Investor Lawyers Blog

Elm Tree Investment Advisors Founder, COO Charged in $17M Ponzi Scam

Published on: April 14, 2016 | by Shepherd Smith Edwards & Kantas, LLP

In Manhattan, prosecutors are charging Fred Elm, the founder of Elm Tree Investment Advisors LLC, and Ahmed Naqvi, its COO, of running a $17M Ponzi scam that allegedly bilked over 50 investors. According to the government, the two men falsely claimed they had access to pre-initial public offerings and that their funds would be placed in privately held companies, such as Uber Technologies and Twitter Inc.

Manhattan U.S. Attorney Preet Bharara said that only $7.1M of the $17M was actually invested and investor funds were mixed together in one account. Elm is accused of spending millions of these dollars in expensive purchases, including high-end cars and a nearly $2 million home.

Investors were told that Elm and Naqvi would receive a 2 % management fee and 20% of any profit made. Unfortunately, there never was any profit. $5.2M of new investors’ funds was used to pay earlier investors, which is typical of a Ponzi scam. The two men are accused of making misrepresentations that were fictitious to hide their scheme from investors.

Elm and Naqvi are charged with wire fraud, securities fraud, and conspiracy.

Broker Michael Donnelly Gets Prison Time for Elder Financial Fraud

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

Michael Donnelly, formerly the president of Coastal Investment Advisors Inc. and its brokerage firm, has been sentenced to 99-months behind bars. Donnelly pleaded guilty to securities fraud and wire fraud that involved stealing money from older investors and unsophisticated investors.

From ’07 through the middle of ’14, Donnelly, a Florida broker, bilked clients and used the funds for his own expenses, including rent, private school tuition for his kids, golf club memberships, and car payments.

He gave investors bogus trade confirmations and account statements to keep the fraud going and claimed that their investments were doing well. In addition to his time in prison, Donnelly is permanently barred from the industry, has to pay $1.99M in restitution, and will serve three years of supervised release. Last year, the Securities and Exchange Commission filed civil charges against Donnelly.

In other senior fraud news, the Financial Industry Regulatory Authority announced that since launching its Securities Helpline for Seniors last year, customers have received back over $1.25m because of calls about possible elder fraud. Already, the hotline has answered 4,000 phone calls from people of all ages.

The FCA Bars Ex-Royal Bank of Scotland Trader Over Libor Rigging

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

U.K.’s Financial Conduct Authority is barring Paul White, an ex-Royal Bank of Scotland (RBS) trader, for misconduct involving the rigging of the London interbank offered rate. The FCA said that White behaved with recknlessness and was not in integrity when he would submit information about Libor related to the Swiss frank and the Japanese yen.

According to the British regulator, from 5/07 to 11/10, White improperly considered requests that came from derivatives traders at two banks when issuing Libor submissions. If any of the information he turned in wasn’t been accurate, this could have changed the rate for Libor in a manner benefitting White and others. In a news release, the FCA said that White had a duty to make sure his submissions were correct and not influenced by his own financial interests or the interests of others.

The regulator provided a transcript that included electronic messages between a broker at another bank and White. The messages indicated that they worked together to rig Libor.

White was the recipient of 68 communications from RBS derivatives traders for Libor submissions. In the exchanges, said the FCA, the traders sought to help their trading positions. There was also a Swiss franc trader that purportedly made such requests verbally for twenty months. White also received requests from a yen derivatives trader who did not work at the firm.

The FCA’s final notice states that White claims that although he took into account trading positions when issuing Libor submissions, his entries were always “correct” and within a range that was acceptable according Libor’s definition. White claimed that he engaged in seemingly improper communications only to “appease.” FCA, however, rejects White’s account of what happened. Yet despite imposing an industry bar against him, the regulator waived what could have been a $354,000 fine because White is undergoing financial difficulties.

Morgan Stanley Still Embroiled in $147M RMBS Lawsuit Brought by IKB Deutsche Industriebank

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

More than three years after IKB Deutsche Industriebank AG sued Morgan Stanley (MS) for over $147.1M in residential mortgage-backed securities, the brokerage firm is asking the New York appeals court to dismiss the case. Morgan Stanley claims that it was the German lender that did not conduct the necessary due diligence.

IKB claims the Morgan Stanley provided offering documents that left out or did not properly characterize different underwriting standards involving the loans that were underlying the securities. The bank claims there were misrepresentations and omissions regarding loan-to value ratios.

The lender says it received inaccurate information about the underlying loans related to how much homeowners had borrowed, the securities’ credit ratings, and the percentage of properties that were occupied by the owners. IKB cited purportedly incorrect statements made about trusts, loans, and mortgages. It accused Morgan Stanley of taking the loans from different originators and bundling them together to package the securities despite knowing there were issues that could make the RMBS problematic.

Goldman Sachs Will Pay $5.06B Over Mortgage-Backed Securities Practices

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

Goldman Sachs (GS) has settled a mortgage case brought by the U.S. Department of Justice accusing the firm of deceptive mortgage practices leading up to the 2008 financial crisis. As part of the deal, Goldman will pay $5.06B to resolve the charges. According to the DOJ, the bank also admitted that it issued representations that were “false and misleading” to prospective investors about the MBS that were up for sale. Details of the deal were announced in January after an agreement was reached in principal.

In a statement of facts, Goldman said that “significant percentages” of the mortgages it bundled with securities sold between ’05 and ’07 were not in line with the information provided to investors about the loans. The bank’s Mortgage Capital Committee approved every residential mortgage-backed security it assesses between December ’05 and ’07 even though they were aware that a lot of the home loans contained compliance and credit defects.

The settlement shows that Goldman was aware that a lot of the subprime loans it was packaging into securities could be defective, including an RMBS it created in ’06 using loans made by Countrywide Financial, which was the largest subprime loan provider. It was during this time that a Goldman manager issued an equity research report recommending that the stock be brought. Responding to the report, the bank’s due diligence head that had supervised the scrutiny of several Countrywide mortgage pools replied, “If only they knew.”

The government said that 70% of total loan pools were not examined for problems even though in one bond pool about 25% of loans that were examined were dropped because their quality was poor. For example, in 2006, Goldman notified investors via marketing materials that one underwriter in particular was dedicated to “quality over volume” when it came to the loans even though its own analysis determined that the underwriter, a Fremont General Corp unit, applied “off market” guidelines. In early 2007, the Fremont unit was shut down after the Federal Deposit Insurance Corp. said that the lender allowed people who couldn’t afford to pay back the mortgages to have them anyways.

Hedge Funds Sue Puerto Rico’s Government Development Bank Over Assets

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

Problems continue to plague Puerto Rico as its financial situation continues to deteriorate. Just recently, as things have worsened for the U.S. territory, a number of hedge funds have asked the United States District Court in San Juan, Puerto Rico to freeze the assets of the Commonwealth’s Government Development Bank (“GDB”). The hedge funds, who are large owners of Puerto Rican debt, are accusing the bank of insolvency and spending its remaining money to help support other sectors of the island’s beleaguered government.

The plaintiffs in the case include Claren Road Asset Management and Brigade Capital Management. The hedge funds reportedly hold about $3.75 billion of the bank’s debt.

In their lawsuit, the hedge funds said that the GDB has not provided the financial data that creditors have requested. They want the Court to prohibit additional cash transfers except for those that are necessary. The hedge funds do not want public entities, municipalities, and other depositors to be able to take their money out.

The plaintiffs expressed concern that should the GDB run out of funds, a lot of essential services may have to stop and creditors would sustain significant losses. The GDB has a debt payment due on May 1 of about $422 million. In response to the hedge funds’ case, GDB President Melba Acosta-Febo claimed that the accusations made in the complaint are “erroneous” and allegations that the GDB knowingly kept back financial information in order to preference deposits over bondholders are “wholly false.”

The hedge funds believe that GDB kept giving loans even while knowing these loans would likely not be repaid.

Credit Suisse Wants Appeals Court to Dismiss NY AG’s $11.2B Residential Mortgage-Backed Securities Fraud Lawsuit

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

A number of Credit Suisse Group (GS) units want a NY court to rule that the RMBS case brought by Attorney General Eric Schneiderman is time-barred in the wake of precedent from the state’s highest court. The AG, who brought the case under the Martin Act, is seeking more than $11.2B.

According to the complaint, in ’06 and ’07 Credit Suisse put together over 60 residential mortgage-backed securities with about 248,000 loans. 24% of the loans have since been liquidated and investors have lost $11.2B on initial balances of about $93.8B. The state claims that investor losses resulted because of the bank’ determination to raise the volume of mortgages it bought and the securities it generated. Credit Suisse employees purportedly paid a higher price for mortgages and didn’t address reports of problems identified by due diligence forms so as to preserve relationships with mortgage originators. The bank is accused of making false claims about due diligence when choosing which mortgages to bundle with the securities.

$12M Ponzi Scam May Be Connected to Possible NYPD Corruption, Reports Newsweek

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

According to a law enforcement source that spoke to Newsweek, there may be a connection with a $12 million Ponzi scam involving restaurateur Hamlet Peralta and an investigation that the FBI is conducting into allegations of corruption at the NYPD. Peralta, who is the purported mastermind of the alleged scheme, has been arrested.

According to a federal indictment, investors thought they were investing in Peralta’s wholesale liquor business. Instead, he used $700K of their funds on liquor and over $11 million to pay earlier investors, purchase spa treatments and cover his other expenses. Peralta purportedly lied when he told investors that he was the owner of the West 125th Street Liquors. (The business belongs to his sister.) One investor gave Peralta over $3.5M.

Peralta is charged with wire fraud. At least 12 investors were allegedly bilked. Peralta is said to have promised them regular interest rate returns that he claimed would come from profits made by his business. Instead, he misappropriated the money.

Now, Newsweek is saying that the liquor scam may be tied to the FBI’s NYPD probe. The FBI is reportedly looking into whether senior members of the police department received gifts in exchange for favors from two businessmen who invested with Peralta.

California Venture Capitalist to Disgorge $4.875M to Settle Institutional Investor Fraud Charges

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

The SEC and G. Steven Burrill have reached an agreement to settle charges accusing the biotech venture capitalist of taking money from a fund overseen by his firm to pay for his expensive lifestyle and help support his other businesses. Burrill is accused of hiding from investors that he siphoned money from Burrill Life Sciences Capital Fund III while claiming that the cash was going toward management fees. In truth, claims the regulator, Burrill used the money to pay for private jets, lavish vacations, gifts, and other items. The investors of the fund include public companies, state pension funds, and others.

Burrill and his Burrill Capital Management have consented to disgorge $4.785M that he is accused of stealing plus pay a $1M penalty. He also will be barred from the securities industry. Commenting on the case, SEC Enforcement Division Director Andrew J. Ceresney said that despite having registration exemption, Burrill and other venture capital advisers have a fiduciary obligation to clients. Ceresney accused Burrill of prioritizing his own interests over that of his clients.

Also settling SEC charges are Burrill Capital Management controller Helena C. Sen and chief legal officer Victor A. Hebert. Hebert is accused of agreeing to call in more money from fund investors even while knowing that the cash would be spent on unrelated expenses. Sen is accused of, along with Burrill, at least twice delaying payment distributions that fund investors were owed so that Burrill’s personal spending and the salaries of Sen and Hebert would continue to be paid. It was in 2013 that the fund’s Investment Committee noticed that all of the capital that had been committed was already spent.

Securities Fraud: Ex-SWS Financial Services Broker Faces Improper Trading Charges, Ex-Fox Commentator Settles Penny Stock Scam Case, and Former Investment Adviser Gets 7-Years in Prison

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

FINRA Accuses Ex-Broker of Unsuitable Trading Involving Mutual Funds
David Randall Lockey, a former broker, is facing Financial Industry Regulatory Authority charges for allegedly engaging in improper trading of customer accounts while associated with SWS Financial Services Inc. He is no longer with that firm, now called the Hilltop Securities Independent Network. According to the regulator, Lockey took part in “unsuitable short-term trading and switching” involving unit investment trusts and mutual funds in four accounts between ’12 and ’14.

Lockey purportedly made about $75,730 for himself and the firm while engaging in improper trading. Meantime, three of the four customers whose accounts he used sustained losses of $15,699. The fourth customer made a gain of almost $5,000.

FINRA said Lockey has not been registered with any broker-dealer since 2014.

Ex-TV Commentator Settles Penny Stock Fraud Charges with the SEC
The U.S. Securities and Exchange Commission is charging former FOX commentator Tobin Smith with fraud. According to the regulator, Smith, who is also a market analyst, and his NBT Group fraudulently promoted a penny stock to investors.

The SEC said that both Smith and his firm received payments to prepare and distribute e-mails, articles, blogs, and other communication promoting IceWEB Inc. stock. They purportedly failed to fully disclose they were receiving the compensation.

The investors were not made aware of that part of what Smith and NBT were paid was linked to a sustained rise in the data storage company’s share price. The Commission said that marketing materials the investors received included misleading and false statements put there to artificially up the share price and trading volume of IceWEB stock. For example, payment for promotional efforts was $300K and IceWEB stock. NBT could also make over $250K if marketing campaigns proved successful.