Investor Lawyers Blog

Defective Security Swaps

Published on: August 14, 2018 | by Shepherd Smith Edwards & Kantas, LLP

The attorneys at the law firm Shepherd, Smith, Edwards & Kantas LLP are currently investigating claims of institutional investors involving swaps or other ongoing, inappropriate investments. Many companies, state municipalities, and other governments were talked into entering into swap transactions, either as a part of another securities transaction such as a new bond issuance, or on their own. Typically, these swaps were sold as ways to hedge fluctuating liabilities that the customer already had, or in some other way to reduce financing expenses.

In a typical swap, the two parties are effectively exchanging a fixed rate and a variable rate. The party that currently has a variable rate liability, oftentimes a bond, enters into the transaction to avoid the carrying costs associated with that bond’s benchmark rising. In exchange, that party agrees to pay the other party a fixed, periodic payment. If the swap is done correctly, it allows the party with the original variable rate to avoid the consequences of its bond, or other liability, rate increasing because, if the rate were to increase, that rate increase would actually end up being paid by the swap counterparty. Conversely, if the rate on the bond decreased, the costs of that obligation would go down correspondingly to the increased cost of the swap, creating a wash. The party has effectively transformed a variable obligation to a fixed one.

Unfortunately for many of those customers, many of these swaps have proven wholly ineffective in fulfilling their expressly stated purposes. The reasons for these failures can vary significantly. In some cases, the swaps are set up incorrectly, such as not taking into account various reasons that the underlying obligation could fluctuate, or not marking the swap to the same benchmark as the underlying obligation. Whatever the reasons for their failure, many institutions have found themselves with hugely expensive carrying costs for these swaps and equally huge termination penalties to try to get out of them.

Precious Metal Investments

Published on: July 31, 2018 | by Shepherd Smith Edwards & Kantas, LLP

Date: June 17, 2013

The attorneys at Shepherd Smith Edward & Kantas are investigating the claims of investors who purchased positions in gold, silver, or other precious metals at the recommendation of their broker or financial adviser. Recently, increasing numbers of brokers have been pushing their clients to invest in precious metals or securities based on precious metals for various reasons, including, representations that such investments are “hedges” against a falling market or simply speculating on the price of precious metals, such as gold. Below is a chart showing the returns of many of the currently available investment options in gold and other precious metals.

Fund Name	Ticker	Share Price	1 month	6 month	1 yr return
ETFS Phsical Asian Gold Shares ETF	AGOL	136.52	-2.30%	-18.84%	-14.46%
FactorShares 2x Gold Bull/S&P Bear ETF	FSG	9.71	-4.33%	-54.84%	-59.20%
the Market Vectors Gold Miners ETF	GDX	28.36	-1.22%	-38.98%	-39.56%
Market Vectors Gold Miners Junior ETF	GDXJ	11.32	-4.47%	-46.85%	-45.34%
Global X Pure Gold Miners ETF	GGGG	12.11	-5.98%	-41.67%	-45.94%
StreetTracks Gold Shares ETF	GLD	134.15	-2.66%	-18.27%	-15.01%
Global X Gold Explorers ETF	GLDX	15.82	0.89%	-47.82%	-50.56%
the UltraShort Gold ProShares ETF	GLL	85.61	4.05%	39.86%	24.36%
iShares COMEX Gold Trust ETF	IAU	13.48	-2.67%	-18.40%	-14.85%
Direxion Daily Gold Miners Bull 3x Shares ETF	NUGT	9.77	-9.54%	-81.87%	-84.78%
ETFS Physical Swiss Gold Shares ETF	SGOL	136.79	-2.65%	-18.42%	-14.91%
RBS Gold Trendpilot ETN	TBAR	28.07	0.11%	-5.49%	-3.04%
the ProShares Ultra Gold ETF	UGL	56.9	-5.69%	-35.10%	-31.15%
iShares MSCI Global Gold Miners Fund	RING	11.63	-4.83%	-39.74%	-43.24%
PowerShares DB Base Metals Fund ETF	DBB	16.76	-0.59%	-13.79%	-8.37%
Powershares DB Precious Metals Fund ETF	DBP	45.63	-51.40%	-72.87%	-17.87%
ETFS Physical Precious Metal Basket Shares	GLTR	74.9	-3.73%	-21.71%	-15.96%
the PowerShares Global Gold & Precious Metals ETF	PSAU	22.81	-3.63%	-37.56%	-36.09%
the SPDR S&P Metals & Mining ETF	XME	35.71	-5.15%	-19.88%	-9.43%
the ProShares Ultra Silver ETF	AGQ	21.78	-11.68%	-56.34%	-47.99%
PowerShares DB Silver Fund ETF	DBS	37.21	-6.41%	-33.22%	-24.96%
Global X Silver Miners ETF	SIL	13.65	-1.66%	-41.04%	-31.51%
iShares MSCI Global Silver Miners Fund	SLVP	13.24	-2.58%	-40.84%	-31.33%
ETFS Physical Silver Shares ETF	SIVR	21.81	-5.71%	-31.61%	-23.26%
iShares Silver Trust ETF	SLV	21.3	-5.63%	-31.67%	-23.44%
Global X Copper Miners ETF	COPX	9.94	-6.84%	-25.88%	-10.13%
First Trust ISE Global Copper Index Fund	CU	22.91	-5.80%	-24.21%	-9.87%
the ETFS Platinum Physical Shares ETF	PPLT	141.82	-3.79%	-10.81%	-3.10%
First Trust ISE Global Platinum Index ETF	PLTM	11.74	-2.41%	-17.38%	-22.66%

The results that these investments have seen over the last year vary tremendously for a number of different reasons. First, while most of the precious metals securities are designed to increase in value as the price of its target precious metal increases, some of them do the exact reverse and increase in value as the price of its target precious metal falls (“inverse funds”). As a result, many of the inverse funds have achieved positive returns over the last year as the price of many precious metals have plummeted. However, if prices rise, these funds could quickly lose value.

Second, some of these investments are “leveraged,” meaning the investment borrows money or uses another strategy to let it get returns greater than the change in the underlying value of the precious metal it is tracking. For example, the UltraShort Gold ProShares ETF is designed to return three times the amount that the value of gold falls. So if the price of gold fell 10%, an investment in this fund would increase approximately 30%.

However, on a more basic level, these investments have fared differently because they invest in fundamentally different assets. Some of these investments gain exposure to gold or some other precious metal by actually purchasing the metal and storing it in vaults. This is the most obvious and simple way for a fund to invest in these assets. Others are investing not in gold, but in mining companies that mine gold. These funds theorize that those types of companies should increase or decrease in value with the changes in value of the product they produce; namely gold, silver, or copper. However, there are some flaws in this analysis, as most experts agree that on a long time line, the share price of these companies will not keep up with the value of the metal they produce.

Finally, some, if not most of, these funds gain their exposure to the target metal by buying futures contracts on them. That means that the fund buys the right to purchase gold or some other metal at a fixed price at a fixed time in the future. However, instead of ever collecting the gold, these funds sell their right to purchase the gold before it comes due and instead purchase a new future, or right to buy. In doing so, the fund avoids the expense of ever actually having to process and handle gold, while still being affected in value by changes in the price of gold.

Recently, the funds which are based upon gold mining companies have fared the poorest. Not only have they lose value as the price of gold has plummeted, but the share price of those companies also suffered because equity markets worldwide have been weak. However, none of these funds, other than the inverse funds, have performed well. One of the funds, Direxion Daily Gold Miners Bull 3x Shares ETF, lost almost 85% of its value over the last twelve months. Many others lost half their value or more.

The moral of the story is that many brokers have been pushing their clients into investing in these or similar securities, without the clients being aware of the fact that these investments can be, and have been, very high risk investments which can end up wiping out an investor’s life savings in a matter of months. If you have invested in these or other investments in precious metals based upon your broker’s recommendation, contact the law firm Shepherd, Smith, Edwards & Kantas LLP for a free evaluation of a potential claim to recover some or all of the investment that you lost. All communications will be kept strictly confidential and you will not be billed in any way for a consultation.

SSEK Investigating Claims Involving Jeff Wilson and Wells Fargo

Published on: July 11, 2018 | by Shepherd Smith Edwards & Kantas, LLP

The securities lawyers with Shepherd, Smith, Edwards, & Kantas LLP (“SSEK”) are investigating claims of investors and clients of Jeffrey Randolph Wilson (“Wilson”) who works with Wells Fargo Clearing Services, LLC (“Wells Fargo”) in Las Cruces, New Mexico. In the last 18 months, at least three of Mr. Wilson’s clients have filed arbitration claims against Wells Fargo claiming that Wilson and/or Wells Fargo acted improperly regarding those clients’ accounts. These customer claims include allegations that Mr. Wilson excessively traded customer accounts, made unsuitable investment recommendations, and exposed the clients to excessive risk.

All brokers are required to make only suitable recommendations to their clients and manage their clients’ investments appropriately. That means that the brokers, like Mr. Wilson, are supposed to consider a client individually and consider that client’s willingness to take risks, age, and other factors – like whether the client is retired – into account when deciding what investments to recommend. Similarly, some investments which might have been appropriate for a client can become inappropriate, or unsuitable, if they are bought and sold too often in a client’s account. Generally, the more frequent the trading in an account, the higher risk the investment strategy.

In the case with Mr. Wilson’s clients, more than one has complained that Mr. Wilson improperly advised them to invest in energy related investments which led to substantial losses. Recently, a FINRA arbitration panel agreed with that allegation, ordering Wells Fargo Advisors to pay a client $357,000 for losses suffered in unsuitable energy and housing based investments, as well as use of margin trading.

Retired Couple Awarded $800,000 in Damages From Oppenheimer & Co., Inc

Published on: June 1, 2018 | by Shepherd Smith Edwards & Kantas, LLP

Lawyers representing a retired couple in a claim against Oppenheimer & Co., Inc. recently obtained an award from a Financial Industry Regulatory Authority (“FINRA”) arbitration panel awarding them $800,000 in damages. The claim was based upon an investment of the couple’s money, including retirement assets, into various energy stocks, including Breitburn Energy Partners, Sandridge Permian Trust, Atlas Resource Partners, and Vanguard National Resources. The arbitration panel found that Oppenheimer was negligent in the treatment of the clients, and awarded $800,000 in damages, $61,5217 in costs, and post-judgement interest.

The broker, Evan Fischer, appears to have moved to Ameriprise Financial Services, Inc., despite the fact he currently has four customer claims against him, including the one recently concluded with this award, which allege various types of mismanagement of client assets. It is unclear whether these other customer complaints involve investments in energy stocks like Breitburn or Sandridge.

Unfortunately, when brokers act improperly with some clients, as Mr. Fischer has been accused of doing by at least four different clients, they often do so with many clients. If you are or were a client of Mr. Fischer and believe you may have been inappropriately invested or otherwise lost money with him, contact the law firm of Shepherd, Smith, Edwards & Kantas LLP for a free, no obligation evaluation of your account to determine if you might have a claim to attempt to recover some or all of your losses. All communications will be kept strictly confidential, and you will not be billed in any way for a consultation.

Wilmington Trust Agrees to $210M Settlement in Shareholders’ Bank Fraud Lawsuit

Published on: May 24, 2018 | by Shepherd Smith Edwards & Kantas, LLP

The Associated Press is reporting that the shareholders who sued Wilmington Trust are asking a federal judge to approve a proposed $210M bank fraud settlement reached with the bank. The plaintiffs contend that the bank fraudulently hid billions of dollars in bad loans while bank officials misled investors and regulators about overdue commercial real estate loans prior to its sale to M & T Bank Corp. (MTB) several years ago.

As part of the settlement, Wilmington Trust would pay $200M. KPMG, an auditing firm, would pay $10M.

The wrongdoing alleged in the shareholder lawsuit addresses a longer time period than what was noted in a parallel criminal case, in which four ex-Wilmington Trust executives were convicted on conspiracy and fraud charges. Wilmington Trust is the only financial institution to be subject to criminal charges related to TARP (Troubled Asset Relief Program) to date.

Platinum Partners Principal Pleads Guilty to Fraud

Published on: May 23, 2018 | by Shepherd Smith Edwards & Kantas, LLP

Murray Huberfeld, a Platinum Partners principal, has pleaded guilty to allegations that he was involved in a wire fraud conspiracy. However, he has not admitted a guilty plea to related to an alleged $1B scam involving his hedge fund.

Huberfeld admitted to misleading his hedge fund when he falsely claimed that a $60K payment was to pay for Knicks tickets when, in truth, it was a bribe to ex-New York City jail union boss Norman Seabrook to invest pension cash.

The money had been issued to fixer Jona Rechnitz. She has since turned government witness in a number of federal corruption probes. The bribe resulted in the Correction Officers Benevolent Association investing $20M in Platinum.

Cryptocurrency Fraud Allegations Lead to Criminal Allegations Alleging $32M ICO Scheme

Published on: May 22, 2018 | by Shepherd Smith Edwards & Kantas, LLP

In New York, the founders of Centra Tech are now facing securities fraud, wire fraud, and conspiracy charges related to an alleged cryptocurrency fraud. Robert Farkas, Sohrab Sharma, and Raymond Trapani are accused of fraudulently raising $32M from investors during an initial coin offering (ICO).

Prosecutors claim that the men misled investors into thinking that the Centra tokens they had invested in had partnership deals with Visa, Bancorp, and Mastercard. These agreements supposedly involved the issuance of debit cards that would allow them to spend the cryptocurrency at any business that accepted Mastercard or Visa. Farkas, Sharma, and Trapani are accused of lying about a fake CEO and licenses for money transmitters. They also are accused of making misrepresentations and omissions.

Last month, the Federal Bureau of Investigation arrested the company co-founders and confiscated 91,000 Ether units in digital money valued at $60M.

Assured Guaranty Sues Puerto Rico Over Fiscal Rescue Plan

Published on: May 21, 2018 | by Shepherd Smith Edwards & Kantas, LLP

Assured Guaranty has filed a lawsuit against Puerto Rico for the second time. The bond insurance company, which insures about $5 billion of Puerto Rico bonds, wants a federal court to decide that the U.S. territory’s latest fiscal plan to revive it from financial bankruptcy “invalid.”

Also named a defendant in the lawsuit is the fiscal oversight board that was federally appointed to help the island recover from the over $70 billion of debt that it owes. Assured had filed a similar complaint against Puerto Rico prior to Hurricane Maria’s arrival in September, but it withdrew the lawsuit after the storm.

Now, however, the bond insurer is contending that the fiscal plan, which establishes future economic projections for the U.S. territory, was developed without consulting creditors. The plan estimates about $6.05 billion of debt service capacity over six years, which is a sign that creditors should expect significant reductions to their repayments.

Securities Cases: Anti-Money Laundering Violation Allegations Lead to $5.3M Fine Against ICFBCFS, Three Houston-Based Healthcare Executives are Accused of Falsifying Financial Information, and Pension Fund Accuses Wells Fargo of Holding Back Rebate Fees

Published on: May 18, 2018 | by Shepherd Smith Edwards & Kantas, LLP

ICFBCFS and Chardan Capital Markets Accused of Anti-Money Laundering

FINRA has fined the Industrial and Commercial Bank of China Financial Services LLC (ICBCFS) $5.3M for “systemic anti-money laundering compliance failures.” The self-regulatory organization contends that when clearing and settling the liquidation of over 33 billion penny stock shares between 1/2013 and 9/2015, the firm did not have in place an anti-money laundering program that was reasonable enough to identify and report possibly suspect transactions, especially when penny stocks were involved. ICBCFS is settling the case without denying or admitting to the self-regulatory authority’s findings. It has, however, consented to an entry of the findings.

ICBCFS also agreed to pay an $860K penalty to settle a US Securities and Exchange Commission case alleging anti-money laundering violations and the failure to report billions of suspect penny stock sales.

Royal Bank of Scotland Settles Mortgage Fraud Case for $4.9B

Published on: May 17, 2018 | by Shepherd Smith Edwards & Kantas, LLP

Once again, Royal Bank of Scotland (RBS) has arrived at yet another securities settlement related to its mortgage practices leading up to the 2008 housing crisis. This time, RBS is getting ready to pay almost $4.9B. The deal, reached with the US Justice Department, must still must be finalized. The DOJ had been investigating allegations that the British bank sold high risk loans between 2005 and 2007.

CNN reports that since the economic crisis, RBS has paid about $28.4B in fines and settlements, including $500M to the state of New York earlier this year to settle allegations of misrepresentations made and deceptive practices used on investors of residential mortgage-backed securities. The bank settled for $5.5B with US Federal Housing Finance Agency last year to resolve allegations that it bundled and sold more than $30B of risky loans to government-sponsored enterprises Freddie Mac and Fannie Mae.

RBS previously reached two settlements with the National Credit Union Administration. One, for $1.1BM in 2016, was over claims that it sold faulty mortgage-backed securities to credit unions. The other, for $129.6M, settled claims tied to alleged losses for corporate credit unions Southwest and Members United bought RMBSs. According to NCUA, RBS made misrepresentations when underwriting and selling the residential mortgage-backed securities.