Investor Lawyers Blog

FINRA Files Securities Case Against Texas Firm Over Churning Allegations

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

The Financial Industry Regulatory Authority claims that Caldwell International Securities Corp. engaged in the churning of customer accounts and that this purportedly resulted in $1 million in excess commissions for the firm. The self-regulatory organization says that the alleged violations began in 2011.

According to FINRA, the Texas-based company’s founder Greg Caldwell and supervisors Lennie Freiman and Paul Jacobs decided to ignore that four OSJs (offices of supervisory jurisdiction), three in New York and one in New Jersey, were churning customer accounts and making yearly commission revenues of at least 100% of the customers’ equity.

The regulator said that brokers at the OSJs contacted foreign investors to persuade them to take part in speculative stock and option trading. Even after 15 customers lost $1.1M and paid over $1M in commissions and fees, Caldwell and its supervisors purportedly still did not take any action.

Cost-to-equity ratios in customer accounts are believed to have varied from 18% to over 100%. The firm is also accused of not reporting that it had been the subject over three dozen customer complaints.
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Closing Arguments in UK Libor Trial Against Ex-RP Martin, Tullet Prebon, and Icap Brokers

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

Wrapping up its case, the UK’s Serious Fraud Office accused former ICAP (IAP) brokers Danny Wilkinson, Darrell Read, and Colin Goodman, ex-Tullet Prebon employee Noel Cryan, and ex-RP Martin brokers Terry Farr and James Gilmour of behaving like a “well-oiled machine” as they allegedly helped former Citi (C) and UBS (UBS) trader Tom Hayes manipulate the London interbank offered rate (Libor). The office’s lawyer said that the six men are guilty of conspiracy to defraud.

In addition to purportedly assisting Hayes to Libor’s yen variant by deceiving clients about the market’s conditions, the men are also accused of trying to convince traders at other banks to submit false Libor rates. The prosecution has said that for the ex-brokers alleged wrongdoing, they received hundreds of thousands of pounds in kickbacks. The SFO said that the former traders agreed to to try to manipulate Libor in return for “wash trades,” which are transactions intended to make it look as if a sale and purchase have happened even though there has been no change in ownership.

All of the men have pleaded not guilty, with five of them maintaining that they were never involved in the Libor rigging scam at all. Ex-RP Martin trader Terry Farr is the only one who has admitted that he tried to help Hayes. However, his defense team argued that Farr was not aware that his actions were wrong because he only had a basic understanding of the finance industry and didn’t understand derivatives. Also, Cryan said that he lied when he told Hayes he was helping him manipulate Libor. He claims that he never actually engaged in the wrongdoing alleged. Hayes, who recently succeeded in getting his 14-year prison sentence reduced to 11 years following an appeal, made over $300M for his former employers by rigging Libor.

SEC Probes High-Yield Funds in the Wake of Third Avenue’s Junk Bond Fund Collapse, Says Reuters

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

Reuters is reporting that the Securities and Exchange Commission is examining the possible liquidity risks involved in high-yield bond funds. The probe comes following the collapse of the Third Avenue’s Focused Credit Fund (TFCVX) in early December. That has been touted as the largest mutual fund failure since the financial crisis of 2007.

The fund failed because of its inability to meet so many investor redemption request following heavy losses in the junk bond market. When the fund couldn’t find more buyers, it ended up having to suspend the redemptions and liquidate.

Now, regulators want to look into the ways in which mutual funds deal with liquidity risks and how such disruptions can impact not just shareholders but also the wider market. Reuters said that last month the SEC notified mutual funds and exchange-traded funds that it wants information about how securities that are less liquid are priced and whether certain parties have questioned these prices.

In particular, reports the news agency, the Commission has specifically asked for daily internal illiquidity calculations from 8/31/15 to 12/15/15, the names of large fund shareholders, disclosures related to liquidity, redemption activity, portfolio composition quality for each fund, and the daily outflow and inflow of information. Fund mangers were reportedly given only 24 hours to provide a little over half of the information requested and another week to hand over the rest of the documents.

Ambac Assurance and Assured Guaranty Sue Puerto Rico For Defaulting on Bond Payment

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

Municipal bond insurance companies Ambac Assurance Corp. (Ambac) and Assured Guaranty Corp. (Assured) are suing Puerto Rico in the wake of its failure to make $37 million in bond payments that were due on January 1. The U.S territory defaulted on paying certain bonds in order to have the funds to repay $355 million owed to holders of Puerto Rico general obligation debts. In the process, it diverted $163 million from revenue streams that should have gone to the island’s government agencies.

Ambac and Assured insure approximately $1.1 billion and almost $1.5 billion, respectively, of the debt still owed to government agencies. The insurance companies contend that the island’s decision to use tax money, which should have gone toward payments on the bonds that they insure, to pay the other bond obligations due is unconstitutional. Assured also said that this legally interferes with the insurer’s contractual rights and violates the U.S. Constitution’s Fifth and Fourth Amendments, as well as Article I, Section 10.

Because of the default, the two insurance companies are collectively compelled to pay $10.7 million on insurance policies. Their lawsuit seeks to stop Puerto Rico from completing the payment clawbacks.

According to the two insurers, clawback authority is only applicable when no other funds are available to pay debt. They say that the island has yet to prove this to be true.
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Massachusetts Charges Citizens Securities in Elder Fraud Case

Published on: January 11, 2016 | by Shepherd Smith Edwards & Kantas, LLP

William Galvin, the securities regulator of the state of Massachusetts, has filed charges against Citizens Securities for purportedly selling an older investor funds that were too high risk for her investment tolerance level. He wants restitution for the investor, who lost approximately $7,000.

Citizens Securities operates out of Citizen Bank locations. According to the state, even though she had a low risk tolerance level, the woman was sold alternative and emerging markets funds and funds that purchase high-yield bonds. She also purchased a market-linked CD, investing $100K, without comprehending that it was riskier than a regular CD.

Her financial consultant, whom she met at Citizens Bank, purportedly did not give adequate disclosures of the branch’s brokerage activities or tell her the name of his employer. This caused the investor to think that he worked for the bank.

The advisor is accused of disregarding the elderly investors stated goals and not asking about her investment experience or education. The administrative complaint says that she told the financial consultant that she didn’t want to be exposed to the stock market. It also said that financial consultants at Citizens Bank are not supervised daily or in-person.
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SEC Cautions Mutual Funds That They May be Misdirecting “Sub-Accounting Fees” And Impacting Investor Returns

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

The Securities and Exchange Commission’s Division of Investment Management has put out a guidance on its website cautioning mutual fund directors to more closely scrutinize the money that is paid to brokers and certain other intermediaries. The warning comes following a sweep exam, which found that fees that should be going toward record-keeping and other administrative services are instead being directed toward encouraging fund sales. A number of mutual funds, brokerage firms, investment advisers, and transfer agents were examined prior to the issuance of this guidance.

SEC rules stipulate that sub-accounting fees cannot go toward finance distribution. These fees should only go toward record-keeping and shareholder services. However, there is an issue with mutual fund-maintained omnibus accounts in which all the fees can be placed together. In such instances, payments made to brokers for selling certain funds may get buried in these administrative fees.

Now, the Commission wants fund directors to watch out for fees that intermediaries selling the funds are getting for account services. It wants these directors to establish processes to assess whether a sub-accounting fee is being harnessed to increase sales. It also is calling on fund service providers and advisers to explain distribution and servicing specifics to fund directors.
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Hedge Fund News: Fund Manager Steven Cohen Not Allowed Supervisory Role Until ’18, Father & Son Get Prison Term for Fraud, & Former New Stream Capital Executives Are Permanently Barred from the Securities Industry

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

The Securities and Exchange Commission says that billionaire Steven Cohen will not be allowed to supervise funds that oversee outside money or take on a supervisory position at any brokerage firm or investment adviser firm until 2018. The temporary bar is to resolve charges accusing him of not properly supervise Mathew Martoma. The ex-portfolio manager committed insider trading while at CR Intrinsic Investors. That firm is a subsidiary of S.A.C Capital Advisors LLC, which Cohen founded.

Cohen had been barred for life from the securities industry over said violations, although he was never charged in criminal court. However, because of an appeals court ruling in another case which impacted his case, hence the revised settlement. This latest deal will have caused Cohen to be barred from managing outside money for four years. He’s already been restricted for two of those four years.

The regulator says that before Cohen will be allowed to deal with external funds again an independent counsel will have to make sure that legally adequate procedures, policies, and supervisory mechanisms are implemented so that possible incidents of insider trading in the future are detected and stopped.

The SEC’s order also said that Cohen had ignored warning signs that should have compelled him to act immediately to find out whether or not Martoma was doing something illicit. Instead, he allowed him to make trades while making similar trades in accounts that he controlled. As a result of the insider trading, Cohen’s hedge funds made money while avoiding losses of about $275M.

401(K) Plan Lawsuit Accuses Anthem of Charging Excessive Fund Feeds

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

Participants in Anthem Inc.’s 401(K) plan are accusing the plan’s fiduciaries of breaching their fiduciary duties under the Employee Retirement Income Security Act of 1974. They claim that the fiduciaries churned excessive administrative and investment management fees in Vanguard mutual funds. Vanguard Group is the fund’s record-keeper.

According to plaintiffs, the plan fiduciaries chose mutual fund share classes that were “high-priced” instead of equivalent ones that didn’t cost as much and were also available to the plan. As of 12/14, Anthem’s 401(k) plan offered 11 Vanguard mutual funds, including Institutional and Admiral share classes: Vanguard target-date collective investment trust funds, a fund offered by Touchstone Investments, funds by Artisan Partners, and an Anthem common stock fund. The lawsuit claims that each fund in the plan charged fees excessive to what Anthem could have gotten elsewhere with funds that were comparable.

The Anthem 401(k) fund participants also contend that Vanguard was paid excessive fees for record-keeping related services from ’10-’13, which was when the plan paid about $80-$94/participant for record keeping through revenue-sharing and hard-dollar fees. It wasn’t until 9/13 that the cost was reduced to a flat yearly fee of $42/participant.

The plaintiffs argued that a reasonable fee’s “outside limit” for this particular plan should have been no higher than $30. The class-action securities case also claims that instead of including a stable value fund in the plan, there was a money market fund that generated returns that were “microscopic.”

Shareholder Files Against REIT Over $41M Puerto Rico Hotel Loan Write-Down

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

A shareholder of Resource Capital Corp. is suing the real estate investment trust (REIT) because of the way it dealt with a Puerto Rico hotel loan portfolio and a $41 million write-down that resulted last year. Plaintiff Josh Reaves says that the REIT’s directors knew there was bleak information about the deteriorating financial state of the U.S. territory way before a press release went out in August revealing there had been a $41 million write-down on a hotel mezzanine loan. The announcement caused the REIT’s stock to drop over 12% ,while erasing $55 million in market capitalization.

Reaves says that Resource Capital should have known as early as February 2014, when Puerto Rico debt was downgraded to “junk” status, that investments on the island were at risk. Instead, he contends, the REIT did not disclose the degree to which its loan portfolio was exposed to the Puerto Rican economy, misrepresented the degree of risk the portfolio could handle, did not abide by disclosure practices as they pertain to loan impairment, did not accurately represent the portfolio’s value, and failed to have the internal controls needed to stop the risks from becoming too precarious.

In August 2015, when submitting its filing to the SEC, Resource Capital wrote that the loan’s outstanding balance was $38.1 million and moved $3 million of accrued interest to the negative column from the positive column. Because of the $41 million write-down, $31 million was lost over that quarter.

Reaves’ case is a derivatives lawsuit. He is filing it on the company’s behalf. This means that Resource is a nominal defendant. The defendants named included the REIT’s CFO David Bryant, CEO Jonathan Cohen, Chairperson Steven Kessler, and a number of its board members.
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FINRA Bars Ex-National Securities Broker Zachary Bader Over Investor Fraud Allegations

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

The Financial Industry Regulatory Authority is permanently barring former National Securities broker Zachary Bader from the securities industry in the wake of allegations filed by numerous investors. Bader, who was let go from the National Securities Corporation, also was previously registered with Craig Scott Capital and Brookstone Securities. According to BrokerCheck, five customer complaints and two regulatory sanctions have been brought against him.

Bader is accused of excessive trading, making unsuitable investment recommendations to at least 21 customers by advising them to put their money in the iPath S&P 500 VIX Short Term Futures ETN (VXX), showing reckless disregard of clients’ interests, improper due diligence, breach of fiduciary duty, churning, providing inadequate investment advice, and breach of contract.

iPath S&P 500 VIX Short Term (VXX)
The iPath S&P 500 VIX Short Term is an exchange-traded note. Many ETNs are only appropriate for short-term trading and/or institutional investors. For example, the VXX exposes investors to returns of certain futures contracts on the VIX Index and it is considered a bearish investment. It is not appropriate for certain equity positions. The VXX comes with very specific risks and over time will lose value as futures contracts on the VIX Index go down too.
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