Investor Lawyers Blog

UBS Ordered to Pay Older Couple $700K Over Puerto Rico Bond Sales While Institutional Investors Continue Lawsuits in Puerto Rico Over Investment Losses

Published on: November 29, 2016 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority (“FINRA”) panel is ordering UBS Financial Services, Inc. (“UBS”) to pay Puerto Rico residents over $700,000 in damages. The FINRA panel ordered UBS to pay $549,000 in compensatory damages to a defunct car rental business belonging to Luis Vega, as well as over $165,000 to Teresa Rosas, who is Vega’s former wife. The firm must also pay over $100,000 in costs and hearing session fees.

Vega and Rosas filed their case against UBS accusing the brokerage firm of securities fraud, negligence, recklessness, and deceit. Vega, 87, invested almost $8 million through his Condado Motors with UBS broker Jose Chaves between ’06 and ’11. During that time, Chaves invested approximately 95% of the money in three of UBS’s Puerto Rico close-end funds, even taking out loans to cover some of the costs. The couple’s lawyer claims that Chavez did not disclose any risks involved other than what was noted in the funds’ prospectus. Additionally, Rosas bought over 17,000 shares of the UBS Puerto Rico Fixed Income Fund III.

The couple saw their investments lose the bulk of their value when the prices for the Puerto Rico bonds and Puerto Rico closed-end funds dropped in 2013. According to their lawyer, Condado Motors lost $3.9 million in value, as well as $823,650 in net out-of-pocket losses, during 2013. The couple said that their financial problems played a part in their decision to get a divorce.

Houston-Based Valic Financial Advisers Settles Variable Annuities Case Involving Alleged Conflicts for $1.75M

Published on: November 28, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is ordering VALIC Financial Advisors Inc. to pay a $1.75M fine for purported conflicts of interest that impacted the way that the firm compensated brokers for selling annuities.

According to the self-regulatory organization, from 10/2011 through 10/2014, the Houston-based financial firm established a conflict of interest when it said registered representatives would receive financial incentives for recommending that clients transfer their money from VALIC variable annuities into a Valic fixed index annuity or onto its fee-based platform.

FINRA said that the firm created even more conflict when it told representatives they would not get compensation from moving customer money to a non-Valic product from a Valic variable annuity.

FINRA said that because of these conflicts, a significant amount of assets were moved to the firm’s advisory platform and sales of VALIC ’s proprietary fixed index annuity increased by over 610% after it was included in the firm’s compensation policy.

Securities News: Goldman Sachs to Settle Reno’s Auction Rate Securities for $750K, SEC Demands Remaining $5.4MFine Owed By Maine Developer, & a Federal Judge Rules in Jay Peak Resort EB-5 Case

Published on: November 27, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Goldman Sachs and Reno, NV Settle Securities Fraud Case
According to the Reno Gazette-Journal, the city of Reno is about to settle its securities fraud lawsuit against Goldman Sachs (GS) for $750K. Nevada’s capital city claims that the firm misled it into taking on risky debt that nearly caused Reno to become insolvent. The Reno City Council will vote on approving the settlement next week. Other details of the settlement remain undisclosed at this time.

The auction-rate securities lawsuit involved over $210M in bonds issued by Reno in ’05 and ’06 to refinance the debt for an events center and another facility. The city claims that Goldman Sachs never disclosed that the ARS market was very risky or that the firm was bidding interest rates down to hold up the market.

When the financial collapse happened in 2008 and banks ceased to bid on auction rates, rates went soaring. This left Reno with a 15% debt interest rate and millions of dollars in penalties that it now owed Goldman. For example, in 2012 Reno paid the firm $2.6M. It paid the Goldman Sachs $7M the following year.

Securities Cases: Minnesota Adviser Goes to Prison Over Ponzi Scam, Ex-Morgan Stanley Broker Accused of soliciting $2.7 M from Elderly Investors After He is Barred from the Securities Industry, and 808 Renewable Energy Faces Fraud Charges

Published on: November 25, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Minnesota-Based Investment Adviser Gets Six-Year Jail Term
According to the Minnesota Department of Commerce, Levi David Lindemann was ordered to serve a 74-month prison sentence—that’s six years—for bilking clients in a Ponzi scam. Lindemann owned Gershwin Financial, which did business using the name Alternative Wealth Solutions. He pleaded guilty to money laundering and federal mail fraud charges.

Minnesota Commerce Commissioner Mike Rothman said that Lindemann abused his position as a financial adviser when he defrauded clients, including older investors. He did this by promising to invest their funds in safe investments but instead used their money to make Ponzi-type payments to clients and pay for his own expenses.

Lindemann’s guilty plea states that he solicited money from about 50 investors. He attempted to hide the securities fraud by generating fake secured notes as supposed evidence of the clients’ investments. The SEC permanently barred him from the securities industry earlier this year.

SEC Accuses Barred Broker of Selling Securities to Older Investors
According to the SEC, ex-Morgan Stanley (MS) broker Rafael Calleja solicited $2.7M from 10 retiree and elderly investors after he had already been barred from the securities industry. The regulator claims that Calleja told investors their principal was insured and they would get a fixed return rate in a year. Meantime, he allegedly used at least $12K of their funds to pay for cruises, golf outings, and other personal expenses. He also purportedly failed to tell investors that his broker license had been revoked.

Mortgage-Backed Securities News: Former Standard & Poor Executive On Trial in SEC Case Over Mortgage Bond Ratings & Royal Bank of Scotland and Nomura Try to Overturn $839M MBS Fraud Ruling

Published on: November 25, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Barbara Duka, the ex-head of Standard & Poor’s commercial mortgage-backed securities, is on trial before a Securities and Exchange Commission administrative law judge. Duka is accused of inflating the ratings of commercial mortgage-backed securities and not telling investors that she and her team had changed the way they formulated ratings for the securities in 2011.

The SEC contends that Duka implemented the change after the credit rating agency lost market shares for rating commercial-backed securities using “more conservative criteria” in the wake of the 2008 economic collapse. The regulator believes that Duka began to rate the securities in a way that favored the issuers so S & P could bring in more business.

Meantime, investors continued to believe that the ratings were conservatively-based. Now, the Commission wants to bar Duka from associating with ratings organizations. It also wants her to pay financial penalties.

The SEC brought its case against Duka last year around the time that the Commission and two state attorneys general announced that they had reached a $77M settlement with S &P. The regulator’s case was brought after Citigroup Inc.(C) and Goldman Sachs Group(GS) had to withdraw a $1.5B commercial mortgage-backed securities offering because S & P told them about an internal review of the securities ratings. Duka, meantime, sued the SEC, questioning whether it had the right to pursue cases in-house before its own judge instead of in court. Although a district court judge ruled that the SEC could not move forward with its case against Duka, a federal appeals court decided otherwise.

Ally Financial Will Pay $52M To Settle RMBS Fraud Allegations Involving Subsidiary ResCap

Published on: November 23, 2016 | by Shepherd Smith Edwards & Kantas, LLP

According to the U.S. Department of Justice, Ally Financial (ALLY) will pay $52M to resolve allegations accusing its subsidiary Residential Capital (ResCap) of purposely marketing mortgage bonds even though it knew that the mortgages backing the bonds were toxic. At issue are Residential Capital LLC mortgage-backed securities.

10 subprime residential mortgage-backed securities (RMBS) were issued in ’06 and ’07 with Ally Financial’s brokerage firm, Ally Securities, previously known as Residential Funding Securities, in the role of lead underwriter. The government contends that even though Ally Securities purportedly noticed that mortgage loan pools in RASC-EMX securities were deteriorating because of deficiencies in both the underwriting guidelines for the subprime mortgage loans and the diligence employed to the collateral before securitization, the firm took great pains to set up the RASC-EMX brand, secure investors for the RMBS offerings, and direct third-part due diligence to test if the loans were in compliance with disclosures made in public offering documents to investors.

The U.S. Attorney’s Office claims that the firm continued to market the securities to investors even though it knew that the toxic subprime mortgages were likely to become delinquent. The government is alleging that Ally Financial made misstatements about the RMBSs.

Securities Fraud Cases: VFG Securities Settles With FINRA Over Nontraded REIT Sales, Massachusetts Seeks To Ban Trader and His Software Company, and Utah Man Who Bilked Over 5,700 in $25M Fraud Gets Prison Sentence

Published on: November 22, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Broker-Dealer Owner and His Firm Settle SEC Case Alleging Overconcentration of Investor Money In Illiquid Investments

Jason Vanclef and his brokerage firm VFG Securities Inc. have settled the Financial Industry Regulatory Authority’s case accusing them of not adequately supervising their brokers so that clients’ portfolios did not end up concentrated in illiquid investments. Vanclef and VFG Securities, however, are not denying or admitting to the claims made in the complaint.

According to FINRA, from 11/2010 to 6/2012, nearly 95% of the broker-dealer’s revenue came from direct participation programs (DPP) and nontraded real estate investment trusts (nontraded REIT) sales. The illiquid investments were sold retail customers.

FINRA claimed that Vanclef had used “The Wealth Code,” which was the book that he authored, as a sales tool to promote investing in DPPs and nontraded REITs and to attract potential investors. The settlement with the regulator notes that in the book Vanclef repeatedly touted both types of illiquid investments as offering capital preservation and better returns—claims that FINRA said are “inaccurate and misleading” and conflict with information that the firm offered in prospectuses for the nontraded REITs and DPPs.

Tutor Perini’s $50M Auction-Rate Securities Lawsuit Against Bank of America is Revived

Published on: November 22, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The 1st U.S. Circuit Court of Appeals in Boston has resuscitated Tutor Perini Corp.’s (TPC) securities fraud lawsuit against Bank of America (BAC). Circuit Judge Ojetta Rogeriee Thompson said that a district court judge made a mistake when tossing the Massachusetts and federal securities claims accusing the bank of selling the construction company millions of dollars in auction-rate securities that it knew were about to fail.

Tutor Perini, which is estimating over $50M plus interest in losses, claims that Bank of America persuaded it to purchase auction-rate securities (ARS) prior to the financial crisis, toward the end of 2007 and the beginning of 2008, even though it knew that the securities were on the brink of becoming illiquid. It was in February 2008 that the dealer stopped supporting the $330B ARS market, leaving investors with debt that was illiquid—debt that they had been reassured time and again was liquid, like cash. Instead, investors were unable to access their funds.

In 2015, the district court judge dismissed Tutor Perini’s ARS fraud case, noting that Bank of America did not have the “duty” to reveal every fact about the risks involved to the construction company and that the bank had, in fact, already made a number of disclosures. Judge Thompson, however, said that because the auction-rate securities market was failing, this might have meant that Bank of America now had the duty to warn about the new risks, including those involving its earlier recommendations. Thompson noted that a jury could very well find that as the bank had sought to protect itself from the ARS market, it pushed the construction company toward greater exposure.

Edward Jones is Sued Over 401(K) Excessive Fees—Again

Published on: November 21, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Another group of plaintiffs is suing Edward Jones, accusing the firm of charging excessive fees and self-dealing in its 401(K) Plan. In the complaint, the brokerage firm and a number of its employees, including managing partner James Weddle and financial adviser Brett Bayston, are accused of breach of fiduciary duty related to their decision to choose costlier mutual funds when there were less expensive, equivalent funds available. Edwards Jones and its employees are also accused of choosing an “unreasonable” amount of risky investment choices and engaging in self-dealing.

The purported self-dealing allegedly occurred through its distribution deals with a number of fund companies, including Franklin Templeton Investments, American Funds, BlackRock (BLK), and Goldman Sachs (GS). The plaintiffs claim that the fund companies paid Edward Jones revenue-sharing fees for access to its “captive market,” which included 401(K) participants, and “shelf space” in its brokerage business that targeted retail investors. As part of the distribution relationship, Edward Jones offered the fund companies’ investment options in its Edward D. Jones & Co. Profit Sharing and 401(K) Plan.

The plaintiffs believe that these distribution relationships affected the decisions made by the fiduciaries and ended up costing participants millions of dollars in excessive fees. An Edward Jones spokesperson says that the allegations are false and that the broker-dealer would mount a “vigorous defense.”

Edward Jones is Sued Over 401(K) Excessive Fees—Again

Published on: November 21, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Another group of plaintiffs is suing Edward Jones, accusing the firm of charging excessive fees and self-dealing in its 401(K) Plan. In the complaint, the brokerage firm and a number of its employees, including managing partner James Weddle and financial adviser Brett Bayston, are accused of breach of fiduciary duty related to their decision to choose costlier mutual funds when there were less expensive, equivalent funds available. Edwards Jones and its employees are also accused of choosing an “unreasonable” amount of risky investment choices and engaging in self-dealing.

The purported self-dealing allegedly occurred through its distribution deals with a number of fund companies, including Franklin Templeton Investments, American Funds, BlackRock (BLK), and Goldman Sachs (GS). The plaintiffs claim that the fund companies paid Edward Jones revenue-sharing fees for access to its “captive market,” which included 401(K) participants, and “shelf space” in its brokerage business that targeted retail investors. As part of the distribution relationship, Edward Jones offered the fund companies’ investment options in its Edward D. Jones & Co. Profit Sharing and 401(K) Plan.

The plaintiffs believe that these distribution relationships affected the decisions made by the fiduciaries and ended up costing participants millions of dollars in excessive fees. An Edward Jones spokesperson says that the allegations are false and that the broker-dealer would mount a “vigorous defense.”