Securities Fraud

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.

Wells Fargo to Pay $30M in Compensatory Damages to Four Nonprofits for Securities Fraud

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

A jury has ordered Wells Fargo to pay four Minnesota nonprofits $30 million in securities fraud damages. The Minnesota Medical Foundation, the Minneapolis Foundation, the Minnesota Workers’ Compensation Reinsurance Association, and the Robins, Kaplan, Miller & Ciresi Foundation for Children had accused the investment bank of investing their funds in high risk securities and then failing to disclose until it was too late that the investments were going down in value. The same jury has yet to decide the issue of punitive damages
The jury found that Wells Fargo violated the Minnesota Consumer Fraud Act and breached its fiduciary duty to the nonprofits. In the investment program that the Minnesota nonprofits participated in, Wells Fargo would hold its clients’ securities in custodial accounts and use the money to issue temporary loans to brokerage firms for their trading activities. Each brokerage firm posted collateral of at least 102% the worth of the borrowed securities’ value.

While the investment bank had promised that the nonprofits money would be placed in liquid, safe investments, the plaintiffs contend that Wells Fargo put their money in high-risk securities, including asset-backed and mortgage-backed securities. They say that even as the collateral investments’ value became less stable in 2007, the investment bank continued to place more of the nonprofits’ securities out on loan. The nonprofits also claim that when two of the SIV’s went into receivership and they asked Wells Fargo to either redeem their interests or return the securities, the investment bank refused to do so until the collateral investments were sold and the nonprofits made up a shortfall in value.

While the nonprofits are asking for over $400 million in damages, Wells Fargo’s lawyers argue that the actual damages to the plaintiffs was just $14.3 million. According to the bank, “the investments made by Wells Fargo on behalf of our clients in the securities lending program were in accordance with investment guidelines and were prudent and suitable at the time of purchase.” Apparently ignoring the claim or puntive damages, the investment bank says it is pleased that the plaintiffs were denied the full amount of damages they had sought. Wells Fargo continues to maintain that it didn’t invest in high-risk securities and that the nonprofits had the choice to get out of the investments if they were willing to pay 102% of the collateral.

Related Web Resources:
Wells Fargo ordered to pay $30 million for fraud, MRNewsQ, June 3, 2010
Continue Reading ›

Citigroup to Pay $1.5 M for Supervisory Violations Related to Broker’s Handling of Trust Funds

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

According to the Financial Industry Regulatory Authority, Citigroup Global Markets Inc. has consented to pay $1.5 million in disgorgement and fines for failing to properly supervise broker Mark Singer and his handling of trust funds belonging to two cemeteries. By agreeing to settle, Citigroup is not denying or admitting to the charges. Also, the disgorgement amount of $750,000 will be given back to the cemetery trusts as partial restitution.

FINRA says that from September 2004 and October 2006, Singer and his clients Craig Bush and Clayton Smith were engaged in securities fraud. Their scheme involved misappropriating some $60 million from cemetery trust funds. Bush and Smart were the successive owners of the group of cemeteries in Michigan that the funds are believed to have been stolen from. Smart bought the cemeteries from Bush in August 2004 using trust funds that were improperly transferred from the cemeteries to a company that Smart owned.

When Singer went to work for Citigroup as a branch manager in September 2004, he brought Bush’s cemetery trust accounts with him. FINRA says that Singer then helped Smart and Bush open a number of Citigroup accounts in their names and in the names of corporate entities that the two men controlled or owned. The broker also helped them deposit cemetery trust funds into some of the accounts, as well as effect improper transfers to third parties. Some of the fund transfers were disguised as fictitious investments made for the cemeteries.

FINRA says that Citigroup failed to properly supervise Singer when it did not respond to “red flags” and that this lack of action allowed the investment scheme to continue until October 2006. As early as September 2004, Singer’s previous employer warned Citigroup of irregular fund movements involving the Michigan cemetery trusts. Within a few months, Citigroup management also noticed the unusual activity.

Citigroup failed to “conduct an adequate inquiry” even after finding out in February 2005 that Smart may have been making misrepresentations about his acquisition of hedge fund investments that belonged to the Michigan cemetery trusts and had used the hedge funds as collateral for a $24 million credit line. Although the investment bank had received a whistleblower letter in May 2006 accusing Singer of broker misconduct related to his handling of the cemetery trusts, it still failed to restrict Singer’s activities or more strictly supervise him.

Related Web Resources:
Citi Sanctioned $1.5M By Finra In Supervisory Lapse, The Wall Street Journal, May 26, 2010
Stealing from the dead, CNN Money, August 13, 2007 Continue Reading ›

Deutsche Bank Securities & National Financial Services Fined $925,000 for Regulation SHO Short Sale Restrictions & Supervisory Violations

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

The Financial Industry Regulatory Authority says that Deutsche Bank Securities and National Financial Services LLC have consented to be fined $925,000 in total for supervisory violations, as well as Regulation SHO short sale restrictions violations. By agreeing to settle, the broker-dealers are not denying or admitting to the charges.

FINRA claims that the two investment firms used Direct Market Access order sytems to facilitate client execution of short sales and that they violated the Reg SHO “locate” requirement, which the Securities and Exchange Commission adopted in 2004 to discourage “naked” short selling. FINRA says that while the two broker-dealers put into effect DMA trading systems that were supposed to block short sale order executions unless a locate was documented, the two investment banks submitted short sale orders that lacked evidence of these locates.

FINRA says that during the occasional outages in Deutsche Bank’s systems, short sale orders were automatically rejected even though a valid documented locate had been obtained. This is when the the investment bank would disable the automatic block in its system, which allowed client short sales to automatically go through without first confirming that there were associated locates.

As for NFS, FINRA contends that the investment bank set up a separate locate request and approval process for 12 prime clients that preferred to get locates in multiple securities prior to the start of trading day. With this separate system, the requests and approvals for the numerous locates did not have to be submitted through the firm’s stock loan system at approval time. Instead, the clients could enter and execute orders through automated platforms that lacked the capacity to automatically block short sale order executions that didn’t have proper, documented locates.

JP Morgan Chase & Co. Accused of Securities Violations Involving Guaranteed Investment Contracts and Derivatives

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

In a May 10 Securities and Exchange Commission filing, JP Morgan Chase & Co. says that an SEC regional office intends to recommend that the agency file charges against the investment bank for securities violations involving the selling or bidding of derivatives and guaranteed investment contracts (GICs). JP Morgan says the Office of the Comptroller of the Currency and a group of state attorneys general are looking into the allegations. The investment bank is cooperating with investigators.

JP Morgan’s Form 10-Q details the bank’s activities during the first quarter of 2010. The investment bank says that Bear Stearns is also under investigation for possible securities and antirust violations involving the sale or bidding of GICs and derivatives. JP Morgan acquired Bear Stearns in 2008.

Guaranteed Investment Contract
GICs are sold by insurance companies. Other names for GIC include stable value fund, capital-preservation fund, fixed-income fund, and guaranteed fund. GICs are considered safe investments with a value that remains stable. They usually pay interest from one to five years and when a GIC term ends, it can be renewed at current interest rates.

Related Web Resources:
US Securities and Exchange Commission

Guaranteed Investment Contracts, Financial Web Continue Reading ›

State of Connecticut Retirement and Trust Funds to Get Back $795,000 Lost in Securities Fraud Carried by Former Connecticut State Senate Fresident

Published on: May 18, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission says that the U.S. District Court for the District of Connecticut has approved a Fair Fund distribution that will give back $795,000 to the State of Connecticut Retirement and Trust Funds, which suffered financial losses because of an investment scam involving William A. DiBella, the former president of the Connecticut State Senate. The SEC’s 2004 complaint had accused DiBella and his consulting firm North Cove of taking part in an investment scheme with former Treasurer of the State of Connecticut Paul Silvester, who had invested $75 million in state pension funds with private equity firm Thayer Capital Partners.

The SEC claims that Silvester arranged for DiBella to receive a percentage of the investment from Thayer. Silvester is also accused of increasing the pension fund’s investment with Thayer by at least $25 million so that DiBella could receive a larger fee. In total, Thayer paid $374,500 to DiBella through North Cove.

A jury found DiBella liable for abetting and aiding in the securities fraud, and the trial court ordered him to pay $374,500 in disgorgement, $307,127 in prejudgment interest, and $110,000 in penalties. The SEC had to instigate contempt proceedings with the federal court because of DiBella’s continued nonpayment. He finally completed payment of over $795,000 in March 2010, and the SEC fair fund was then set up.