Investor Lawyers Blog

Securities News: Ex-Fannie Mae CEO Settles Mortgage Fraud Case, WL Ross to Pay Back $11.8M to its Funds, SEC Chastises Bank of America For Not Explaining COO’s $15.5M Compensation, and Pension Returns Drop

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

Former Fannie Mae CEO Settles SEC Charges for $100K
Daniel Mudd has agreed to pay $100K to settle Securities and Exchange Commission charges accusing the ex-Fannie Mae CEO of misleading investors about the degree to which the mortgage company was exposed to subprime loans leading up to the 2008 economic crisis. The regulator had filed its civil case against Mudd and two other Fannie Mae executives in 2011. The latter two settled with the Commission last year.

Mudd maintains he did nothing wrong.

WL Ross Resolves Fee-Allocation Disclosure Charges
WL Ross & Co. will reimburse specific WL Ross funds about $11.8M to resolve SEC charges related to its fee allocation practices and disclosures. The firm will also pay a $2.3M civil penalty.

According to the SEC, WL Ross was given transaction fees by portfolio companies. This lowered the management fees that funds had to pay the firm. The regulator points to WL Ross’s limited partnership agreements that were unclear regarding fee offsets when multiple funds and other co-investors share ownership.

Elderly Investors Lose Money After Broker Recommends Energy and Gold Stocks

Published on: August 26, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has filed a securities case against Christopher Ariola, a former broker. According to the regulator, while he was at Bay Mutual Financial, Ariola recommended that three retirees invest a chunk of their retirement funds in energy and gold stocks. He is accused of helping a fourth investor with similar investments using a TD Ameritrade (AMTD) account under his control.

This caused the investors to lose $140K. All of them had previously worked for the same bus company. These were not sophisticated investors who could handle a lot of risk nor did they have unlimited financial resources to withstand huge losses. Ariola came to work with them after the employees decided to roll over their money from their 401(k) into a Bay Mutual Financial IRA.

FINRA alleges that Ariola recommended that these investors “invest heavily” in energy and gold, including high-yield dividend producing stocks that came with a lot of risk. One couple, both retired bus drivers, were about 80% exposed to these risky stocks because of Ariola’s recommendations. Another bus drives was 44% invested in the stocks.

FINRA said that not only did Ariola expose these investors to “significant” risks with his recommendations, but also the recommendations were unsuitable for them.

13 Investment Advisers Pay Penalties Over F-Squared Investment’s False Performance Claims

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

The U.S. Securities and Exchange Commission has imposed penalties against more than a dozen investment advisory firms because they purportedly spread false claims made by F-Squared Investments about its Alpha Sector strategy. The SEC said that the firms violated securities laws.

According to the regulator, which conducted an enforcement sweep, 13 firms accepted y F-Squared’s false claim that its exchange-traded funds’ investing strategy had outperformed the S & P index for a number of years. The firms touted these claims when recommending the investment to their clients. The SEC said that they did this without first obtaining adequate documentation to confirm that what F-Squared had told them was true.

It was in 2014 that F-Squared admitted to wrongdoing and consented to pay $35M to settle allegations accusing it of using false performance information about its key product to bilk investors. The SEC said that F-Squared falsely advertised its supposed successful multi-year performance record. Unfortunately, that supposed time period for this performance record would have taken place before key algorithm that had been touted for this success even existed.

In reality, backtesting had been used to come up with a “hypothetical performance” from the noted period of supposed success. Yet, F-Squared and ex-CEO Howard Present marketed AlphaSector as “not backtested.” Also, the hypothetical information included a performance calculation mistake that increased results by about 350%.

Penalties for the 13 firms vary in amount from $100K to $500K. These were determined according to the fees they respectively made from strategies related to AlphaSector.

MedCapital, Related Companies, and Executives Ordered to Pay $831M of Disgorgement Over Ponzi Scam

Published on: August 24, 2016 | by Shepherd Smith Edwards & Kantas, LLP

A U.S. District Court judge has ordered Medical Capital Holdings, related companies, and a number of executives to pay $831M of disgorgement. The disgorgement comes seven years after the U.S. Securities and Exchange Commission brought its securities fraud case against Medical Capital over its billion-dollar Ponzi scam.

The allegations eventually forced dozens of mid- and small-sized independent brokerage firms that sold Medical Capital private placements, among other deals that failed, to shut down in the wake of the slew of investor securities fraud cases that followed. Nearly 9,000 investors were owed about $1.08B from the Ponzi scam.

Medical Capital raised over $2B through its independent brokerage firm network from ’03 and ’09. The money was supposedly going toward the purchase of discounted medical receivables, payment of general operating expenses, and loans that were secured.

The private placement offerings promised 8.5-10.5% yearly returns. Meantime, Medical Capital made almost $325M in administrative fees.

Investors, alleging fraud, unsuitability, and misrepresentation, have since recovered $432M, including what was recovered and given out by a court appointed receiver, $101M from brokerage firms, and $180M from banks or bond indenture trustees. Investors who got money back were paid 40 cents on the dollar.

In June, ex-Medical Capital Holdings COO and president Joseph Lampariello was sentenced to 10 years and a month behind bar. He also was told to pay almost $40M to investors that were harmed. Lampariello is accused of misappropriating money from investors to pay other investors, as well as issuing administrative fees to himself.

Our private placement fraud lawyers represent investors in getting their investment losses back from negligent firms, brokers, investment advisers, and others in the industry. Your initial consulation with Shepherd Smith Edwards and Kantas, LTD LLP is a free, no obligation session. We work with investors throughout the US and with investors based abroad who have been defrauded by US-based financial firms.

Medical Capital Ponzi scheme case ends with $432 man recovered, Reuters, August 22, 2016

Securities Cases: Medical Capital Executive To Pay Almost $40M for Private Placement Fraud, Momentum Investment Partners Accused of Not Disclosing Fees, and First Mortgage Corp. Settles Mortgage Fraud Claims, Stockbroker Fraud Blog, June 22, 2016

Apollo Global Management Settles Supervisory and Disclosure Failure Charges for $52.7M

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

Apollo Global Management (APO) has agreed to settle for $52.7M allegations that the firm misled fund investors regarding fees and a loan agreement, as well as failed to supervise a senior partner. The settlement was reached with the U.S. Securities and Exchange Commission, which found during its probe that Apollo advisers did not adequately disclose benefits they obtained. This ended up harming fund investors.

Four private equity fund advisors will be paying part of the settlement include:

· Apollo Management V, LP

Morgan Stanley and Edward Jones Are Sued in Separate 401(K) Lawsuits

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

An ex-participant in Morgan Stanley’s (MS) 401(k) plan is suing the financial firm. The plaintiff is alleging self-dealing and excessive retirement plan fees. Robert Patterson contends that the firm enriched itself at cost to employees. The case is Patterson v. Morgan Stanley et al. He is alleging breaching of fiduciary duty under ERISA. Patterson believes that plan participants sustained millions of dollars in losses in retirement funds from 1/11 through 4/14 because of the alleged breaches.

He is seeking class action status for case over the losses sustained and he wants the firm to pay $150M. The Morgan Stanley 401(k) Plan includes several Morgan Stanley mutual funds. According to the complaint these funds suffered “high relative fees” and/or “poor relative performance.” Although there were a number of non-proprietary investments included in the retirement plan, Patterson claims that they also performed poorly.

Meantime, Edwards Jones is also now a defendant in a 401(k) lawsuit. The plaintiff is a plan participant who claims that the firm caused employees to pay excessively high fees for record keeping and investment management services that purportedly resulted in the loss of millions of dollars in retirement savings. The proposed class-action lawsuit is McDonald v. Edward D. Jones & Co. L.P. et al.

Two Investors File Securities Arbitration Claim Against Santander Securities Over Puerto Rico Municipal Bonds

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

Two investors, seeking to recover the investment losses they sustained in Puerto Rico municipal bonds, are pursuing a FINRA arbitration claim against Santander Securities LLC. According to the case, the Puerto Rican investors are claiming breach of fiduciary duty, violation of common law fraud, negligent supervision, and the unsuitable investment of their money in the Puerto Rico Public Finance Corporation RFDG Commonwealth Appropriation Series A Bond. Santander Securities is a Banco Santander (SAN) subsidiary.

These investors are among the thousands seeking to recover the money they lost in Puerto Rico bonds and Puerto Rico closed-end bonds after brokerage firms, such as Santander Securities, Banco Popular, and UBS Puerto Rico (UBS-PR) recommended that they invest in these securities. Many investors were never equipped to handle the risks involved in Puerto Rico bonds yet their broker encouraged them to invest, ignoring suitability rules and often misrepresenting the investment.

Last October, Santander agreed to pay $6.4 million to settle allegations related to Puerto Rico bonds, including $4.3 million in restitution to clients in the U.S. territory, as well as a $2 million fine. FINRA, which announced the settlement, said the brokerage unit would repurchase the Puerto Rico bonds from a group of customers that were still holding them. The self-regulatory organization had pursued an enforcement action against Santander Securities because of the way the firm’s brokers sold and bought the bonds during a more than three-year period beginning in 2010.

For many investors, Puerto Rico bonds seemed like a good investment because of the tax benefits they offered, along with a yield that was higher than comparable bonds that were issued by U.S. cities and states. Unfortunately, when the price of the Puerto Rico municipal bonds dropped in 2013, many investors sustained huge losses.

CFTC and FINRA File Charges Against Deutsche Bank Over Swap Data and Information Transmitted Over Squawk Boxes

Published on: August 20, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Commodity Futures Trading Commission has filed a civil case against Deutsche Bank AG (DB). According to the regulator, for five days the firm, which is a provisionally registered Swap Dealer, did not report any swap data for a number of asset classes, turned in untimely and unfinished swap information, failed to supervise the staff responsible for the reporting of the swap data, and had an inadequate Business and Continuity and Disaster Recovery Plan.

The bank’s swap data reporting system had suffered a System Outage. The CFTC said that the swap data reported prior to and after the outage showed that there had been ongoing problems with specific data fields and their integrity. As a result, the market data issued to the public was affected. Some of it purportedly continues to be affected to this day. The CFTC said that a reason for the System Outage and the reporting problems is that Deutsche Bank lacked an adequate Business Continuity and Disaster Recovery Plan or another supervisory system that was equally satisfactory.

Earlier this month, the Financial Industry Regulatory Authority fined Deutsche Bank $12.5M for substantive supervisory failures involving trading-related information and research that the firm had issued to employees over internal speakers, also referred to as squawk boxes. The self-regulatory organization said that even though there were red flags related to this matter, Deutsche Bank neglected to set up supervision that was adequate over both the access that registered representatives had to the “squawk,” or “hoots,” which is the information issue through the squawk boxes, and the communication of this data to customers.

Tax Whistleblowers Are Entitled to Award When There Are Civil Forfeitures and Criminal Fines, Rules Court

Published on: August 19, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Tax Court has ruled that tax whistleblowers are entitled to a reward when criminal fines and penalties are collected. The ruling in this particular case found that two whistleblowers had a right to receive a $17.7M reward in the wake of the $54M in civil forfeitures and criminal fines that resulted.

The Internal Revenue Service had argued that the fines and forfeitures were not under the realm of the IRS Whistleblower Program. The IRS and the U.S. Treasury Department had been seeking to approve a rule that would not award whistleblowers if the violation they reported ends up being criminally prosecuted. The rule would allow tax whistleblowers to be reward only for resulting administrative or civil penalties.

The IRS had previously decided that “collected proceeds” in a tax whistleblower case was only limited to taxes paid under Title 26. This decreased the incentive for whistleblowers to come forward and inform on criminal tax activities and illegal offshore accounts. Now, however, the Tax Court has said that “collected proceeds” in a tax whistleblower case includes not only Title 26 taxes but also civil forfeitures and criminal penalties.

In other whistleblower news, the U.S. Securities and Exchange Commission has imposed a $340K penalty against Health Net Inc. for using severance agreements that obligated outgoing employees to waive their right to receive monetary rewards under the regulator’s whistleblower program. The SEC said that the requirement is illegal and violates federal securities laws.

Mortgage Company President Charged With Defrauding Ginnie Mae

Published on: August 19, 2016 | by Shepherd Smith Edwards & Kantas, LLP

U.S. prosecutors are charging Robert Pena with fraud. Pena, who is the founder and president of Mortgage Security— a mortgage company that is no longer in operation—was indicted on wire fraud and conspiracy charges.

Court documents state that Mortgage Security was contracted with the Government National Mortgage Association, also known as Ginnie Mae. Its job was to pool eligible residential mortgage loans and sell mortgage bonds that were backed by Ginnie Mae to investors. Mortgage Security also was supposed service the loans, including collecting payments plus interest from the borrower ( in addition to loan payoffs) and putting the money in accounts that Ginnie Mae held in trust. The funds were to eventually go to investors.

However, contends the indictment, starting in 2011, Pena allegedly started moving the funds that borrowers sent to Mortgage Security into secret accounts without Ginnie Mae’s knowledge. He purportedly used the money for business and personal expenses, eventually taking close to $3M. He allegedly tried to conceal his scam through false reports that he issued to Ginnie Mae regarding the loans. Ginnie Mae wound up having to pay investors because it had guaranteed their investments.