Investor Lawyers Blog

Investors Can Sue Bank of America’s Merrill Lynch For Illegal Short Selling in State Court, Rules U.S. Supreme Court

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

The U.S. Supreme Court has issued a unanimous ruling allowing investors to sue Bank of America Corp’s Merrill Lynch (BAC) and other brokerage firms in New Jersey state court even though the lawsuit cites federal laws. The plaintiffs, who are Spectrum Group International Inc. investors, claim that they sustained investment losses because the brokers engaged in illegal short-selling. They are invoking NJ’s RICO statute in their case. RICO is the Racketeer Influenced and Corrupt Organizations Act. It is a federal law that allows for victims of organized crime to seek civil damages. It also provides provisions for other extended penalties. Bank of America Merrill Lynch claims that this naked short selling case is meritless.

The plaintiffs are accusing Merrill Lynch and other broker-dealers of playing a part in causing Spectrum’s market capitalization to drop by $800M in 11 months. The investors said that the firms did this by helping naked short sellers who bet against the company, causing its share price to plunge.

Naked Short Sales
A short sale involves the use of borrowed shares to bet that a security’s price with drop. The short sale is naked if the trader doesn’t borrow the shares required to make the transaction happen. Under Regulation SHO, naked short sales cannot be used to manipulate a security. Still, lawsuits over illegal naked short selling haven’t done too well in federal court.

Emotions Make Older Investors More Vulnerable to Fraud, Says FINRA/Stanford/AARP Study

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

According to research, some financial fraudsters may try to manipulate investors by getting them to feel strong emotions so that they will hand over their money, and older investors are the ones who most vulnerable to this type of manipulation. Research was conducted and funded by the FINRA Investor Education Foundation, the AARP Fraud Watch Network, and Stanford University psychologists. They said that inducing certain emotions in older individuals may make them more likely to purchase items that were falsely advertised.

The team studied adults in the 65- 85 age group and adults in the 30-40 age group. They sought to find out whether inciting anger or excitement in either demographic made them more susceptible to fraud.

According to their findings, feeling excitement or anger enhanced an older investor’s desire to buy in investment item as opposed to when there was no emotional arousal. Furthermore, the emotional state felt by an older adult did not have to be positive or negative for him/her to become more vulnerable to fraud. As AARP Fraud Watch Network Dr. Shadel stated, whether a fraudster is trying to get an older investor excited about making a lot of money or angry about past or future financial losses, either approach, when used to get them to make a purchase, proved just as impactful. The elderly investor’s rational thinking becomes suspended in the process.

The research found that in younger adults, experiencing strong feelings of excitement or anger did not appear to be a factor in whether or not they would make a purchase. This suggests that heightened feelings do not increase the younger group’s susceptibility to fraud.

Former UBS Trader is Helping Prosecutors Pursue Forex Rigging Cases Against Individuals

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

Bloomberg reports that according to sources, Matt Gardiner, a former UBS Group AG (UBS) trader who was part of the instant-messaging group the federal government identified when obtaining guilty pleas from Barclays PLC (BARC), Royal Bank of Scotland (RBS), UBS, Citigroup (C), and JPMorgan Chase & Co.(JPM) over currency-rate manipulation, is working with prosecutors to pursue certain individuals over the rigging allegations. The Cartel chat room to which Gardiner belonged existed from at least 12/07 through 1/013.

According to prosecutors, traders who were part of the chat room communicated in code to share information about orders made by clients and to coordinate euro-dollar trades so that they could make more money. Having someone like Gardiner working with the government could help prosecutors understand what the traders were doing together. It’s unknown at this time whether his cooperation is part of a prosecution deal he may have reached.

His former firm, UBS, was granted immunity from antitrust charges because it was the first financial institution to report the market misconduct. Meantime, the banks whose traders were in the Cartel have turned over chat transcripts to the U.S. Department of Justice and foreign authorities. A lot of the chats occurred right before daily fixes, which is the short period of time when data providers are able to get a picture of trading in order to establish daily rates.

U.S. Government to Help Restructure Puerto Rico’s $70B Debt

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

U.S. lawmakers have come up with a bill that will help Puerto Rico restructure its debt. The territory has been asking for help from the federal government to deal with its debt crisis.

Unlike states and other municipalities in the U.S., territories are not allowed to file for bankruptcy protection under the U.S. Bankruptcy Code. The bipartisan legislation would offer the territory a legal remedy similar to filing for bankruptcy protection but without requiring the commitment of federal funds.

Puerto Rico has been in a huge economic crisis while struggling to repay its debt. Already, the island has defaulted on different bond classes, including the majority of a $422 million payment that was due this month. The Commonwealth also has another $2 billion debt payment due in July.

The purpose of the bill would be to lower the island’s debt burden, which absorbs over 30% of the Commonwealth’s revenues. The U.S. government is also trying to prevent the legal brouhaha that could arise in court between different creditors to which the island owes money. Per some of the terms of the bill, a control board would mandate that Puerto Rico’s government establish a fiscal plan, which would including providing sufficient funding for pensions. At the moment, according to Fox News, the territory has underfunded its public pension by over $40 billion. However, there are those who oppose the bill, including opposition groups cautioning that the legislation could establish a precedent for U.S. states that are in trouble. Already, Puerto Rico’s economic woes have compelled over 200,000 to flee the island.

M & T Bank Settle Fraud Case for $64M

Published on: May 18, 2016 | by Shepherd Smith Edwards & Kantas, LLP

M & T Bank (MTB) will pay the U.S. government $64M to resolve a lawsuit about housing loans. The case stems from a whistleblower case filed by an ex-M & T underwriter accusing the bank of underwriting fraud. Following its investigation, the Department of Justice said that M & T had awarded loans that failed to meet certain Federal Housing Administration (FHA) requirements.

As part of the deal reached, M & T Bank admitted that between 1/07 and 12/11, it certified mortgage loans that were insured by the FHA even though they did not satisfy the Department of Housing and Urban Development’s (HUD) underwriting requirements and failed to adhere to the federal government’s quality control requirements. M & T Bank also admitted that before 2010, it did not preview every Early Payment Default loan, which are loan that become 60 days past due during the first six months of repayment, nor did it review an adequate FHA loan sample between ’06 and ’11 even though this was an HUD requirement.

M & T also established a quality control process that let it generate preliminary major errors that were much lower than what that rate would have been if the preliminary major error rate were determined more appropriately. The bank did not abide by HUD’s self-reporting requirements even after identifying that a number of FHA insured loans had these “major errors.” It wasn’t until 2008 that it began to self-report loans with errors.

Securities Fraud Cases: Ex-Head of MICG Investment Management Firm Faces 13 New Charges, SEC Accuses Unregistered Brokers of Bilking Investors in $6M Scam, and $250M Pump-And-Dump Case Leads to Guilty Plea

Published on: May 18, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Government Charges Convicted Broker with More Fraud Charges
Jeffrey Martinovich is charged with 13 new counts of fraud. He is is ex-head of MICG Investment Management and was convicted of 17 fraud charges three years ago.

Martinovich is accused of improperly moving over $700K from a company hedge fund in 2010. According to prosecutors, he spent $170K of the funds for his legal defense fees and at least $59K on his personal expenses. He also purportedly took out over $147K more from the hedge fund account.

It was in 2011 that the Financial Industry Regulatory Authority expelled Martinovich and his firm for securities fraud, improperly using client money, and causing false statements to be sent to investors related to the MICG Venture Strategies LLC, a proprietary hedge fund. The self-regulatory organization said that Martinovich and MICG improperly assigned asset values that were excessive to two non-public securities.

FINRA said that the assets’ value were inflated so that incentive and management fee could be increased.

Offshore Broker Pleads Guilty in $250M Pump-and-Dump Scam
Gregg Mulholland has pleaded guilty to conspiracy for operating a pump-and-dump-scam that manipulated shares of over 40 companies in the U.S. One company, Cynk Technology, saw its share price increase by 24,000%.

Wells Fargo to Pay UBS $1M Over Broker Departure

Published on: May 17, 2016 | by Shepherd Smith Edwards & Kantas, LLP

A FINRA arbitration panel has ordered Wells Fargo Advisors LLC (WFC) to pay UBS Financial Services Inc. $1.1M to resolve a claim involving financial adviser David Kinnear who went to work for the Wells Fargo & Co. brokerage arm after leaving the UBS Group AG (UBS) unit. UBS claims that Kinnear stole thousands of client and business records, as well as proprietary information, after resigning from the firm.

The Wall Street Journal reports that according to a source, Kinnear downloaded the data and distributed it to clients. UBS contends that the compensation Kinnear received at Wells Fargo was related to his ability to successfully bring UBS clients with him. UBS also claims that Kinnear owes it promissory notes.

Wells Fargo denies UBS’s allegations. It submitted a counterclaim accusing the firm of unfair completion, including preventing clients from moving from UBS to Wells Forgo.

Under the Protocol for Broker Recruiting, brokers are only allowed to bring the names and contact information of clients that they serviced while having worked at a firm when moving to another brokerage firm.

Texas Fraud Cases: Houston Municipal Employees Pension System Sues BOFl, Dallas Police and Fire Pension System Accuses Financial Adviser of Fraud, and SEC Accuses Two Attorneys of $13M Escrow Scheme

Published on: May 17, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Houston Pension Fund Accuses Bank of Fraud
In the U.S. District Court Southern District of California, the Houston Municipal Employees Pension System has filed a securities fraud case against Bofl Holding (BOFI) Inc. The pension fund claims that the bank employed illegal lending practices and depended on off-balance-sheet entities to enhance profits.

According to the plaintiff, Bofl did not disclose its use of off-balance-sheet entities to buy lottery receivables, failed to put into place a healthy compliance system, and gave loans to foreign nationals even though they had suspect or criminal histories. The Houston pension fund also believes that Bofl did not fully disclose to investors that it had been subject to regulatory and government subpoenas or that there were pending federal probes against it.

Dallas Pension Fund Files Lawsuit Against CDK Realty Advisors
The Dallas Police and Fire Pension System is suing CDK Realty Advisors. The Texas pension fund claims that the advisory firm directed it toward risky deals while making excessively high fees and garnering other benefits. The plaintiff is seeking to recover millions of dollars.

CDK Realty Advisors once managed over $700M for the Dallas pension fund. Now, the latter is claiming multiple breaches of fiduciary duty. It is also claiming write-downs and losses of over $320M because of the risky investments. The Dallas Police and Fire Pension System says that CDK should have done a better job of protecting the fund’s members.

HSBC Settles Yen Libor Rigging Lawsuits With Investors

Published on: May 16, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Investors and HSBC Holdings PLC (HSBC) and HSBC Bank PLC have settled two proposed anti- trust class action lawsuits accusing the banks of fixing yen-denominated Libor rates. The first lawsuit, which was filed in 2012, contends that lead plaintiff Jeffrey Laydon lost thousands of dollars in 2006 while shorting derivatives involving the Euroyen Tokyo Interbank Offered Rate. Laydon said that the banks on the Tibor and London Interbank Offered Rate Panel, including Deutsche Bank (DB), JPMorgan (JPM), and Mizuho Bank, conspired together to rig the rates through the submission of estimates that they had agreed upon.

A district court judge dismissed the antitrust, vicarious liability, and unjust enrichment allegations but allowed for the claims accusing the banks of violating the Commodity Exchange Act through price manipulation. Last year, the judge dismissed ICAP PLC (IAP), Resona Bank Ltd., and Mizuho as defendants of the case after finding that they and the markets operator lacked sufficient contact with the Second Circuit or the U.S. Laydon was then allowed to add Tullet Prebon PLC (TLPR), Lloyds Banking Group PLC (LYG), ICAP Europe LTD., and Martin Brokers UK Ltd. as defendants. In an amendment to the complaint, Laydon said he was asserting antitrust, CEA, RICO, unjust enrichment, and vicarious liability claims against the added defendants.

The second lawsuit also names several banks as defendant. Sonterra Capital Master Fund ltd. is claiming that HSBC and others manipulated the Tibor, Yen Libor, and derivatives that are Euroyen-based.

Oppenheimer Shuts Down Its Commodity Strategy Total Return Fund

Published on: May 16, 2016 | by Shepherd Smith Edwards & Kantas, LLP

After nearly twenty years, Oppenheimer (OPY) is liquidating its Commodity Strategy Total Return Fund (QRAAX) in mid-July. The reason for the shut down is underperformance.

According to the company’s website, the Oppenheimer Commodity Strategy Total Return Fund lost 49% since it was created in 1997, and average yearly returns have consistently declined by the double digits. The Wall Street Journal reported that the commodity fund has lost money annually since hitting an 8.5% return in 2010. It’s also been up 7.19% since the beginning of 2016. However InvestmentNews reports, the fund’s performance has been poor over the last five years. The Oppenheimer fund’s assets under management is down to $269M from over $2B in 2011.

While Oppenheimer said that it continues to believe in the value of its investment strategy, the firm is now saying that investors would benefit more from a multi-asset portfolio. The Commodity Strategy Total Return Fund is most heavily involved in energy, with agriculture and precious industrial metals also big presences. The decline in their prices have played a factor in the fund’s decline.

Oppenheimer has also been in the spotlight of late because a lawmaker has asked the SEC to look into OppenheimerFunds and whether the firm has complied with securities laws when dealing with Puerto Rico bond investments. NY City Council Speaker Melissa Mark-Viverto believes that the firm helped to make the U.S. territory’s financial crisis worse. OppenheimerFunds is heavily invested in Puerto Rico. The Island owes more than $70B in debt.

Oppenheimer Shuts Down Its Commodity Strategy Total Return Fund, The Wall Street Journal, May 11, 2016

NY City Council Speaker Wants SEC to Investigate Oppenheimer Funds Over Puerto Rico Debt Crisis, Stockbroker Fraud Blog, May 9, 2016