Articles Posted in Shareholder Lawsuits

The U.S. Court of Appeals for the First Circuit has reinstated the shareholder derivative claims filed by two Puerto Rican pension funds against UBS Financial Services Inc. (UBS) Judge Kermit Lepez said that following de novo review—a district court had dismissed the case on the grounds that a failure to properly plead demand futility was subject to such an examination—it seemed to him that the plaintiffs’ allegations sufficiently show reasonable doubt about six fund directors’ ability to assess the former’s demand to bring this action with the independence and disinterest mandated by Puerto Rican law.

The two pension funds are the owners of shares in closed-end funds that made investments, which were not successful, through UBS entities. Their investment adviser and fund administrator is UBS Trust, which is a UBS Financial affiliate.

According to the court, UBS Financial, which has been Puerto Rico’s Employee Retirement System (ERS) financial adviser for more than five years, underwrote $2.9B of ERS-issued bonds. Meantime, the UBS Trust bought approximately $1.5B of the ERS bonds and then sold them to funds. At issue is about $757M in bonds that the two Puerto Rican funds purchased.

Citigroup (C) has agreed to pay $590 million settle a shareholder class action collateralized debt obligation lawsuit filed by plaintiffs claiming it misled them about the bank’s subprime mortgage debt exposure right before the 2008 economic collapse By settling, Citigroup is not admitting to denying any wrongdoing. A federal judge has approved the proposed agreement.

Plaintiffs of this CDO lawsuit include pension funds in Illinois, Ohio, and Colorado led by ex-employees and directors of Automated Trading Desk. They obtained Citigroup shares when the bank bought the electronic trading firm in July 2007. The shareholders are accusing bank and some of its former senior executives of not disclosing that Citigroup’s CDOs were linked to mortgage securities until the bank took a million dollar write down on them that year. Citigroup would later go on to write down the CDOs by another tens of billions of dollars.

The plaintiffs claim that Citigroup used improper accounting practices so no one would find out that its holdings were losing their value, and instead, used “unsupportable marks” that were inflated so its “scheme” could continue. They say that the bank told them it had sold billions of dollars in collateralized debt obligations but did not tell them it guaranteed the securities against losses. The shareholders claim that to conceal the risks, Citi placed the guarantees in separate accounts.

Prior to the economic collapse of 2008, Citi had underwritten about $70 billion in CDOs. It, along with other Wall Street firms, had been busy participating in the profitable, growing business of packaging loans into complex securities. When the financial crisis happened, the US government had to bail Citigroup out with $45 billion, which the financial firm has since paid back.

This is not the first case Citigroup has settled related to subprime mortgages and the financial crisis. In 2010, Citi paid $75 million to settle SEC charges that it had issued misleading statements to the public about the extent of its subprime exposure, even acknowledging that it had misrepresented the exposure to be at $13 billion or under between July and the middle of October 2007 when it was actually over $50 billion. Citigroup also consented to pay the SEC $285 million to settle allegations that it misled investors when it didn’t reveal that it was assisting in choosing the mortgage securities underpinning a CDO while betting against it.

This week, Citi agreed to pay a different group of investors a $25 million MBS settlement to a securities lawsuit accusing it of underplaying the risks and telling lies about appraisal and underwriting standards on residential loans of two MBS trusts. The plaintiffs, Greater Kansas City Laborers Pension Fund and the ‪City of Ann Arbor Employees’ Retirement System,‬ had sued Citi’s Institutional Clients Group. ‬

This $590 million settlement of Citigroup’s is the largest one reached over CDOs to date and one of the largest related to the economic crisis. According to The Wall Street Journal, the two that outsize this was the $627 million that Wachovia Corp. (WB) agreed to pay over allegations that investors were misled about its mortgage loan portfolio’s quality and the $624 million by Countrywide Financial (CFC) in 2010 to settle claims that it misled investors about its high risk mortgage practices.

Citigroup in $590 million settlement of subprime lawsuit, The New York Times, August 29, 2012

Citi’s $590 million settlement: Where it ranks, August 29, 2012

Citigroup Said To Pay $75 Million To Settle SEC Subprime Case, Bloomberg, July 29, 2010

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Morgan Keegan Settles Subprime Mortgage-Backed Securities Charges for $200M, Stockbroker Fraud Blog, June 29, 2011

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Amerigroup Corp (AGP) shareholders are suing its board and Goldman Sachs Group (GS) because they say that the defendants’ conflicts of interest got in the way of other bids being considered before they agreed to let WellPoint Inc. (WLP) buy the managed care company for $4.9B.

The shareholders’ securities lawsuit was filed by the Louisiana Municipal Police Employees Retirement System and the City of Monroe Employees Retirement System in Michigan in the Delaware Court of Chancery, which has seen an increase in cases over whether certain deals shouldn’t go through because of questions surrounding whether the advisors involved had conflicts of interest.

According to the plaintiffs, a complex derivative transaction with Amerigroup created a financial incentive for Goldman to execute a deal quickly even if was not in the best interests of shareholders. The financial firm is accused of pushing for the WellPoint purchase instead of one with another company that was willing to pay more albeit bringing more regulatory issues with it that would take time to resolve.

The WellPoint deal, contend the pension funds, allowed for the possibility that Goldman would get a windfall profit on the derivative deal that would obligate Amerigroup to pay the financial firm $233.7M if an agreement on the sale was reached by August 13, as well as another “substantial” financial figure if by October 22 it was closed.

Now, Amerigroup’s shareholders want to block the sale of the company until the board improves the deal’s terms. They believe that the process that led to the deal, which could nearly double WellPoint’s Medicaid business, prevented the highest price possible from being considered and was “flawed.” They said that the derivative transaction was a conflict for Goldman because Amerigroup would be it much more than the $18.7M it was supposed to get from the WellPoint deal.

Although not defendants in this shareholder complaint, the firm’s management and Barclays (BCS) also had conflicts when arranging the company’s sale, claim the plaintiffs. They said that one could argue that WellPoint bought Amerigroup executives’ loyalty by indicating that they could stay in their positions after the acquisition and that following the merger they would be given $12M worth of WellPoint stock.

Under President Barack Obama’s health-care law, up to 17 million patients would be added under Medicaid. The sale would make WellPoint the largest provider of Medicaid coverage for the impoverished. UnitedHealth Group Inc. (UNH) would be the second largest. More healthcare company acquisitions are expected as competition for the growing Medicaid market continues.

Goldman ‘conflicted’ in Amerigroup/WellPoint deal-lawsuit, Reuters, August 17, 2012

WellPoint dragged into Goldman Sachs suit,, August 20, 2012

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Goldman Sachs Ordered by FINRA to Pay $650K Fine For Not Disclosing that Broker Responsible for CDO ABACUS 2007-ACI Was Target of SEC Investigation, Stockbroker Fraud, November 12, 2010

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In the US District Court for the Southern District of New York, the shareholder complaint against a number of Goldman Sachs Group (GS) executives, including CEO Lloyd Blankfein, COO Gary Cohn, CFO David Viniar, and ex-director Rajat Gupta, has been dismissed. The lead plaintiffs of this derivatives lawsuit are the pension fund Retirement Relief System of the City of Birmingham, Alabama and Goldman shareholder Michael Brautigam. They believe that the investment bank sponsored $162 billion of residential mortgage-backed securities while knowing that the loans backing them were in trouble. They say that Goldman then proceeded to sell $1.1 billion of the securities to Freddie Mac and Fannie May. Their securities complaint also accuses the defendants of getting out of the Troubled Asset Relief Program early so they could get paid more.

According to Judge William Pauley, the plaintiffs did not demonstrate that “red flags” had existed for bank directors to have been able to detect that there were problems with the “controls” of mortgage servicing business or that problematic loans were being packaged with RMBS. He also said that the shareholders did not prove that firm directors conducted themselves in bad faith when they allowed Goldman to pay back the $10 billion it had received from TARP early in 2009, which then got rid of the limits that had been placed on executive compensation.

Even with this shareholder complaint against Goldman tossed out, however, the investment bank is still dealing with other shareholder lawsuits. For example, they can file securities lawsuits claiming that they suffered financial losses after Goldman hid that there were conflicts of interest in the way several CDO transactions were put together.

In re China North East Petroleum Holdings Ltd. Sec. Litig., a shareholder complaint against China North East Petroleum Holdings Ltd., (NEP), has been dismissed by the U.S. District Court for the Southern District of New York. The court found that the plaintiffs had not sustained economic losses because of the alleged misrepresentations made by the company. Judge Miriam Goldman Cedarbaum said that this was enough grounds for dismissal.

This is the first shareholder lawsuit dismissed against a U.S.-listed Chinese reverse merger company. An attorney for China North says the case outcome is a reaffirmation that despite “innuendo,” many of these companies are legitimate and have every right to be part of the US markets.

Meantime, the attorney for lead plaintiff Acticon AG, in disagreeing with the Court’s ruling, that the decision rested on issues not connected to the sufficiency of allegations of Defendants’ fraudulent misconduct but on whether the plaintiff sustained damages. He believes that the Court misapplied Dura Pharmaceuticals in holding that a short term recovery of the share price after the class period can negate a claim that a Plaintiff sustained economic loss.

Acticon filed its putative class action against China North last year contending that the company had overstated oil reserves and reported earnings (by over $36 million) and failed to account for significant losses. It was just in February 2010 that the company announced that people should not rely on its financial statements for the year ending Dec. 31, 2008 and the first three quarters 2009. Following that announcement, there were numerous director and executive resignations and replacements made.

Per the shareholder lawsuit, Acticon bought about $60,000 China North shares during the class period of 5/15/08-5/26/10 in a number of installments. The court said that Acticon kept the shares for months even though it could have sold them and even after there had been a final allegedly corrective disclosure that was put out in September of last year. It also said that a plaintiff that decides to not take the opportunity to sell at a profit after a corrective disclosure cannot later say that the disclosure caused the later loss of devaluation. For example, Acticon didn’t sell after a 12-day period when China North’s shares closed higher than the average price that it had paid for the shares.

There has recently been an increase in federal securities lawsuits filed against companies with significant operations in the People’s Republic of China that can be found on US Exchanges. The Securities and Exchange Commission also has identified substantial accounting irregularities among these companies, which have applied the reverse merger strategy to join the US markets.

Victory in fraud lawsuit for Chinese company, China Daily, October 27, 2011

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