Investor Lawyers Blog

Swaps Interest Rate Cases: FHLBNY Settles With Lehman Brothers for $70M & Banco Santander and Portugal Come to An Agreement

Published on: April 13, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The Federal Home Loan Bank of New York will pay Lehman Brothers and its Special Financing unit a $70M settlement in an interest-rate swaps case. The plaintiffs sued FHLBNY two years ago seeking over $150M that they claim they were owed related to their position on more than 350 swaps and options transactions.

Lehman filed for Chapter 11 bankruptcy protection in 2008. The move froze the markets while spurring the end of millions of derivative transactions in which it was involved. A few days later, when FHlBNY ended its swaps with Lehman, it did so with a $16.5B notional amount.

According to Lehman, due to interest rate fluctuations after its bankruptcy filing, FHLBNY returned and “cherry picked” other end dates. As a result, claims the plaintiff, the latter “massively understate” how much it owed Lehman.

Austin Oil and Gas Financiers Plead Guilty in Texas-Based Securities Fraud Case

Published on: April 13, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Business partners Janniece Kaelin and Robert Allen Helms have pleaded guilty to bilking investors of up to $20M in a Texas-based Ponzi scam. The oil and gas financiers used the funds raised for energy ventures to cover their own expenses from 1/2010 to 12/2013.

The US Securities and Exchange Commission filed a securities fraud lawsuit against Kaelin, Helms, and their companies Iron Rock Royalty Partners LP and Vendetta Royalty Partners LTD in 2013. According to the regulato, they misled investors about their professional experience, meantime raising almost $18M that were supposed to go toward royalty interests in oil and gas.

Included among the alleged purchases they made: using investors’ money to pay for a 3 1/2-week trip around the world and paying for the more than $247K wedding of Kaelin’s daughter in Hawaii.

Puerto Rico Debt: Creditor Sues Bank of New York Mellon Over COFINA’s Revenue and Pension Participants File Lawsuit to Stop Island’s Proposed Fiscal Plan

Published on: April 12, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Hedge fund Whitebox Advisors has filed a lawsuit against Bank of New York Mellon (BNY Mellon) over revenues from Puerto Rico’s sales tax bonds, which are commonly called COFINAs, that support $17 Billion of the island’s debt. Currently, the US territory is continuing to struggle to pay back the $70 Billion of debt it owes to creditors and BNY Mellon is a trustee for the island. (A number of hedge funds aside from the plaintiff, hold about $2.5 Billion in senior COFINA bonds, but they are not part of this case.)

In its lawsuit, brought in state court in New York, Whitebox Advisors accused BNY Mellon of breaching its duties to senior COFINA bondholders by continuing to make payments to junior creditors even after the US territory indicated that it wants to make concessions related to different kinds of debts. The hedge fund wants a court order stopping further payments to junior creditors, as well as a statement declaring that BNY Mellon has a conflict of interest. The plaintiff is also seeking monetary damages.

This week, the island is set to begin confidential talks with COFINA creditors as well as holders of competing general obligation debt. Creditors have until May 1 to arrive at mutually agreed upon settlements. The deadline was put into place, temporarily halting creditor lawsuits, to give the federally appointed oversight board a chance to work out a debt restructuring deal outside of court. At this moment, an extension to the freeze is unlikely. After that, the board is allowed to try to place Puerto Rico into quasi-bankruptcy proceedings.

Morgan Stanley to Pay Massachusetts $1M to Settle Charges Alleging Unethical Sales Contests Involving Brokerage Customers

Published on: April 12, 2017 | by Shepherd Smith Edwards & Kantas, LLP

To settle charges over a high-pressure sales contest involving its financial advisers and brokerage clients, Morgan Stanley (MS) will pay $1 million to Massachusetts Secretary of the Commonwealth William Galvin. By settling, the firm did not deny or admit to the charges. It must, however, reassess its sales contest policies and notify the state of what is included in them, as well as what changes it might make in the wake of this review.

It was last year that Galvin charged the broker-dealer for cross selling and encouraging wealthy clients to borrow against their brokerage accounts. He also accused senior Morgan Stanley staff of knowing about the contest, determining that it violated the firm’s own internal policies (in addition to Massachusetts securities rules), but yet allowing the contest to continue for a few more months. It was only then that the firm’s Compliance and Risk decided that the contest was “impermissible.”

The program, which also involved a similar contest in Rhode Island, ran between ’14 and ’15. 30 financial advisers at five Morgan Stanley offices participated. The financial representatives are accused of persuading investors to set up new lending accounts. The broker-dealer purportedly rewarded them with bigger “business development allowances” when their efforts were successful. Advisers were given $1K for every 10 loan accounts that were opened, $3K for every 20 accounts, and $5K for every 30 accounts.

PREPA and Its Bondholders Arrive at Deal to Restructure Almost $9 Billion in Puerto Rico Debt

Published on: April 7, 2017 | by Shepherd Smith Edwards & Kantas, LLP

A new restructuring agreement has been reached between the Power Utility Company of Puerto Rico, referred to locally as PREPA, and its creditors on how to restructure $8.9 billion in Puerto Rico debt.The deal, which must still be approved by the federally appointed oversight board, comes before the May 1 deadline that the US territory must meet to arrive at such settlements with creditors. After May 1, members of the US-government appointed federal oversight board would have the authority to effect a quasi-bankruptcy process and make creditors agree to deals that likely would not favor creditors.

Of the about $70 billion of municipal debt that Puerto Rico owes, roughly $9 billion involves PREPA. Puerto Rico Governor Ricardo Rossello issued a statement noting that if approved, the agreement between PREPA and bondholders could save $2.2 billion in debt servicing expenses for five years while lowering customer electric bills by $90/year during the same period.

Under the original agreement, PREPA bondholders were to trade their bonds for new securities while receiving a 15% discount. With this new agreement, creditors would take the same reduction but maturities would be extended to 2047. Additionally, under the new deals, the requirement of an investment grade rating to close the deal would be eliminated. Insurers, such as Assured Guaranty and MBIA Inc., also consented to another $300 million in deferral of principal during the first six years.

Municipal Bondholders Sue Bank of Oklahoma Financial

Published on: April 6, 2017 | by Shepherd Smith Edwards & Kantas, LLP

In separate bond fraud lawsuits, two groups of municipal bond holders are suing Bank of Oklahoma Financial (BOKF), also called BOK Financial Corp. They claim that the bank was not a responsible trustee to certain conduit bondholders that were harmed by fraud.

The first securities lawsuit is a class action brought by eight plaintiffs in the U.S. District Court for the Northern District of Oklahoma. They are claiming a number of causes of action, including gross negligence, aiding and abetting fraud, breach of fiduciary duty, civil conspiracy, and aiding and abetting breach of fiduciary duty.They want a jury trial and over $5M in compensatory damages.

The second case includes 20 individuals and a company. All of them invested in conduit bonds. They brought their case in Tulsa District Court in Oklahoma and are asking for exemplary damages of up to $5M, as well as yet-to-be determined actual damages.

Securities Cases: SEC Fines Credit Suisse $8M Over Improper Investments, $5M Investment Fraud Case Leads to Guilty Plea, and Florida Man is Ordered to Pay Back Investors $2.9M

Published on: April 6, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Credit Suisse Unit and Ex-Investment Adviser Settle SEC Charges, Pay $8M Fine
Credit Suisse AG (CS) unit Credit Suisse Securities and Ex-investment adviser Sanford Michael Katz have settled SEC charges accusing them of improperly investing the funds of clients in “Class A” mutual fund shares instead of “institutional” shares that were less costly. According to the regulator, the firm and Katz did not adequately disclose the conflict of interest presented by choosing the Class A investment, which allowed them to profit more at investors’ expense. They are accused of breaching their fiduciary duties.

The SEC’s orders state that Credit Suisse made about $3.2M in 12b-1 fees that could have been avoided. According to the Commission, about $2.5M of those fees came from Katz’s clients. The regulator said that the firm did not put into place policies and procedures to prevent fiduciary breaches.

Both Credit Suisse and Katz settled the SEC charges without denying or admitting to the regulator’s findings. Together, they have to pay over $3.2M of disgorgement, over $577K of prejudgment interest, and an over $4.1M penalty. A fair fund has been set up to compensate clients.

Retired San Antonio Spurs Star Tim Duncan’s Ex-Financial Adviser Pleads Guilty To Texas Securities Fraud

Published on: April 4, 2017 | by Shepherd Smith Edwards & Kantas, LLP

In federal court in Texas, Charles Banks, the former financial adviser to ex-NBA star Tim Duncan, has pleaded guilty to wire fraud. Banks admitted to misleading Duncan into guaranteeing a $6M loan to a company that had financial connections to the ex-advisor.

Duncan, who retired from professional basketball in 2016, claims that he lost more than $20M through deals he was involved in because of Banks. The two first started working together in 1997 when Banks was employed with CSI Capital Management Inc. and Duncan was an NBA rookie. After Banks left the firm he continued working with Banks.

Banks encouraged Duncan to lend a company, Gameday Entertainment, $7.5M. The company then obtained a $6M bank loan using what Duncan contends was his forged signature. Banks was Gameday’s chairman at the time.

Federal Judge Orders Wells Fargo to Face Institutional Investors’ MBS Fraud Lawsuits

Published on: April 3, 2017 | by Shepherd Smith Edwards & Kantas, LLP

In Manhattan, U.S. District Judge Katherine Polk Failla ruled that a few dozen funds may pursue their mortgage-backed securities fraud lawsuits against Wells Fargo & Co. (WFC) According to Reuters, five lawsuits are involved and plaintiffs include funds from Prudential Financial Inc.(PRU), BlackRock Inc. (BLK), TIAA-CREF, and Pacific Investment Management Co. (PIMICO) Judge Failla also said that the National Credit Union Administration (NCUA) could proceed with its MBS fraud claims against the San Francisco-based bank, which it filed on behalf of five credit unions that failed after they bought $2.4B in residential mortgage-backed securities.

The funds are seeking to hold Wells Fargo liable for breach of contract and conflict of interest involving over four dozen trusts, breach of due care, and breach of fiduciary duty. Failla, however, did not allow claims contending violation of a NY law related to mortgage trusts, as well as claims of general negligence, to proceed.

The investors contend that the bank took “virtually no action” to make sure that lenders either bought back the faulty securities or fixed the loans that were backing the securities once they knew that the loans were poorly underwritten or had defaulted. They accused Wells Fargo of failing to act despite being aware of these problems.

CFTC Cases: Ex-Citigroup Global Markets Traders Settle Spoofing Charges and Vision Financial Partners to Pay Over $6.5M in Off-Exchange Binary Options Fraud Case

Published on: March 31, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Former Citigroup Global Markets Traders to Pay Penalties for Spoofing

Ex-Citigroup Global Markets Inc. (C) traders Jonathan Brims and Stephen Gola have settled spoofing charges that the US Commodity Futures Trading Commission brought against them. According to the regulator, the two men engaged in spoofing while trading for the firm, and they must now pay $200K and $350K in civil monetary penalties, respectively. They also are temporarily “banned from trading in futures markets.” Goal and Brims won’t be allowed to resume trading in the futures markets until six months after they’ve paid their penalties in full.

According to their respective orders, the two men engaged in spoofing, which involves making a bid or offer with the intention to cancel the bid or offer prior to execution of the bid. They did this over 1,000 times in different Chicago Mercantile Exchange US Treasury futures products. They would make offers or bids of at least 1,000 lots even though they planned to cancel the orders before they actually occurred.

The orders were made after another small offer or bid was made on the other side of the same market “or a correlated futures or cash market.” The CFTC said that the two men initiated the orders in order set up or increase an already existing imbalance in the order book. They purportedly canceled the orders after the smaller orders were filed or if they determined that there was too high a risk that their orders might actually go through.