Investor Lawyers Blog

UK Regulator Fines Ex-JPMorgan Executive $1.1 Over London Whale Debacle

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

The UK’s Financial Conduct Authority is fining former JPMorgan Chase (JPM) executive Achilles Macris approximately $1.1M for failing to cooperate and communicate properly with regulators during the agency probe into the London Whale fiasco. Although Macris is now agreeing to settle the securities charges, he continues to defend himself. He insists that he stayed “above and beyond any reasonable” transparency standards and that he is only agreeing to resolve this case because the F.C.A. had accepted his contention that he did not mislead anyone on purpose. The FCA would not comment on Macris’ statements about the settlement.

The former JPMorgan executive was in charge of the firm’s chief investment office in London, which was supposed to invest funds for the bank and help offset possible losses. Unfortunately, a bad bet made by the unit on credit derivatives cost the bank $6.2B.

Texas Hedge Fund Manager Accuses United Development Funding IV of Ponzi Scam

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

J. Kyle Bass, the hedge fund manager who runs the Dallas-based Hayman Capital, has set up a website accusing Texas-based REIT United Development Funding IV of running a Ponzi-like real estate scam. On the site, Bass published a letter to readers, claiming that his firm had conducted research and found that the nontraded real estate investment trust displayed characteristics in line with a billion-dollar Ponzi scheme.

Bass contends that UDF used money from a public affiliate to rescue its first fund. According to Business Insider, Bass also claims that UDF management has been distorting its poor track record and the financial state of its affiliates going as far back as the financial crisis. He alleges that UDF has been taking advantage of retail investors and using UDF- controlled entities and real estate backed loans to conceal the fact that new investors money is b used to pay existing investors.
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FINRA Cases: Firms To Pay $1.2M Over UIT Sales, Broker Charged for Lying to a Native American Tribe, and Morgan Stanley Ordered to Pay Clients $825K

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

Brokerage Firms to Pay $1.2M for Not Applying UIT Discounts
The Financial Industry Regulatory Authority has charged Next Financial Group Inc., Stephens Inc., and Key Investment Services with failing to grant sales charge discounts when certain customers that were buying unit investment trusts were eligible for the reduced rates. The three broker-dealers are also face charges for inadequate supervision. The self-regulatory organization is ordering the three firms to pay $1.2M in restitution and fines. The FINRA settlements stated that Stephens did not give the discounts from 1/10 to 5/15 and the other two firms did not give them from 5/09 to 4/14.

Unit Investment Trusts
A UIT is a fund that combines a fixed portfolio of income-producing securities that are bought and held to maturity and an actively managed fund. These funds usually issue securities, also known as units that are redeemable-meaning that the UIT will repurchase the units from an investor at the approximate net asset value.

FINRA has been looking into whether firms are giving clients that are entitled to purchase discounts the reduced rates. Last year, the SRO ordered a number of firms to pay $6.7M in restitutions and fines for not giving discounts to clients when selling them UITs.

Broker Accused of Fraud, Targeting Native American Tribe
Broker Gopi Krishna Vungarala is facing FINRA charges for lying to a Native American Tribe about the $11M in commissions they paid him when he sold the tribe $190M of business development companies (BDCs) and nontraded REITS. The SRO said that from 6/11 to 1/15 Vungarala, who was the tribe’s treasury investment manager and registered representative, lied to the tribe about investments he recommended to them.
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SEC News: Brokerage Firm Fined $1M to Resolve Anti-Money Laundering Violations, Ocwen Financial to Pay $2M Over Misstated Financial Results, and Software Company is Accused of FCPA Violations

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

E.S. Financial Accused of Anti-Money Laundering Violations
The Securities and Exchange Commission is charging E.S. Financial Services, now called Brickell Global Markets, with violating anti-money laundering rules. To resolve the charges, the Miami-based firm will pay a $1M penalty.

According to the regulator, on two occasions E.S. Financial did not provide the needed books and records to identify foreign costumers that they were soliciting and providing with investment advice. U.S. law mandates that financial institutions keep a customer identification program (CIP) that is adequate enough to make sure that the institutions know who their customers are so that don’t inadvertently get involved in terrorist financing or money laundering.

An SEC probe found that the firm’s CIP did not procure and keep up documentation to confirm the identities of certain foreign customers who used a brokerage account set up by a Central Bank affiliate. E.S. Financial has consented to hire an independent monitor to assess its CIP policies and anti-money laundering procedures, policies, and practices.

Ocwen Settles SEC Charges for $2M
Ocwen Financial Corp. will settle civil charges accusing the firm of misstating financial results via the use of an undisclosed, flawed methodology to value complex mortgage assets. The SEC found that Ocwen inaccurately disclosed to investors that assets were valued independently at fair value under GAAP when the firm had actually used valuation conducted by a related party that bought the rights to service certain mortgages that were still a financial liability in the company’s accounting.

The SEC that Ocwen’s audit committee did not examine the methodology with an outside auditor or company management and the valuation that occurred strayed from fair value measures. Because of this, Ocwen misstated its net income for four quarters.

SEC Files Fraud Charges Against American Growth Funding II

Published on: February 5, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is pursuing a securities fraud case against American Growth Funding II, LLC. The regulator contends that the company, which raises money for business loans, lied to investors that bought high-yield securities. Also subject to charges is brokerage firm Portfolio Advisors Alliance, Ralph Johnson, Kerri Wasserman, and Howard Allen III.

In its complaint, the regulator said that AGF II sold about $8.6M AGF II units to at least 85 investors through Portfolio Advisers Alliance. The sales occurred in a private placement between 3/11 and 12/13.

However, investors were purportedly not told that AGF II’s principal asset had significantly dropped in value, which lessened the chances that investors would be repaid in full let alone make the12% interest yearly they were promised.

In private placement memoranda that were put out in ’11 and ’12, Johnson is accused of misrepresenting that the lending company’s financial statements had been audited and would continue to be audited periodically. The statements for ’11 and ’12 were not audited until 2014.

The SEC believes that Johnson, who played a central part in preparing the private placement memoranda, knew and acted in reckless disregard and was aware that misrepresentations were made to investors. He also is accused of causing investors to get an email in 2013 that contained false statements noting that an accounting firm was working on an audit, which was not, in fact, the case, and issuing monthly statements that concealed the company’s financial woes. Investors were not made aware that because most of AGF II’s loans were likely uncollectible, the firm wouldn’t be able to pay the account balances that were noted in the statements.
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Municipal Bond Violations: J.P. Turner to pay $140K to FINRA, SEC Fines Underwriters $4.58M Over False Statements

Published on: February 5, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is sanctioning J.P. Turner & Co. for violating a rule mandating that brokers must make sure that municipal securities transactions between a customer’s account and the firm’s account occur at a price that is “fair and reasonable.” The SRO contends that the firm’s supervisory system did not provide the kind of supervision that could achieve compliance with securities regulations involving fair pricing

As part of the settlement, J.P. Turner will pay a $140K fine and over $76K plus interest in customer restitution.

The brokerage firm will also pay a $75k fine related to the ongoing use of a third-party telemarketer, which continued after it made the decision to stop using the marketing firm. Because the telemarketer stopped getting a do-not-call list from the firm, it continued to call people on the registry.

J.P. Turner agreed to settle both cases without denying or admitting to the charges.

In other news, the Securities and Exchange Commission is charging and fining 14 muni bond underwriting firms for issuing inaccurate information to investors. Collectively, the firms will pay about $4.58M for federal securities law violations that purportedly occurred between ’11 and ’14. The alleged violations involved the sale of municipal debt that used offering documents with materially false statements or omissions about borrower compliance as they pertain to disclosure duties. The SEC said that the firms did not perform proper due diligence to identify issues before selling the bonds.Barclays Capital Inc. (BARC), which will pay $500K, Wells Fargo Bank (WFC) N.A. Municipal Products Group, which will pay $440K, Jefferies LLC (JEF), which will pay $500K, and TD Securities USA LLC, which will pay $500K.

Plummet in Oil Prices is a Worry to Investors

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

With oil prices plummeting, investors may have reason for concern. This week, ConocoPhilip cut its dividend by two-thirds because of the drop in oil prices to $30/barrel. Its dividend went from 74 cents/share to 25 cents/share
And Conoco isn’t the only company whose dividends are in trouble because of cheap oil. In January, Noble Energy slashed dividend payout by 44%. Last year, Eni (E) in Italy also made a substantial dividend cut, as did pipeline company Kinder Morgan with a 75% cut in December. Investors are worried that big oil companies, such as Chevron (CVX) and ExxonMobil (XOM), may be next.

Such speculation wasn’t helped by the abrupt liquidation of a $600M leveraged fund bet on falling prices. According to Reuters, unknown investors in the VelocityShares 3x Inverse Crude Oil Exchange Traded Note left the fund after jumping in just last month. Over 1.8M shares of $602M were redeemed, which, according to FactSet Research data, is the largest ETN outflow over the past year. Credit Suisse (CS), the ETN’s issuer, was forced to repurchase short positions in quick measure.
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RMBS Cases and Institutional Fraud: Morgan Stanley to Pay $62.9M, Hedge Funds File Lawsuit Against TWC Asset Management, and Deutsche Bank Must Contend With Allegations Claiming Investor Losses of $3.1B

Published on: February 3, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley Settles RMBS Case with FDIC
Morgan Stanley (MS) will pay $62.9M to resolve allegations that it misrepresented residential mortgage-backed securities prior to the 2008 financial crisis. The deal was reached with the Federal Deposit Insurance Corp., which sued the investment bank on behalf of Colonial Bank in Alabama, Security Savings Bank in Nevada, and United Western Bank in Colorado. All three banks failed after or during the crisis. By settling, Morgan Stanley is not denying or admitting liability.

According to the FDIC, in offering documents Morgan Stanley misrepresented claims for 14 RMBS mortgage backed securities. This is not the first time the investment bank has reached a deal over RMBS with the FDIC. In 2015, the firm resolved similar claims brought on behalf of Franklin Bank in Texas for $24M.

Also last year, Morgan Stanley arrived at a deal for $2.6B to resolve a U.S. Department of Justice probe into mortgage bonds. The government accused the investment bank of misrepresenting the quality of home loans packed into bonds.

Assett Management Firm Must Face RMBS Lawsuit Brought by Hedge Funds
A New York Court refused to grant TCW Asset Management Company’s motion to dismiss RMBS fraud claims brought Basis Yield Alpha Fund and Basis Pac-Rim Opportunity Fund. The Cayman Island hedge funds claim that TWC Asset Management marketed a system for dealing with the RMBS market that it claimed could determine which were the good investments. The purported strategy involved the collateralized debt obligation Dutch Hill Funding II, Ltd., which took a net long position on high-risk RMBS.

The two hedge funds invested over $28.1M in Dutch Hill in May 2007. By July, their investment had become worthless. They sued TCW Asset Management Company in 2012, accusing the firm of fraudulent misrepresentations and a failure to choose Dutch Hill’s RMBS collateral in the ways that it promised. The Basis Funds contended that the defendant knew that the investment strategy couldn’t get the job done.

Citigroup to Pay $23M to Resolve Yen Libor and Euroyen Tibor Rigging Claims

Published on: February 2, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup (C) Inc. has agreed to pay $23M in an institutional investor fraud lawsuit accusing the bank of conspiring to manipulated the Euroyen Tibor and yen Libor benchmark interest rates and Euroyen Tibor futures contracts. Plaintiff investors included hedge fund Hayman Capital Management LP and the California State Teachers’ Retirement System. They contend that Citigroup and other banks benefited their trading positions from ‘06 through at least ’10 when they conspired to manipulate rates. As part of the settlement Citigroup said it would cooperate with the plaintiffs, whose lawsuits are still pending against other banks.

Also settling but without having to anything is broker-dealer RP Martin. Defendants that have yet to settle include Barclays Plc (BARC), JPMorgan Chase & Co. (JPM), Deutsche Bank AG (DB), UBS AG (UBS), HSBCA Holdings Plc (HSBC), Sumitomo Mitsui Trust Holdings Inc., and Mitsubishi UFJ Financial Group Inc.

Texas Securities Commissioner Orders Firm To Stop Selling Pension Streams

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

John Morgan, the Texas securities commissioner, is ordering SoBell Corp. and its owner Andrew Gamber to stop selling its Pension Income Stream Program in the state of Texas. SoBell, which is based in Mississippi, executes agreements with pension benefits recipients to sell their income stream to investors for $35K to over $1K, while offering 7-8% in yearly returns.

Morgan says that the company and Gamber committed fraud by selling unregistered securities and making statements to investors that were “misleading and deceiving.” SoBell also is accused of executing agreements with pension benefit recipients that gave the company authority to sell pension-sourced income to investors.

As for Gamber, he allegedly did not disclose that he had been subject to sanctions in Pennsylvania, Arkansas, New Mexico, and California. The four states had issued cease and desist orders against Voyager Financial Group, LLC, Gamber, and people who sold the unregistered securities. They also are accused of misleading investors about the risks involved in certain investment products, including default rates involving pension income stream sales made by companies that Gamber controlled, and they purportedly did not disclose that making pension payment assignments is against federal law.

Disabled persons, veterans, military members, and federal government employees are among those that typically get involved in pension-sourced income. The Texas Securities Board says that often these investors are solicited while they are under “financial distress.”
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