Investor Lawyers Blog

State Street to Pay Over $64M to Settle US Probes Over Secret Fees Charged to Institutional Clients

Published on: January 20, 2017 | by Shepherd Smith Edwards & Kantas, LLP

State Street Corp. (STT) will pay $32.3M to the US Securities and Exchange Commission and $32.3 to the federal government to resolve probes accusing the firm of bilking six clients on billions of dollars of trades by charging them secret commissions. As part of the settlement, the Massachusetts-based bank agreed to a deferred prosecution deal and admitted to conspiring to include these secret commissions on the trades conducted. State Street reportedly made at least $20M in commissions without these clients knowing they were paying.

According to prosecutors, from ’10 to ’11, former State Street executive Ross McLellan and ex-senior managing director Edward Pennings conspired to charge the secret commissions involving equity and fixed income trades that were conducted for these clients.

These commissions were in addition to fees that clients had consented to pay even though there had been written instructions given to State Street traders noting that these six customers didn’t have to pay these fees. The clients had been working with a State Street unit that supports institutional customers in liquidating big investment portfolios or moving investments between asset managers.

Securities Fraud: Jury Convicts Former Visium Portfolio Manager, Boston-Ex-Hilliard Lyons Broker Accused of Unauthorized Trades is Barred by FINRA, and Utah Businessman is Charged with Bilking Investors In $100M Ponzi Scam

Published on: January 20, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Bond Fraud Case Leads to Conviction for Former Visium Asset Management

A jury has convicted Stefan Lumiere, a former Visium Asset Management LP portfolio manager, of wire fraud and securities fraud. Lumiere was accused of conspiring to artificially inflate the value of a fund that was invested in debt issued by healthcare companies. Prosecutors said that his actions caused the fund’s net asset value to become overstated by tens of millions of dollars, compelling investors to pay more than they should have for the securities. They argued that Lumiere got fraudulent price quotes from brokers who worked outside the firm in order to override prices that the credit fund’s administrator had calculated. They say that he mismarked securities for years.

Ex-Former Hilliard Lyons Broker Doesn’t Appear to Testify, Gets Barred by FINRA

BlackRock and HomeStreet Are Accused of Trying to Impede Potential Whistleblowers

Published on: January 19, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission has announced that BlackRock Inc. (BLK) will pay $340K to settle civil charges accusing the New York-based asset manager of improperly utilizing separation agreements to get employees leaving the firm to waive their ability to receive an award as a whistleblower. BlackRock consented to the order brought by the regulator but did not deny or admit to the findings that it was in violation of any rules.

The SEC claims that over 1,000 BlackRock employees who exited the firm signed separation agreement that included language declaring that they were waiving any right to incentives that could be gained from reporting misconduct. The employees were required to sign these agreements if they wanted to receive any separation payments that BlackRock would owe them after their departure.

This waiver provision was added to BlackRock’s separation agreement in 2011 after the Commission had already put in place its Whistleblower Program rules. The firm continued to use the waiver with the agreements until early last year.

Deutsche Bank and Credit Suisse Finalize Securities Mortgage Securities Fraud Settlements with the DOJ Are Now Final and JPMorgan Resolves for $55M Case Accusing Bank of Working With Racist Brokers

Published on: January 18, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The mortgage securities fraud deal arrived at between Deutsche Bank (DB) and the Department of Justice is now final. As part of the settlement, the German lender will pay a $3.1B civil penalty and $4.1B in relief to borrowers, homeowners, and others that were impacted because it purportedly misled investors about the mortgage securities it was selling before the housing market failed.

Although the agreement was announced last month, the details of the resolution have just been released to the public. This includes information that as far back as May 2006, a Deutsche Bank supervisor had cautioned one of the firm’s senior traders about one mortgage lender that had become too lax with its underwriting practices.

In a Statement of Facts that was part of the agreement, Deutsche Bank acknowledged that it was aware that it was not fully disclosing the risks involved with the loans that it was bundling and selling. Deutsche Bank CEO John Cryan issued a written statement apologizing “unreservedly” for the bank’s conduct. Cryan said that Deutsche Bank now has better standards in place.

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.