Investor Lawyers Blog

Ex-NBA and NFL Players Win $819K Arbitration Award in FINRA Arbitration Case Against Morgan Stanley Smith Barney

Published on: June 13, 2016 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority arbitration panel has awarded former NBA basketball player Keyon Dooling and ex-NFL athlete John St. Clair $819,000 in damages in their securities case against Morgan Stanley (MS). The two men accused the firm of negligent supervision of a former broker whom they blame for their investment losses.

The rogue broker, Aaron Parthemer, has since been barred from the securities industry. It was Parthemer who recommended that the former professional athletes put money into two businesses. Dooling invested $700K in apparel company Global Village Concerns and Miami Beach night spot Club Play. St. Clair invested $200,000 in Global Village Concerns. According to the ex-pro athletes’ securities fraud lawyers, the two investments proved worthless.

Now, the FINRA arbitration panel says that Morgan Stanley must pay Dooling and his spouse over $608K while St. Clair and his wife are to get over $200K. Meantime, Morgan Stanley disagrees with the panel’s ruling, contending that that it was Parthemer who failed to let the firm know that he was engaged in external investment activities. This was the alleged reason that FINRA barred him from the industry.

For instance, Parthemer is accused of lending $400K to three clients without getting his firm’s consent, giving former employers Wells Fargo (WFC) and Morgan Stanley, as well as FINRA, false information, presenting private securities transactions that went undisclosed and involved clients that invested over $3M, running a nightclub, operating a marketing firm, and winning a contract to promote a tequila brand.

SEC Bond Cases: Illinois Mayer Settles Municipal Bond Fraud Charges for $10K, Ethiopia’s Electric Utility Pays Over $6M to Resolve Bond Offering Violations, and Miami , Fla. Likely to Come Under Scrutiny in Civil Trial

Published on: June 12, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Mayor of Harvey, Illinois Barred From Future Involvement In Muni Bond Offerings
Eric J. Kellog, the mayor of Harvey, Illinois, will pay $10K to resolve the Securities and Exchange Commission’s case accusing him of municipal bond fraud. As part of the settlement, Kellog has agreed to never take part in a muni bond offering again.

According to the Commission, Mayor Kellogg was tied to a number of fraudulent bond offerings made by the city of Harvey. Investors thought their money would go toward building a Holiday Inn hotel when, instead, at least $1.7M in bond proceeds were diverted to cover the city’s payroll and pay for operational costs that had nothing to do with the hotel construction project.

Kellogg was in charge of Harvey’s operations. His signature was on key offering documents used by the city of Harvey to sell and offer the municipal bonds. The SEC said that the mayor was liable for fraud as a control person under the Securities Exchange Act.

By settling, Kellog is not denying or admitting to the SEC findings.

Ethiopia’s Electric Utility Pays Over $6M to Settle SEC Municipal Bond Case
In other bond fraud news, the SEC has reached a settlement with the Ethiopian Electric Power over charges that the foreign electric utility did not register the bonds that it sold and offered to U.S. residents who were of Ethiopian descent. EEP will pay almost $6.5M to resolve the case accusing it of violating U.S. securities laws.

U.S. House Passes Puerto Rico Debt Rescue Bill

Published on: June 10, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. House of Representatives passed PROMESA, a bill to help Puerto Rico deal with its recession and its over $70 billion debt, in a landslide vote of 297-to-127. The island has been in financial trouble for some time now, with many of its residents leaving because the situation has gotten so bad. Already, Puerto Rico has defaulted three times in the last year on the debt payments that it owes.

PROMESA would establish an Oversight Board that will regulate the U.S. territory’s finances. The Oversight Board would be able to sell Puerto Rican government assets, let the island reduce the minimum wage for certain workers on a temporary basis, and decide whether to restructure the island’s debt. PROMESA is not a “bailout” of Puerto Rico as no taxpayer money would be used to pay off Puerto Rico’s debt and no federal funds would be committed under the bill.

Congress’s passage of PROMESA comes as the island is encountering new financial problems, including that the Commonwealth owes $2 billion on July 1 of this year. If the U.S. Senate were to pass PROMESA before then, however, Puerto Rico may not have to pay the full amount in July. The bill gives the Commonwealth a grace period through at least February 2017.

Under that “grace period” provision, Puerto Rico would be able to pay just interest on its debts and creditors wouldn’t be allowed to go after the Commonwealth with lawsuits. The grace period would hopefully give the board time to devise a plan.

Even though a solution is clearly needed, there are those who oppose the measure, including some creditors, interest groups, and bondholders. Puerto Rico’s $7 billion debt is held by local residents, financial institutions, U.S. hedge funds, and mutual fund firms, which means that there are investors on the mainland who are also holding Puerto Rico debt.

Oppenheimer to Pay $2.9M for Unsuitable Non-Traditional Exchange-Traded Fund Sales

Published on: June 9, 2016 | by Shepherd Smith Edwards & Kantas, LLP

FINRA is fining Oppenheimer & Co. Inc. (OPY) $2.2M for the sale of non-traditional exchange-traded funds, including inverse, leveraged, and inverse-leveraged ETFs, to retail customers without proper supervision and for suggesting them to clients even though they were not appropriate investments for them. The self-regulatory organization is also making the firm pay over $716,000 to the customers who were impacted.

FINRA said that even though Oppenheimer put into place policies barring representatives from both selling non-traditional ETFs to retail customers and executing non-traditional ETF purchases that were unsolicited for said customers unless they met certain requirements—including liquid assets greater than $50OK—the firm did not do a reasonable job of making sure that these policies were properly enforced. (The firm had put them into effect after FINRA issued a notice advising brokerage firms of the risks involved in non-traditional ETFs.) Because of this, Oppenheimer continued to market non-traditional ETFs to retail customers and effect transactions that were unsolicited for those who failed to meet the requirements.

Tennessee Investment Advisory Firm Accused of Trying to Collect Extra Fees from Hedge Funds

Published on: June 8, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging Hope Advisors Inc. and owner Karen Bruton with scheming to get two hedge funds that they managed to pay them extra fees. The private hedge funds are HDB Investments LLC and Hope Investment LLC.

The purported misconduct was discovered by the regulator’s Atlanta office, which was examining the Nashville, Tennesse-based firm and Bruton. The regulator claims that Hope Advisors and Bruton sought to get around the funds’ fee structure, which lets the firm receive fees from the funds only if their profits for the month exceeds previous losses. The firm and Bruton are accused of orchestrating a number of trades that would let the funds make a bigger gain closer to the end of the month and guarantee a big loss early on at the start of the next month.

The SEC said that if it weren’t for the fraudulent trades, Hope Advisors would have earned almost no incentive fees for close to two years. Instead, claims the Commission, the firm managed to avoid realization of over $50M in losses while making millions of dollars in fees that they should have never been paid.

Morgan Stanley and E*Trade Securities Face Penalties for Inadequate Customer Information Protection

Published on: June 8, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission says that Morgan Stanley Smith Barney LLC (MS) will pay a $1M penalty to resolve charges involving its purported failure to protect customer data. Some of this information was hacked and violators attempted to sell the data online.

According to the regulator, the firm did not put into place written policies and procedures that were designed in a manner reasonable enough to protect customer information. Because of this, said the SEC, from ’11 to ’14, former Morgan Stanley employee Galen J. Marsh was able to access without permission information regarding approximately 730,000 accounts and move them to his own server. This made it possible for third parties to access and hack the information from there.

The Commission said that Morgan Stanley had two internal portals that made it possible for employees such as Marsh to access confidential customer account information and it was for these internal applications that the firm lacked the needed authorization modules that would have restricted which employees could see this information. This deficiency existed for over a decade.

It was just last week that the Financial Industry Regulatory Authority said that it was censuring and fining E*Trade Securities LLC for supervisory violations related to customer order information protection and for not performing sufficient review of the quality of customer order executions. As a firm that offers online services for securities investing and trading to retail customers, E*Trade is supposed to evaluate the competing markets that it routes customer orders to, including exchange and non-exchange market centers. Firms such as E*Trade are also supposed to conduct periodic and stringent reviews of the quality of customer order executions to see if there are any differences among the markets, which is why the firm set up a Best Execution Committee to do this job.

SEC Reaches $12.7M RMBS Fraud Settlement in Case Involving Ginnie Mae

Published on: June 7, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission said that First Mortgage Corporation (FMC) and six of its executives will pay $12.7M to resolve charges accusing them of running a RMBS fraud scam to bilk investors. The Government National Mortgage Association, also known as Ginnie Mae, guaranteed the residential mortgage-backed securities. The mortgage lending company is the one that issued the Ginnie Mae RMBS and the securities were backed by loans that FMC had originated.

According to the regulator, from 3/11 to 3/15, FMC’s top executives withdrew performing loans from Ginnie Mae residential mortgage-backed securities by making false claims that they were delinquent so that it could sell them into newly issued RMBS and make a profit. The mortgage company’s improper and deceptive use of a Ginnie Mae rule giving issuers the choice to rebuy loans that had been delinquent for at least three months caused the prospectuses of the original RMBS to become misleading and false.

The SEC also claims that FMC purposely held back on depositing the checks of borrowers who were late on their loans by making false claims to Ginnie Mae and investors that these loans had stayed delinquent when they were, in fact, current. In its complaint, the regulator said that FMC’s top management approved these actions.

T. Rowe Price to Pay Fund Shareholders, Clients About $194M Over Dell Buyout Voting Mistake

Published on: June 6, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Mutual fund company T-Rowe Price Group Inc. (TROW) will pay $194M to clients because of a proxy-voting mistake it made in 2013 during the management buyout of Dell Inc. The payments will be made to a number of institutional client accounts, two trusts, four U.S. mutual funds, and one fund located overseas.

Among the funds to benefit the most are the:

· T. Rowe Price Equity Income Fund (PRFDX)

· T. Rowe Price Science & Technology Fund (PRSCX), which is expected to be affected the most because it has a greater number of Dell shares as a percentage of all its assets.

· T. Rowe Price Institutional Large-Cap Value Fund (TILCX)

Shareholders will not get cash as part of this payout. Instead, they will see the results in the performance bump of the impacted portfolios.

Citibank Settles Libor, Euroyen Tibor, and YenLibor Rigging Allegations With $425M Fine

Published on: June 4, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Citibank (C) is the first U.S. bank to settle allegations of benchmark interest rate manipulation. To resolve the Commodities Futures Trading Commission claims that it manipulated the London Interbank Offered Rates (LIBOR), Citibank will pay $250M. It will pay $175M to resolve Euroyen Tibor and Yen Libor rigging claims. Also settling charges within this case are Citibank Japan Ltd (CJL) and Citigroup Global Markets Japan Inc. (CGMJ).

The CFTC claims that between ’07 and ‘12 Citigroup had specific traders input false information so their trading positions would benefit. It also claims that the bank’s affiliates issued false reports related to dollar Libor rates and ISDAFIX benchmark rates during the financial crisis so that its reputation would be protected.

Citigroup Global Markets Japan is charged with trying to rig Euroyen TIBOR and Yen LIBOR. Citibank Japan Ltd. is accused of engaging in false reporting related to the Euroyen TIBOR so that derivatives trading positions priced according to Euroyen TIBOR and Yen LIBOR would purportedly benefit.

Libor, along with the Tokyo Interbank Offered Rate (Tibor), is what banks use to establish the cost of borrowing from one another. Libor is also used to set the rates on mortgages, credit cards, derivatives, and other financial products.

SEC & Fraud Cases: Ponzi Scam Targeting Middle Class Investors is Stopped, NY-Based Forex Trader is Accused of Bilking Ex-Classmates, Family, and Friends, and NC Investment Adviser is Sued Over $11.5M Real Estate-Related Scheme

Published on: June 4, 2016 | by Shepherd Smith Edwards & Kantas, LLP

SEC Stops Ponzi Scam Involving Pre-IPO Stocks and Middle Class Investors
The U.S. Securities and Exchange Commission is charging Jaswant Gill and Javier Rios with fraud. The regulator claims that the two men and their investment firm, JSG Capital Investments, targeted middle-class investors through a Ponzi scam in which they touted purportedly huge returns through pro-IPO stock in renowned companies such as Airbnb, Alibaba, and Uber.

Gill and Rios are accused of pocketing at least $2.8M in investor money for their own lavish spending instead of investing the money in the pre-IPO shares. Funds of new investors were used to pay “returns” to earlier investors.

Gill allegedly touted fake credentials. He, Rios, and their firm are not registered with the Commission or with a state regulator.

The SEC said that in total the two investment advisers raised $10M through their company and related entities. They are said to have promised these retail investors access to investment opportunities that were typically only available to “one-percenters.” They also guaranteed yearly returns as high as 60%.

The U.S. Attorney’s Office for the Northern District of California has filed a parallel criminal case against Rios and Gill.

Trader Accused of Bilking Friends and Family of Millions of Dollars
The SEC is suing Haena Park for allegedly defrauding friends, her ex-Harvard classmates, family members, and other individuals of millions of dollars. Park is accused of using investor funds and making misrepresentations about her investment history, as well about the profits the investments were supposed to have made.

Since 2012, Park has raised at least $14M from over 30 investors, sustaining $16M in trading losses in the process.