Investor Lawyers Blog

FINRA Orders Merrill Lynch to Pay $7M, Including $780K in Restitution to Customers that Invested in Puerto Rico Securities

Published on: December 1, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority (“FINRA”) has fined Merrill Lynch, Pierce, Fenner & Smith Inc (“Merrill Lynch”) $6.25 million and imposed a restitution penalty of $780,000 over Merrill Lynch’s inadequate supervision of its customers that employed leverage in brokerage accounts, as well as its failure to supervise the way that these customers were able use the proceeds from their loan managed accounts (“LMAs”). LMAs are credit lines that let customers use the securities in their brokerage accounts as collateral in order to borrow funds from a bank affiliate. However, these LMAs are not supposed to be used to purchase additional securities.

The $780,000 will go to customers that invested in Puerto Rico municipal bonds and Puerto Rico closed-end bond funds. By settling Merrill Lynch is not admitting or denying FINRA’s findings.

According to FINRA, Merrill Lynch did not have these adequate procedures and supervisory systems at issue in place from 1/2010 through 11/2014. FINRA found that even though Merrill Lynch’s policy and non-purpose LMA agreements barred customers from using LMA proceeds to buy different kinds of securities, there were thousands of times during the relevant period that, within two weeks of getting LMA proceeds, Merrill Lynch brokerage accounts collectively purchased hundreds of millions of dollars of securities. Merrill Lynch also set up over 121,000 LMAs, with Bank of America (“BAC”) extending over $85 Billion in aggregate credit. FINRA said that all of this was able to happen because the firm’s supervisory procedures and systems were inadequate.

SEC Charges Onix Capital and Its Owner With $5.7M Promissory Note Fraud

Published on: November 30, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission has filed promissory note fraud charges against Onix Capital and it owner Albert Chang-Rajii. The Miami-based asset management company and Chang are accused of bilking investors who put their money into promissory notes and start-ups, as well as of falsely portraying the Chilean national as an award-winning multi-millionaire “angel” investor who had graduated from Stanford University’a business school.

According to the regulator’s complaint, Chang and Onix Capital sold over $5.7M in promissory notes that they falsely claimed he had guaranteed and told investors that the notes themselves “guaranteed” yearly returns of 12-19%. They also raised over $1.7M that Chang was supposed to invest in companies like Square, Snapchat and Uber.

The SEC said that, in truth, Onix Capital’s investment revenue was “non-existent” and Chang did not have the professional or educational background that he touted. The Commission alleges that rather than use the funds as promised, the money went to Chang and to pay other investors.

PIMCO Agrees to Pay Almost $20M to Settle SEC Charges That It Misled Exchange-Traded Fund Investors

Published on: November 30, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Pacific Investment Management Company (PIMCO) has agreed to settle the U.S. Securities and Exchange Commission’s charges accusing the firm of misleading investors about the performance of one of its exchange-traded funds and not placing an accurate value on certain fund securities. As part of the settlement, PIMCO will pay almost $20M and hire an independent compliance consultant.

The regulator contends that investors were drawn to the Pimco Total Return Active ETF after, within months of its launch in 2012, it did well enough to outperform the investment management firm’s flagship mutual fund. The fund was previously managed by Bill Gross, PIMCO’s co-founder, and it was intended to mirror PIMCO’s flagship Total Return Fund.

Although Pimco Total Return Active ETF’s initial success is linked to the smaller-sized bonds that were purchased to help boost early performance, in its yearly and monthly reports PIMCO purportedly gave investors other reasons for these early results that were “misleading.” Meantime, the SEC said, PIMCO did not disclose that the initial performance success was a result of an “odd lot strategy”—referring to the purchase of the smaller bonds, which were non-agency mortgage-backed securities—and that this approach that would not be sustainable as the fund continued to grow.

SAC Capital Advisers Concludes Final Insider Trading Case By Agreeing to Pay $135M to Elan Corp. Investors

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

Stephen A. Cohen and SAC Capital will pay a group of Elan Corp. investors $135M to settle their insider trading case against him and the firm. The plaintiffs had contended that sustained they financial losses because of insider trading that involved Elan shares. A judge still has to approve the settlement.

Ex-SAC Capital money manager Mathew Martoma was convicted two years ago for making $285M for SAC Capital on trades involving Elan and Wyeth, both pharmaceutical companies. He used insider information about the clinical trials of an Alzheimer’s drug that companies were developing together. Martoma is appealing his conviction while serving a 9-year prison sentence.

Although Cohen was not charged with insider trading, his firm pleaded guilty and consented to pay $1.8B in criminal and civil penalties. SAC Capital also changed its name to Point72 Asset Management LP. Cohen, meantime, went from managing other people’s money to only being allowed to oversee his multibillion-dollar fortune.

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.