanctioned for “unethical” business practices that are now sanctioned, the court order that he pay $61.3 million for ill-gotten gains should be set aside.

Black applied a similar argument when he went to the SEC asking that it lift the lifetime ban preventing him from taking part in the investment industry. Although Black is still not allowed to associate with investment companies or investment advisers, he can once again associate with dealers, brokers, and municipal-securities dealers. He has, however, lost his appeals to have the criminal conviction against him overturned.

As a victim of investment fraud, you may be entitled to tax refunds.

Related Web Resources:
Fraud says he shouldn’t have to pay restitution to his victims, Pittsburgh Live, August 18, 2010
Related Court Document (PDF)
Continue Reading ›

UBS Ordered to Pay Auction-Rate Securities Investor Kajeet Inc. $81 Million

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

A Financial Industry Regulatory Authority arbitration panel has ordered UBS Financial Services Inc. to pay investor Kajeet Inc. $80.8 million for failed auction-rate securities. The brokerage firm disagrees with the decision and intends to file a motion to have the claim vacated.

Although Kajeet had only invested $8 million in ARS through UBS, the company, which markets cell phones for kids, contends that because its securities were frozen, a “domino effect” resulted and it ultimately lost $110 million. Also, Kajeet was forced to significantly cut its 60-person work team and it lost a key distribution deal with a national retail chain.

UBS had previously resolved ARS-related charges with an agreement that it would pay a $150 million fine and buy back $18.6 billion of the securities. The brokerage firm was one of a number of broker-dealers that agreed to repurchase over $60 billion in ARS from investors because they had allegedly misrepresented the securities as safe investments. When the $330 million ARS market froze in February 2008, UBS had over $35 billion in ARS that were held by some 40,000 customers.

Citigroup Settles Subprime Mortgage Securities Fraud Claims for $75 Million

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

For $75 million, Citigroup will settle federal allegations that it failed to disclose that its subprime mortgage investments were failing while the market was collapsing. This is the first securities fraud case centered on whether investment banks fairly disclosed their own financial woes to shareholders.

Unlike the Goldman Sachs case, which resulted in a $550 settlement and involved allegations that the investment bank misled investors, Citigroup is accused of misleading its shareholders. This also marks the first time the SEC has filed securities fraud charges against very senior bank executives for their alleged roles in subprime mortgage bonds.

The SEC contends that Citigroup failed to reveal the true nature of its financial state until November 2007. Just that summer the investment bank told investors that it had about $13 billion of exposure to subprime mortgage related-assets that were declining in worth. However, Citigroup left out about $43 billion of exposure to similar assets that bank officials thought were very safe.

Key evidence against Citigroup centers on an announcement that it prepared for investors that cautioned that the quarter was likely going to be one of lower earnings in the fall of 2007. However, the investment bank did not reveal its full subprime exposure. Former Citigroup investor relations head Arthur Arthur Tildesley Jr., who has agreed to pay an $80,000 fine over allegations he omitted key information in the shareholder disclosures, is accused of preparing the statement. Former chief financial officer Gary L. Crittenden, who has settled the SEC case against him for $100,000, recorded the audio message to investors.

The government was eventually forced to bail out the investment bank. Citigroup is not admitting to or denying the charges by consenting to settle. Now, however, the investment bank has to defend itself from private shareholder complaints.

Related Web Resources:
SEC Charges Citigroup and Two Executives for Misleading Investors About Exposure to Subprime Mortgage Assets, SEC, July 29, 2010
Citigroup Pays $75 Million to Settle Subprime Claims, NY Times, July 29, 2010
Citigroup agrees $75m fraud fine, BBC News, July 29, 2010 Continue Reading ›

Dallas Billionaire Brothers Charged with Texas Securities Fraud

Published on: July 31, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Following a six-month probe, US Securities and Exchange Commission has charged two Dallas billionaires with Texas securities fraud. Brothers Charles and Samuel Wyly are accused of taking part in a financial fraud scheme that garnered them over $550 million in illicit gains.

The two men are accused of trading stock in four companies that they were the directors of and devising a securities scheme involving bogus subsidiaries and trusts in the Cayman Islands and the Isle of Man to cover up over $750 million of stock sales in Sterling Commerce Inc., Michaels Stores Inc, Scottish Annuity & Life Holdings Ltd., and Sterling Software Inc.

The SEC is also accusing the Wylys of making an insider trading gain of $31.7 million when they made a bet in Sterling Software, which they own, that was “massive and bullish” in 1999 after deciding to sell the company. Computer Associates bought the firm for $4 billion in stock in March 2000.

Also charged with Dallas securities fraud is the Wylys’ attorney Michael French and broker Louis Schaufele.The SEC claims that the Wylys and French either should have known or knew that they had disclosure obligations because of their roles as owners and directors of over 5% of company stock. The defendants are accused of issuing hundreds of misleading statements that allowed the brothers to conduct trades without detection, including large block trades involving of over 14 million shares.

The SEC contends the two brothers used the proceeds from the alleged Texas securities fraud to acquire real estate, art, and jewelry. They also are accused of using the money to donate to charitable causes.

The SEC wants to get back ill-gotten gains, impose civil fines, prevent the two men from serving as director or officer of a public company, and other remedies. An attorney for the brothers says that the securities charges are without merit.

“This is a situation in which wealthy investors may find that they can seek tax refunds by characterizing the loss on their investment as a “theft lost” rather than as a capital loss carry-forward. In total, our clients have received millions of dollars in refunds using this technique,” says Dallas Securities Lawyer William Shepherd.

Related Web Resources:
SEC Charges Corporate Insider Brothers With Fraud, SEC, July 29, 2010
SEC Charges Wyly Brothers With $550 Million Fraud, ABC News, July 29, 2010 Continue Reading ›

Securities Class Action Against Morgan Stanley by Xerox and Kodak Retirees Dismissed by Appeals Court

Published on: July 20, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Second Circuit Court of Appeals in New York has upheld a lower court’s ruling to dismiss that the securities class action filed by Eastman Kodak Co. and Xerox Corp. against Morgan Stanley. The plaintiffs, retirees from both companies, are accusing the broker-dealer of advising them that if they retired early their investments would be enough to support them during retirement. They also claim that the investment bank persuaded them to open accounts that cost them the bulk of their wealth. According to the plaintiffs’ attorney, the retirees gave up job security and employment rights after they were told that if they retired early they could avail of a 10% withdrawal rate from their individual retirement accounts.

However, upon retiring, the retirees that invested lump-sum retirement benefits with Morgan Stanley experienced “disastrous” value declines. Also, they had invested with two Morgan Stanley broker, Michael Kazacos and David Isabella, that were later barred from the securities industry. Last year the broker-dealer settled FINRA charges over the two men’s activities by paying over $7.2 million.

The appeals court says that because of the 1998 Securities Litigation Uniform Standards Act, the plaintiffs are precluded from pursuing class state law claims, including misrepresentation claims. While the statute lets plaintiffs file lawsuits in state court to get around 1995 Private Securities Litigation Reform Act’s securities fraud pleading requirements, federal preemption of class actions claiming “misrepresentations in connection with the purchase or sale of a covered security” are allowed. The three-judge panel also said that because the retirees waited too long to file their securities fraud lawsuit, they cannot raise other federal securities law claims.

Related Web Resources:
Xerox, Kodak retirees lose Morgan Stanley appeal, Reuters, June 29, 2010
Morgan Stanley to Pay More than $7 Million to Resolve FINRA Charges Relating to Misconduct in Early Retirement Investment Promotion, FINRA, March 25, 2009
1998 Securities Litigation Uniform Standards Act, The Library of Congress Continue Reading ›

Refusal to Grant Prevailing Party of Securities Fraud Case Attorneys’ Fees and Costs is Affirmed by Appeals Court

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

In Kelter v. Associated Financial Group Inc., The U.S. Court of Appeals for the Ninth Circuit affirmed a lower court’s decision to refuse to grant attorney fees and costs under the Private Securities Litigation Reform Act to the prevailing parties, which in this case are the defendants. In its unpublished ruling, the court determined that the plaintiff did not take part in any “egregious conduct” that would warrant that the district court’s denial be reversed.

The securities fraud case was filed by Richard Kelter and involved his failed APEX Equity Options Fund LP investments. The plaintiff accused Jeffrey Forrest of fraudulent misrepresentation regarding the risks and nature of the equity fund. He claimed that as Forrest’s principals, Associated Securities Corp., Associated Financial Group Inc., and Associated Planners Investment Advisory Inc. should be held liable.

On January 14, The district court granted the Associated defendants’ summary judgment. Two weeks later, the defendants moved for attorneys’ fees and costs under PSLRA. They claimed that Kelter did not have enough legal basis and factual evidence when he named them as defendants in his first amended complaint. The district court denied their motion.

The appeals court says that the district court had found that the Associated Defendants did not timely serve its motion for fees on Respondent before filing and, as a result, did not give the Respondent twenty-one days to withdraw the challenged paper. The lower court also said that it did not see any indication that the plaintiff’s actions were unreasonable, frivolous, filed for improper purpose, or objectively baseless.

The appeals court not only affirmed the district court’s decision, noting that it did not find Kelter’s arguments of the objectively baseless nature that have in past cases resulted in such fee awards, but also it declined to “reach the question of whether the district court improperly applied Rule 11’s safe harbor provision.”

Related Web Resources:
Kelter v. Associated Financial Group Inc., 9th Circuit

Private Securities Litigation Reform Act
Continue Reading ›

No Criminal Cases Yet Against Wall Street Banks Despite Obama Administration’s Vow To Go After Those Responsible for Financial Crisis

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

According to the Washington Post, even though the President Obama had vowed to hold Wall Street accountable for the economic collapse, his administration has yet to bring any charges against the large investment banks that took out loans from mortgage companies, turned them into toxic securities, and sent them into the world’s financial markets. Now, some are wondering whether government officials went too far in their promise to pursue charges that can’t really be filed because they could criminalize an “entire business model in the financial industry.”

Tim Coleman, a former senior Justice Department staff member,says that one of the problems is that not all of the people on Wall Street that contributed to the economic meltdown necessarily committed crimes. Rather, some of them made bad calls and took risks that fared poorly.

It was just last November that US Attorney General Eric H. Holder reinforced the vow to prosecute Wall Street executives and others. When launching the Financial Fraud Enforcement Task Force, he said the Justice Department would be “relentless” in pursuing financial and corporate wrongdoing. Now, officials and Holder himself are defending this promise against critics.

At a recent news conference, Holder stated that the Justice Department’s efforts should not be assessed only in relation to Wall Street cases. Also, James M. Cole, Obama’s nominee for deputy attorney general, has said that it is essential to go after the individual executives whose actions led to the economic collapse.

The Justice Department has charged 1,215 people with mortgage fraud since the beginning of March. Also, earlier this month, the Justice Department arrested Lee Bentley Farkas, the former chairman of Taylor, Bean & Whitaker. The government is accusing Farkas of committing a $1.9 billion securities fraud against the government and investors, destroying evidence, falsifying documents, covering up the mortgage firm’s losses with money from Colonial Bank, and then tapping into the emergency bailout program for the banking system to help Colonial.

With 48 ongoing FBI investigations into financial institutions and businesses, officials say to expect more indictments. UBS, Deutsche Bank, Morgan Stanley, Goldman Sachs, the former Lehman Brothers, Citigroup, and JP Morgan Chase are among the firms being probed. Also, the Justice Department obtained a 12% budget increase to combat financial fraud this year and is asking for an additional 23% for next year.

Related Web Resources:
Cases against Wall Street lag despite Holder’s vows to target financial fraud, Washington Post, June 18, 2010
Mortgage Scams Targeted in Sweep, The Wall Street Journal, June 18, 2010
CEO of mortgage giant, Lee Bentley Farkas, indicted in $1.9B massive fraud scheme, NY Daily News, June 16, 2010
Financial Fraud Enforcement Task Force

Eric H. Holder, US Department of Justice Continue Reading ›

Lehman Brothers Lawsuit Claims Its Bankruptcy Was In Part Due to JP Morgan Chase’s Seizure of $8.6 Billion in Cash Reserves

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

The estate of Lehman Brothers Holdings is claiming that JP Morgan Chase abused its position as a clearing firm when it forced Lehman to give up $8.6 billion in cash reserve as collateral. In its securities fraud lawsuit, Lehman contends that if it hadn’t had to give up the money, it could have stayed afloat, or, at the very least, shut down its operations in an orderly manner. Instead, Lehman filed for bankruptcy in September 2008.

JP Morgan was the intermediary between Lehman and its trading partners. Per Lehman’s investment fraud lawsuit, JP Morgan used its insider information to obtain billions of dollars from Lehman through a number of “one sided agreements.” The complaint contends that JP Morgan threatened to stop serving as Lehman’s clearing house unless it offered up more collateral as protection. Lehman says it had to put up the cash because clearing services were the “lifeblood” of its “broker-dealer business.”

JP Morgan’s responsibilities, in relation to Lehman, included providing unsecured and secured intra-day credit advances for the broker-dealer’s clearing activities, acting as Lehman’s primary depositary bank for deposit accounts, and serving in the role of administrative agent and lead arranger of LBHI’s $2 billion unsecured revolving credit facility.

SEC Inquiring About Wisconsin School Districts Failed $200 Million CDO Investments Made Through Stifel Nicolaus and Royal Bank of Canada Subsidiaries

Published on: June 11, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to local new services, the US Securities and Exchange Commission is asking five Wisconsin school districts for additional information about the $200+ million in synthetic collateralized debt obligations that they purchased through Stifel Nicolaus and Royal Bank of Canada subsidiaries in 2006. The CDO’s are now reportedlyworthless.

The districts collectively bought the CDOs with $35 million of their own money and more than $165 million borrowed from Depfa bank. Since then, the entire investment has failed. In March, Depfa noticed default on the district trusts which had been established for the investments and took the $5.6 million in interest that had been earned since the purchase was made.

In their 2008 securities fraud lawsuit against the investment firms, the districts accused the defendants of deceptive practices and fraud. School officials contend that they were misled into investing in CDO’s because of a Stifel product that was supposed to build trusts for post-retirement teacher benefits. They say that they weren’t told that that they could lose their entire investment because of the 4 – 5% default rate among companies within the CDO. They also contend that they were never advised that their investments included sub-prime mortgage debt, credit card receivables, home equity loans, and other risky investments.