Texas Securities Fraud

$2.6M Texas Securities Fraud Settlement: Hedge Fund Adviser Settles SEC Allegations Involving Violations Related to Improper Public Stock Offering Participation After Short Selling

Published on: October 5, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Carlson Capital L.P. has agreed to pay over $2.6 million to resolve charges that it wrongly participated in 4 public stock offerings after short selling the same securities. The Texas securities fraud charges were brought by the Securities and Exchange Commission against the a Dallas-based hedge fund adviser. By agreeing to settle for $2,653,234, Carlson Capital is not denying or admitting to the allegations of securities misconduct.

According to the SEC, the Texas hedge fund violated Rule 105 four times and lacked adequate procedures and policies to keep the firm from taking part in the relevant offerings. During one occasion, Carlson Capital allegedly violated the rule even though the portfolio manager that purchased the offering shares and the one that sold short the stock were not the same person. The SEC determined that Rule 105’s “separate accounts” exception, which allows the purchase of an offered security in an account that is “separate” from the account used through which the same security was sold short, did not apply in this case. The SEC also found that the portfolio manager that sold short the stock during the restricted period had been given information indicating that the other portfolio manager was planning on buying the offerings.

Rule 105 of Regulation M
This rule helps prevent short selling, which can lower the proceeds received by shareholders and companies by artificially depressing the market price not long before the company issues its public offering price. Rule 105 is there to make sure that the natural forces of supply and demand, and not manipulation, sets the offering price. The short sale of an equity security during the restricted period and the purchase of the same security through the offering are prohibited.

During the SEC’s investigation into the allegations, Carlson Capital implemented remedial steps, including putting into place an automated system that assists in the review of the firm’s previous short sales prior to it taking part in offerings.

10th Circuit Issues Split Decision on Fees to Gemstar-TV Guide International Inc.

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

In a split decision, the U.S. Court of Appeals for the Tenth Circuit decided that while Gemstar-TV Guide International Inc. can collect fees spent in its defense of the Oklahom securities fraud complaint filed against the company and two ex-officers by a former executive, it cannot collect legal fees it incurred from its counterclaim against the plaintiff. The court said that while a separation agreement executed by the two parties does not allow the former executive to sue the company it also does not allow for fees to be awarded for counterclaims.

Ex-Gemstar-TV Guide executive Pamela McKissick had sued the company, its former chief financial officer Elsie M. Leung, and its former chief executive Henry C. Yuen in 2004. McKissick claimed that the defendants issued false and misleading statements that overstated company revenues and that this resulted in an artificially inflated stock price. McKissick says that because of this misconduct and other acts, her stock options became worthless. However, prior to exiting Gemstar in 2003, McKissick had consented to a Separation Agreement and Release that included a “no actions” provision that had her releasing all claims against the company unless a claim involved the enforcement of the SAR.

Gemstar submitted a motion for summary judgment claiming that the SAR prevented McKissick from filing the securities fraud lawsuit. Gemstar then counterclaimed saying that it should receive legal fees because her lawsuit violated the terms of the SAR.

The judgment was upheld on appeal in 2008, which was the same year that criminal charges were filed against Yuen for alleged securities fraud. Yuen had also been ordered by the US Securities and Exchange Commission to pay $22.3M in penalties, disgorgement, and interest to settle allegations that he played a role in Gemstar significantly overstating its revenues.

Summary judgment was awarded by the district court to Gemstar for both McKissick’s securities fraud case and the company’s counterclaim. McKissick appealed. Yuen and Leung filed a motion for legal fees. After the district court granted their fee request, McKissick added the issue to her appeal.

Related Web Resources:
McKissick v. Yuen, United States Court of Appeals, 10th Circuit Continue Reading ›

Three Houston Men Accused of $103 Million Texas Securities Fraud Involving Life Insurance Scam that Victimized at Least 800 Investors

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

In an indictment unsealed in federal court, Adley H. Abdulwahab, Christian M. Allmendinger, and David C. White were charged with running a life insurance scam and stealing $103 million from at least 800 investors in the United States and Canada. Their Texas securities scheme allegedly involved the sale of “bonded life settlements” that guaranteed 10-20% returns. All three men are principals of A&O Resource Management Ltd., which is based in Houston.

In the US, A & O is accused of using funds from investors in 37 states to purchase the investments. A life insurance policy is bought by a third party, while the policy owner receives a cash payout. Meantime, the buyer pays the premiums and when the insured passes away, is supposed to collect on the death benefits. However, the Texas State Securities Board does not believe that the bonds purchased by A & O gave investors the returns that they were promised.

According to US Attorney Neil H. MacBride, the defendants defrauded investors for personal gain. The three men are accused of making misrepresentations regarding A & O’s previous successes, office locations, and number of employees, its investment offerings’ risks, and its use and safekeeping of investor money. Abdulwahab and his co-conspirators allegedly made up sham transactions involving A & O selling to two shell corporations once state regulators started examining investor funds.

The three defendants are charged with conspiracy, securities fraud, mail fraud, and money laundering. The Justice Department is seeking the forfeiture of about $103 million from the men.

Raymond James Loses Texas Auction Rate Securities Case and is Ordered by FINRA to Pay Couple $925K

Published on: September 4, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Raymond James and Associates Inc. and financial advisor Larry Milton must pay Rex and Sherese Glendenning $925,000, says a Financial Industry Regulatory Authority panel. The Texas securities case involved an auction-rate securities dispute. brokerage firm advisor Milton has been accused of misrepresenting that the ARS the couple invested in was extremely liquid.

The Glendennings opened their Raymond James (NYSE: RJF) account in 2008 right before the ARS market failed. They claim that Milton, who had invested $1.4 million of their funds in an ARS that consisted of sewer revenue bonds, did not tell them that there was an inherent possibility that the securities might fail. Instead, they allege, he lead them to believe that the ARS could be easily sold. You can imagine their dismay when Raymond James refused their request to repurchase the ARS at full value.

The Gleddenings are not the only ones that the broker-dealer has been ordered to compensate. In just the last two months, Raymond James has been ordered to buy back $3.5 million in ARS from investors. A FINRA panel ordered the brokerage firm to repurchase $2.5 million in ARS from investor Greg Merdinger, who claims that not only was he told that auction-rate securities were safe and very liquid (even more than market funds), but also he contends that no one apprised him that there was an illiquidity risk. Raymond James affiliates Raymond James & Associates Inc. and Raymond James Financial Services Inc. were ordered to make the ARS repurchase.

Related Web Stories:
FINRA: Raymond James must pay $925,000 to couple, Reuters, August 25, 2010
Raymond James faces $2.5 million payback ruling, Tampa Biz, July 26, 2010

Related Blog Posts:
Raymond James Ordered to Buy Back $2.5M in ARS by FINRA, https://www.stockbrokerfraudblog.com, July 28, 2010
Raymond James and RBC Capital Markets Fined $1.4 Million in Total Over Improper Stock Lending Activities, https://www.stockbrokerfraudblog.com, June 22, 2009 Continue Reading ›

Investors File Texas Securities Fraud Lawsuit Against Ernst & Young

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

A group of investors that lost over $17 million after a Plano-based hedge fund that promised low risk investments collapsed are suing Ernst & Young for Texas securities fraud. Parkcentral Global sold the two funds involved.

According to the Houston securities fraud complaint, although E & Y was auditing Parkcentral, the audited financial statements never warned investors that they were in financial trouble. Investors quickly lost every cent they invested even though they were promised that placing their money in Parkcentral would preserve capital. Parkcentral, which is now-defunct after losing over $2.6 billion, used to be run by affiliates of former presidential candidate H. Ross Perot

The plaintiffs contend that not only did E & Y make false representations that it fairly audited Parkcentral, but also it failed to fulfill its role as “watchdog” for investors. They are accusing E & Y of Texas securities fraud, fraud, negligent misrepresentation, and conspiracy.

Earlier this month, one of the plaintiffs, Brown Investment Management, L.P., won a Delaware Supreme Court case requiring that Parkcentral Global disclose the identity of its investors, which means that their names could also be added to the Houston securities case. Other current plaintiffs include Thomas R. Brown Family Private Foundation, SBS Ventures LLC, and MBB Ventures LLC. They are seeking actual and punitive damages.

Related Web Resources:
Ernst & Young Facing Securities Fraud Lawsuit in Houston Over Failed Hedge Fund, Digital Journal, August 26, 2010
Delaware Supreme Court Says Hedge Fund Investors Are Entitled to Ownership List, Securities Technology Monitor, August 25, 2010

Other Recent Texas Securities Fraud Stories on Our Blog Site:
Texas Securities Fraud Incidents on the Rise, Say State Officials, https://www.stockbrokerfraudblog.com, August 18, 2010
Dallas Billionaire Brothers Charged with Texas Securities Fraud, https://www.stockbrokerfraudblog.com, July 31, 2010 Continue Reading ›

Texas Securities Fraud Incidents on the Rise, Say State Officials

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

According to state authorities, there are more Texas securities schemes happening than ever before. One of the reasons for this is that many investors are looking for opportunities to make money during these tough economic times as they try to rebuild their savings. Securities officials are working hard to combat these investment schemes.

The Texas State Securities Board says that it took about 2,177 law enforcement actions during fiscal year 2009-up significantly from the 949 administrative and criminal actions it took in 2008. Now, after the recent BP oil spill, there have been scammers who have tried to persuade investors to invest in “new technology” that can stop similar disaster from happening. Also, State Securities Commissioner Denise Voigt Crawford says precious metal-related schemes are currently popular because gold prices are at a high. According to the Statesman.com, other leading Texas investors traps include:

• Life settlements • Gas schemes • Oil scams • Exchange-traded funds • Foreign exchange trading schemes • Affinity fraud • Green scams • Undisclosed conflicts of interest • Unsolicited online offers (via email, Twitter, Facebook, other social media)
• Private deals
People who want to retire and need financial security are among those at high risk of becoming victims of Dallas securities fraud. Crawford suggests that investors contact her office to make sure that a financial adviser is properly licensed.

It is important that you do your own due diligence find out more about a particular financial opportunity before investing your own money. For example, not only can you check with the Texas State Securities Board to find out whether a securities dealer or investment adviser is in fact registered, but also you can go onto the Financial Industry Regulatory Authority Web site to find out more about a broker-dealer or broker.

Texas authorities see rising investment scams in a soft economy, Statesman, August 14, 2010
Texas State Securities Board

FINRA

SEC
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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 ›

Texas Securities Fraud Alleged in SEC Lawsuit Against Former Advanced Materials Group Inc. CFO

Published on: July 1, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission is suing William G. Mortenson with Texas securities fraud related to an alleged revenue scheme that allowed him to maintain an expensive lifestyle. According to the SEC, the former chief financial officer of Advanced Materials Group Inc. fraudulently inflating the company’s financial results in 2008 and 2009. AMG is now in bankruptcy protection fired Mortenson in 2009.

In addition to the charges of Texas financial fraud charge and misappropriating hundreds of thousands of dollars from AMG, The SEC is accusing Mortenson of falsifying records, lying to accountants, circumventing internal controls, and aiding and abetting violations involving reporting, internal control, and record-keeping. The SEC claims that Mortenson instructed employee Feng “Eric” Zheng to document bogus sales to two of the company’s biggest customers. The entries materially overstated AMG’s sales, accounts receivable, and earnings as they were then reported in quarterly and annual reports.

Mortenson allegedly used the inflated accounts receivable to borrow money under the company’s bank line of credit. He is accused of misappropriating the money, as well as other funds, to cover up to $380,000 in personal expenses, including property tax, country club membership, private jet flights to Europe, family vacations, and home remodeling. The SEC is asking the U.S. District Court for the Northern District of Texas to order civil penalties, an officer/director bar, disgorgement, and permanent injunctive relief against Mortenson.

Meantime, Zheng has settled charges regarding his alleged involvement in the Texas securities scam for $25,000. He was accused of falsifying records, lying to accountants, circumventing internal controls, and aiding and abetting violations of recordkeeping, reporting, and internal controls.

Related Web Resources:
SEC sues ex-president of Garland-based Advanced Materials Group, Dallas News, June 10, 2010
SEC Charges Former Advanced Materials Group, Inc. CFO with Securities Fraud and Misappropriation of Hundreds of Thousands of Dollars, SEC.gov, June 9, 2010 Continue Reading ›

Texas Attorney General Candidate Barbara Ann Radnofsky Says State Should File Securities Fraud Lawsuit Against Wall Street Firms

Published on: June 26, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Barbara Ann Radnofsky, the Democratic candidate for Texas attorney general, says that the state should sue Wall Street firms for securities fraud. Earlier this week, she published a legal brief accusing investment banks of being responsible for the financial crisis. Her Texas securities fraud briefing, which is modeled on the multibillion-dollar tobacco settlements from the 1990’s, is seeking approximately $18 billion in securities fraud damages and other reparations for Texas. She targets Morgan Stanley, Goldman Sachs Group, AIG insurance, and other leading financial firms, banks, and bond-rating agencies.

Radnofsky’s brief is not a securities fraud lawsuit, but it is a framework for one. She hopes that it will push incumbent Texas Attorney General Greg Abbott to take action. She contends that if Abbott fails to sue the firms by September, “he is committing legal malpractice.” She is accusing him of failing to act despite the “clear evidence.”

Radnofsky has noted that the financial meltdown has forced Texas to make cuts to social programs, environmental enforcement, and child protective services. She says the “Great Recession” has lead to child illness, hunger, death, and abuse. She also contends that foreclosures and abandoned homes have severely affected neighborhoods.

FINRA Suspends License of Dallas Broker-Dealer Linked to Failed Medical Capital Notes

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

Dallas-based securities firm Cullum & Burks Securities Inc. has had its license suspended by the Financial Industry Regulatory Authority Inc. The broker-dealer, which had 1,300 client accounts, 100 affiliated reps, and $150 million in assets, reportedly failed to files its mandatory, quarterly Focus report.

Last November, FINRA said the Texas broker-dealer had violated its net capital requirement because it didn’t have enough capital to stay in business. It was then that Cullum & Burkes raised more capital.

The securities firm was one of three broker-dealers listed as sellers of Medical Provider Funding Corp. V, which is a series of private placements that were created by Medical Capital. Other sellers on the list included Securities America Inc. and First Montauk Securities Corp., which is now defunct.

A Reg D filing with the SEC in 2007 reported that the offering was for $400 million. Medical Capital raised about $2.2 billion in investor funds. Now, over half of the investors’ money has been lost.

Cullum & Burks Securities Inc. is the subject of a class action lawsuit filed over the Medical Capital notes sale. The complaint contends that the notes should have been registered with the Securities and Exchange Commission. However, the securities firm denies that it engaged in broker-misconduct in relation to the sale and sees itself as a victim of any wrongdoing committed by Medical Capital. In 2009, the SEC charged Medical Capital Holdings Inc. with securities fraud related to private placement sales.

Related Web Resources:

Another broker-dealer down: Dallas B-D capsized by MedCap, Investment News, June 16, 2010
FINRA
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