Investor Lawyers Blog

SEC Cases: Morgan Stanley to Pay $13M for Custody Rule Violations and Overbilling Clients, BNY Mellon to Settles Allegations of Reported Miscalculations By Paying $6.6M, and Citadel Securities to Pay $22M for Purportedly Misleading Clients About Pricing Trades

Published on: January 17, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley Accused of Overbilling Investment Advisory Clients

The US Securities and Exchange Commission announced that Morgan Stanley Smith Barney (MS) will pay a $13M penalty to resolve charges accusing the firm of overbilling clients through billing system and coding mistakes and violating the custody rule regarding yearly surprise exams.

As a result, said the regulator’s order, Morgan Stanley has agreed to pay over $16M in excess fees because of billing mistakes that took place from ’02 to ’16. Investment advisory clients that were affected have been paid back the excess fees in addition to interest.

According to the Commission, Morgan Stanley overcharged over 149,000 investment advisory clients. The reason for this is that the firm did not put into place compliance policies and procedures that were designed reasonably enough to make sure that clients were accurately billed according to their advisory agreements. The SEC said that Morgan Stanley did not validate billing rates that were in its billing system against client billing histories, contracts, and other documents.

Moody’s Corp. Settles With US Government, States Over Pre-Crisis Mortgage Securities Ratings for Almost $864M

Published on: January 16, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Moody’s Corp. (MCO) will pay nearly $864M to settle allegations about the way that credit ratings agency rated high-risk mortgage securities, including residential mortgage-backed securities (RMBSs) and collateralized debt obligations (CDOs), leading up to the 2008 financial crisis. The settlement was reached between Moody’s Corporation, Moody’s Analytics Inc., and Moodys’ Investors Services, and the US Department of Justice, the District of Columbia, and 21 US states. Moody’s is accused of knowing that it was inflating the ratings of mortgage securities that were toxic.

As part of the agreement, $437M will be paid as penalty to the DOJ. The rest of the $426.3M would be divided between DC and the states. Moody’s consented to measures that would make sure of its credit ratings’ integrity moving forward, and its chief executive will have to certify measures of compliance for a minimum of five years.

Despite settling, Moody’s maintains that its ratings pre-the 2008 crisis were valid. The credit rater also pointed out that this case has been resolved without any findings that it violated any laws. Moody’s is not admitting any liability. However, in a Statement of Facts, the company admitted to key parts of its purported behavior.

UBS Ordered to Pay Another $18M in Puerto Rico Bond Fraud Case

Published on: January 14, 2017 | by Shepherd Smith Edwards & Kantas, LLP

A few weeks after a FINRA arbitration panel ordered UBS (UBS) to pay $18 million in a Puerto Rico bond fraud case, the firm has been ordered to pay another customer a large amount in a similar municipal bond claim. In this latest ruling, the Gomez family claimed they lost $22.87 million from investing in Puerto Rico securities. UBS Puerto Rico (UBS-PR) brokers had purportedly suggested the Gomez family invest in Puerto Rico bonds despite the fact that they wanted investments that were safe. The family relied on the funds from their investments to cover their living expenses.

UBS argued that Mr. Gomez was an experienced investor. The firm claimed that when Gomez opted to concentrate his portfolio in Puerto Rico bonds, he knew what he was doing.

The FINRA panel disagreed with UBS’s assessment, awarding the Gomez family almost $20 million in cash and refusing to enforce almost $6 million is loans the Gomez family owed to UBS. The securities arbitration award to the Gomezes includes $4 million in punitive damages.

Pension Fund Lawsuit Against Volkswagen is Allowed to Proceed

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

U.S. District Judge Charles Breyer says that Volkswagen AG (VW) and ex-CEO Martin Winterkorn must face an investor lawsuit related to its diesel emissions cheating scandal. Breyer turned down VW brand chief Herbert Diess’s request that the proposed securities fraud cases be dismissed from a California court. The company is still under criminal investigation by the US Justice Department.

The plaintiffs are primarily municipal pension funds that invested in Vokswagen via American Depositary Receipts. An ADR is a type of equity ownership in a non-US company that represents the company’s foreign shares that are kept on deposit by a bank in the home country of that company.

Volkswagen believes that the investor complaints at issue should be heard in Germany. Judge Breyer, however, ruled that since the US is invested in protecting investors from this country against securities fraud, the complaints should proceed in the US. Investors believe that the German automaker and its executives misled the public when it assured them that its diesel vehicles fulfilled all emission standards while downplaying the liabilities that would result because the company was not, in fact, complying with these standards.

Puerto Rico Bond Cases: 1st Circuit Revives Pension Fund Lawsuit & FINRA Arbitration Panel Orders Oriental Financial Services and Santander Securities to Pay Over $808K

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

The U.S. Court of Appeals for the First Circuit has revived a Puerto Rico bond fraud lawsuit brought by Puerto Rico Employee Retirement System bondholders. The pension fund is the largest on the island and the plaintiffs are suing the territory’s government. The bondholders brought their case after former Puerto Rico Governor Alejandro García Padilla put into effect a fiscal emergency law that blocked the repayment of the debt owed to the Employee Retirement System, diverting the funds that were promised to the Employee Retirement System as collateral. Invoking the fiscal emergency law has allowed the island to keep up its public services. The pension bondholders, however, are arguing that diverting the money is hurting them because there may not be enough money left to repay the bondholders what they are owed.

Also, under PROMESA (the Puerto Rico Oversight, Management and Economic Stability Act) which is the federal rescue law that was passed last year, lawsuits brought against the island over debt payments have been temporarily frozen to give the territory time to restructure the deals it would need so it can try to pay back its $70 billion of debt the Commonwealth owes. However, this has not stopped creditors from suing Puerto Rico for their money. Many bondholders are contending that the fiscal emergency law is not constitutional and that the litigation stay should not affect them.

Although the First Circuit did not rule on whether the funds owed to the bondholders should continue to be repaid, it ordered a lower court to decide whether the case could go forward. The appeals court, however, blocked a similar lawsuit brought by holders of the bonds issued by Puerto Rico Highways and Transportation Authority (PRHTA). Those same bondholders also believe that their collateral was confiscated. The First Circuit said that these plaintiffs did not succeed in demonstrating that they were harmed.

Meantime, in Puerto Rico, a judge is currently deliberating over whether to halt another bond fraud lawsuit by invoking the litigation stay. This case involves general obligation bondholders who are owed $13 billion. The plaintiffs claim that they are the ones who should get the sales tax revenue that was promised to another group of creditors.

Securities Fraud Cases: Connecticut-Based Investment Adviser Settles Fraud Charges that Allegedly Involved Secret Referral Fees, Jefferies Bond Trader’s Second Criminal Fraud Trial is Underway, Former Barclays Trader Gets 5-Month Prison Term in Insider Case

Published on: January 11, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Investment Adviser Settles SEC Case for $575K
John W. Rafal, a Connecticut-based investment adviser, has agreed to settle US Securities and Exchange Commission charges for $575K. As part of the settlement, Rafal is admitting wrongdoing in a civil case that accuses him of bilking a client and then trying to mislead the SEC while lying to other clients about the regulator’s probe.

The SEC said that Rafal paid attorney Peter D. Hershman in secret for referring one of his client’s to Essex Financial Services, which is the firm that Rafal founded. He is no longer affiliated with Essex. Rather than disclose the referral deal to the older widow who was that client, Rafal and Hershman concealed the payments as “legal fees.” Even after Essex officers found out about and stopped the referral arrangement, the deal between the two men continued in secret. The SEC also said that Rafal responded to rumors that he had violated a securities law by emailing his clients and falsely stating that the regulator’s probe had been resolved. He also purportedly tried persuading the Commission that his arrangement with Hershing was over.

Essex Financial Services will pay $180K in disgorgement and interest to resolve charges connected to Rafal’s wrongful behavior. Herhsman will pay over $90K to resolve the civil charges accusing him of aiding and abetting the violations committed by Rafal. The two men agreed to a securities industry bar and from serving in the roles of director or officer for any publicly traded company. They also are no longer allowed to represent clients regarding SEC matters.

President-Elect Trump’s SEC Chief Pick Has Strong Ties to Big Banks

Published on: January 11, 2017 | by Shepherd Smith Edwards & Kantas, LLP

News that President-Elect Donald Trump has nominated Wall Street defense attorney Jay Clayton as the next of Securities and Exchange Commission Chair is causing worries that a person who has legally represented big banks may soon be in charge of the agency of the federal government that is tasked with regulating the securities industry.

For example, Clayton was the attorney for Goldman Sachs (GS) when billionaire Warren Buffet gave the firm a $5B capital infusion during the financial crisis of 2008. He also represented Barclays (BARC) when it acquired Lehman Brothers’ assets and he was the attorney for Bear Stearns when JPMorgan (JPM) bought the firm in a fire sale.

Clayton’s wife Gretchen is a Goldman Sachs wealth management advisor and broker. This means that Goldman, one of the firms that he is in charge of regulating, is also providing income to his family through her salary and any bonuses. Although Clayton will have to recuse himself when there are any enforcement rulings involving Goldman, he won’t have to in rulemaking decisions of “general application” that could impact the bank as long as other banks are also affected.

Hedge Fund Fraud: SEC Partially Overturns Ruling Against Investment Adviser But Raises Amount He Owes & Jury Selection Begins in Former Visium Fund Manager’s Bond Fraud Case

Published on: January 9, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Ex-Visium Fund Manager on Trial for Bond Fraud
Jury selection is scheduled to begin this week in the criminal trial against Stefan Lumiere, an ex-Visium Asset Management LP portfolio manager. Lumiere, who managed the Visium Credit Opportunities Fund, is accused of falsely inflating the value of securities in a fund and committing bond fraud.

Visium Asset Management LP is a New York based-hedge fund. The $8B investment hedge fund shut down in 2016 after a criminal investigation that led to charges against a number of people, including Sanjay Valvani, who killed himself several months ago following allegations of insider trading.

According to prosecutors, from ’11 to ’13, Lumiere was among a number of people who conspired to bilk investors through the mismarking of securities’ values that were in a fund that invested in healthcare company-issued debt. The prosecution believes that the alleged misconduct caused the net asset value of the fund to be overstated by tens of millions of dollars monthly. Meantime, investors were fooled into thinking the bonds were very liquid even though they were illiquid.

Lumiere pleaded not guilty to securities fraud, conspiracy, and wire fraud charges last year.

SEC Charges NY-Based Brokers with Fraud, Excessive Trading

Published on: January 9, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission is charging two brokers with securities fraud. The regulator claims that Donald J. Fowler and Gregory T. Dean fraudulently employed an in-and-out trading strategy that was not suitable for customers so that they could make more in commissions. Because of their actions, 27 customers alleged lost substantial amounts of money. Fowler and Dean are accused of violating the Securities Act of 1933 and the Securities Exchange Act of 1934, and Rule 10-B5.The Commission said that they examine trading patterns involving over two dozen of the brokers’ customer accounts.

The SEC contends that the two men did not engage in any due diligence to figure out whether their investment strategy could help customers obtain even the smallest profit. With their strategy, they engaged in the frequent purchase and sale of securities, which would both take place within a two-week or shorter timeframe. They charged customers a commission for every transaction. Meantime, Fowler and Dean were the only ones who had a chance of making a profit.

SEC Warns Investors to Look Out for Excessive Trading, Churning

Along with its announcement of this securities case, the SEC put out an Investor Alert cautioning the public about churning and excessive trading. In its alert, the regulator warned about red flags that may be signs of these types of fraud, including trading that a customer did not authorize, which is known as unauthorized trading, trading that happens more often than seems reasonable for a customer’s investment objectives and/or the level of risk that the portfolio can handle, and suspicious and/or unusually high fees.

Ex-MF Global CEO Jon Corzine Settles Securities Fraud Case Brought by the CFTC for $5M

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

Jon S. Corzine, the former head of MF Global Inc. has arrived at a securities settlement with the US Commodity Futures Trading Commission in which he will pay a $5M penalty for his involvement in the firm’s illegal use of nearly $1B in customer money and for not properly supervising the way these funds were handled. A federal judge has approved the deal.

The regulator sued Corzine in 2013 and he must now pay the civil penalty out of his own funds rather than have an insurer cover the costs. Also part of the deal, Corzine has agreed to a permanent bar from heading up a futures broker or registering with the CFTC. This means that he will no longer be allowed to trade other people’s funds in the future industry unless the trades are below specific threshold limits.

Corzine’s settlement with the SEC comes after he’d resolved most of the private litigation against him related to MF Global. Investors and the industry were flummoxed when the almost $1B in customer couldn’t be accounted for. Fortunately a trustee has since recovered the missing funds for the investors, which are both individuals and hedge funds, to whom the money belonged. The money, which were segregated customer funds, was inappropriately used to fund the futures commission merchant’s proprietary operations and that of its affiliates, pay FCM customers for withdrawals involving customer funds, and pay brokerage firm securities customers.