Investor Lawyers Blog

SEC Bars Former Investment Adviser Over Alleged Misuse of Exchange-Traded Funds

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

The U.S. Securities and Exchange Commission is barring Nicholas Rowe, the former owner of registered investment advisor Focus Capital Wealth Management, from the industry. The charges come in the wake of parallel proceedings in New Hampshire where state regulators barred him from being licensed as an investment adviser. The New Hampshire Bureau of Securities Regulation also said he had to pay $20K.

Rowe and his RIA are accused of using inverse and leveraged exchange-traded funds in a way that was not suitable for clients. They also purportedly made misrepresentations regarding the fees that the clients would be charged.

Focus Capital had been registered with the SEC until 2012 when it registered with New Hampshire instead. The state launched a probe into the RIA’s investment practices, which allegedly included placing the assets of older investors into unsuitable strategies without notifying them that was what was happening. A number of elderly clients, including three widows, allegedly lost close to $1.M.

Bank of New York Mellon Must Face $1.12B RMBS Lawsuit

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

U.S. District Judge Judge Gregory Woods in Manhattan says that Bank of New York Mellon Corp. (BK) must face a residential mortgage-backed securities fraud lawsuit holding the bank liable for $1.12B of investor losses. Royal Park Investments SA/NV, which is a Belgian investment fund, may now proceed with its claims, including those alleging breach of trust, breach of contract, and Federal Trust Indenture Act violations.

In its case against BNY Mellon, Royal Park wants class action status for other investors. It claims that its RMBS in the trusts at issue are now “”completely worthless.”

The investment fund contends that BNY Mellon, in its role of trustee for five trusts, disregarded the abuse occurring in the way the underlying loans were serviced and underwritten and did not mandate that bad loans be bought back. Royal Park believes that BNY Mellon breached its obligations out of fear it would lose business or make other financial service companies angry.

Over the past year, the investment fund has been allowed to pursue similar cases against HSBC Holdings Plc. (HSBC) And Deutsche Bank AG (DB). In the investment fund’s case against Deutsche Bank. U.S. District Judge Alison J. Nathan in New York recently denied the bank’s bid to get the proposed class action over $3.1B in RMBS losses dismissed. She did, however, dismiss derivative claims. Royal Park claims that Deutsche Bank knew by April 2011 that loans involved were highly defective but refused to force loan sellers to buy back the loans or replace them when it became clear that the mortgages backing the bonds were defaulting. Nathan also said that the plaintiffs detailed claims of significant losses, high default rates, and widespread probes into RMBS securitization were sufficient that the court was able to draw “reasonable inference” that loan guarantees had been breached.

FiNRA Bars Chicago-Based Broker For Market Manipulation

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

The Financial Industry Regulatory Authority has barred broker George Johnson from the industry. The regulator is accusing him of market manipulation involving the artificial inflation of a penny stock’s value. FINRA claims that Newport Coast Securities, which is the last firm where Johnson worked, let its brokers engaging in churning.

According to the self-regulatory organization, over eight days in May 2012, Johnson, while working for Meyers Associates, told customers to buy stocks of iceWEB at prices that were artificially inflated. He also suggested that certain clients sell their shares to match trades between clients.

FINRA said that Johnson manipulated stock to get business from the issuer, which agreed to compensate him for a future private offering. He purportedly worked with a stock promoter to increase iceWEB’s share price to the point that certain warrants could be exercised.

Johnson also has been accused of involvement in a second penny stock fraud and he purportedly has tried to cover up different state securities violations. He has a history of regulatory actions and customer disputes going as far back to 1994. Johnson previously worked for H.J. Meyers & Co. and Jesup & Lamont Securities, two firms that have since been expelled. Meyers Associates also has been linked to a number of regulatory probes.

Study Accuses Nearly 20% of Oppenheimer Advisers, 15% of Wells Fargo and UBS Advisers, Others of Misconduct

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

InvestmentNews reports that according to a new working paper by business school professors at the University of Minnesota and the University of Chicago, 7% of financial advisers have been subject to discipline for misconduct. The study noted that at certain large firms, the trend of misconduct exceeds that average. For example, found the paper, at Oppenheimer & Co., almost 20% of its advisors’ records indicate misconduct.

Other advisor firms noted for their high misconduct rates included First Allied Securities at 17.7%, Wells Fargo Advisors (WFC) at 15.3%, UBS Financial Services (UBS) at 15.14%, Cetera Advisors at 14.39%, Securities America at 14.3%, National Planning Corp. at 14%, Raymond James Financial Inc. (RJF) at 13.74%, Stifel Nicolaus & Co. at 13.27%, (SF) and Janney Montgomery Scott at 13.27%. Firms with the lowest misconduct rates among its advisers included Morgan Stanley & Co. (MS), Goldman Sachs & Co. (GS), BlackRock Investment (BLK), UBS Securities, Jefferies, Prudential Investment Management, and Wells Fargo Securities, among others.

University of Chicago finance professor Amit Seru, who co-authored the working paper, titled “The Market for Financial Adviser Misconduct” called this misconduct problem “pervasive.” He also said that he believes the study did a conservative job of measuring misconduct, which ranges from behavior such as placing clients in unsuitable investments to the more extreme type, such as using client accounts to trade without their permission. Insurance products were reportedly factor in many misconduct cases.

The study noted that firms often do take action when misconduct by its advisers is discovered. About half of those caught are fired, although 44% of these individuals will typically end up going to another firm. Often these places will have higher misconduct rates, making it possible for the advisers to continue engaging in wrongful behavior. The study said that prior offenders are five times more likely to taking part in new actions of misconduct than the average adviser.
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Seminole Tribe Accuses Wells Fargo of Fraud

Published on: February 29, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Seminole Tribe of Florida is suing Wells Fargo (WFC). The Tribe claims that the bank mismanaged its funds for years while charging it millions of dollars in fees that were not warranted. The plaintiff is claiming over $100M in losses.

The Seminole Tribe said that it set up a trust account with Wachovia Bank, which was Wells Fargo’s predecessor in interest, for the purpose of using the revenue from gaming facilities to help the Tribe garner self-sufficiency, economic development, and strong governments. Rather than helping the Tribe achieve its goals, the bank, instead, purportedly set up confusing and deficient accounts statements to conceal unauthorized fees. The tribe also said that they lost at least $100M from mismanagement and poor investment strategies. The Seminole Tribe contends that the bank failed to give proper investment advice, invested in a deficient portfolio to bilk minor beneficiaries, and charged fraudulent fees.

The trust fund is the Seminole Tribe of Florida Minors’ Per Capita Payment Trust Agreement. It was set up in 2005. The Tribe said it put in $16.8M into the trust during the first year, with the Trust principal eventually growing to about $1.4B.

According to the Tribe’s complaint, in 11/07, it merged its 2005 trust into three trust investments. Wachovia was reappointed as trustee. Wachovia then revised the fee schedule of the trust five times in five years. The Tribe contends that even though the fees were adjusted downward, Wachovia was also collecting fees that were concealed from the minor beneficiaries. It was last year while reviewing the account records of the Minor’s Trust that the tribe claims that they discovered an elaborate fraud involving the unauthorized fees.

Foreign Corrupt Practices Act Violation Allegations: VimpelCom, Qualcomm, and PTC Inc. Settle with Regulators

Published on: February 28, 2016 | by Shepherd Smith Edwards & Kantas, LLP

VimpelCom Resolves FCPA Violations for $795M
The U.S. Securities and Exchange Commission, the U.S. Department of Justice, and regulators in the Netherlands have arrived at a global settlement with VimpelCom Ltd. to resolve Foreign Corrupt Practices Act violations. The telecommunications provider purportedly committed the offenses in order win business in Uzbekistan.

According to the regulator, the company offered bribes to an Uzbek government official who was the relative of Uzbekistan’s President, just as VimpelCom entered that nation’s telecommunications market. VimpelCom needed government-issued licenses, channels, frequencies, and mobile blocks. At least $114M in bribes were funneled through an entity with ties to the official who was bribed, while about $500K was hidden under the guise of “charitable donations” that were also affiliated to the same official.

As a result of the alleged FCPA violations, said the SEC, the telecommunications company earned massive revenues in Uzbekistan. As part of the settlement, VimpelCom will pay $167.5M to the SEC, $130.1M to the DOJ, and $397.5M to Dutch regulators.

PTC Inc. is Accused of Bribing Chinese Officials to Win Business
PTC Inc. and its two Chinese subsidiaries (PTC-China) have consented to collectively pay $28M to resolve civil and criminal actions accusing them of violating the Foreign Corrupt Practices Act. According to the regulator, the two subsidiaries provided improper payments and non-business related travel to Chinese government officials to garner business. The SEC order, which institutes a settled administrative proceeding against the Massachusetts-based technology company, states that the two subsidiaries spent almost $1.5M on improper travel, entertainment, and gifts for the Chinese government officials who worked for state-owned entities that were customers of PTC. This purportedly made the company about $11.8M in profits from sales contracts with these entities.

Fidelity Suspends MetLife Annuity Sales and Commonwealth Stops Selling L Share Variable Annuities

Published on: February 26, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Fidelity Investments has decided to suspend sales of annuities from MetLife while the life insurance company considers a possible spinoff, sale, or public offering of a retail unit that offers retirement products. According to InvestmentNews, MetLife, which is the biggest life insurer in the US, has said that the move is under consideration because of expected, more stringent capital rules now that it has been designated a “non-bank systematically important financial institution.” Some in the industry have said that this could cause the insurer to lose distributors.

The possible sale or break up would likely include General American Life Insurance Co, MetLife Insurance Co., Metropolitan Tower Life Insurance Co., and a number of subsidiaries with reinsured risks that MetLife Insurance Co. underwrites. A retail unit break off would result in businesses that are still regulated, but not as regulated as retail products.

MetLife also is reportedly in discussion with MassMutual over the possible sale of its U.S. adviser unit, the MetLife Premier Client Group.

The U.S. Department of Labor’s proposed fiduciary rule is pushing for tighter rules for retirement product sales. This is compelling some insurance company to reassess whether to continue running their own brokerage firm operations. In February, American International Group Inc. announced that it was selling its AIG Adviser Group to Canadian pension manager PSB Investments and private equity firm Light Year Capital. Under the proposed rule, investment advisor standards for giving advice related to retirement accounts would be raised.
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Securities News: UBS To Pay $33M to NCUA For Mortgage-Backed Securities, CFTC, FCA May File More Civil Charges Against Banks for Libor Rigging, Moody’s Waits for end of DOJ’s Subprime Mortgage Probe

Published on: February 26, 2016 | by Shepherd Smith Edwards & Kantas, LLP

UBS to Pay $33M to NCUA Related to MBS Sold to Credit Unions
UBS AG (UBS) will pay $33 million to resolve a lawsuit filed by the National Credit Union Administration accusing the bank of selling toxic mortgage-backed securities to credit unions. The case revolves around MBS that were underwritten and sold by UBS. The securities were purchased by Members United Corporate Federal Credit Union and Southwest Corporate Federal Credit Union for almost $432.4M from ’06 to ’07.

NCUA alleged that offering documents for the securities sold included untrue statements claiming that the loans were originated in a manner that abided by underwriting guidelines when, in fact, the loans’ originators had “systematically abandoned” said guidelines. The false statements made the securities riskier than what was represented to the credit unions. Eventually, the MBS failed, resulting in substantial losses.

To date, NUCA has recovered almost $2.46B from banks over MBS sales that occurred prior to the 2008 financial crisis.

US, UK Regulators May Pursue More Banks Over Libor
According to the The Wall Street Journal, the US Commodity Futures Trading Commission and the UK Financial Conduct Authority are working on pressing the last civil charges against a number of banks for alleged rigging of the London interbank offered rate. LIBOR is the benchmark that underpins interest rates on trillions of dollars of financial contracts around the globe.

Sources tell WSJ that the firms under scrutiny include Citigroup (C), J.P. Morgan Chase & Co (JPM)., and HSBC Holdings (HSBC)—although the FCA has already dismissed its probe into J.P. Morgan.

Independent Brokerage Firms that Sold UDF REITs May Be Subject to Arbitration Claims Over Alleged Ponzi Scam

Published on: February 25, 2016 | by Shepherd Smith Edwards & Kantas, LLP

According to InvestmentNews, a number of independent broker-dealers could find themselves in legal hot waters, should investors decide to pursue them through arbitration for selling UDF real estate investment trusts. United Development Funding is under investigation over allegations that the UDF IV was run for years like a Ponzi scam. UDF IV was initially a nontraded real estate investment trust that later became listed as a publicly traded REIT.

The article goes on to name four firms that sold the UDF REITs or private deals to investors: Financial Services Inc., Berthel Fisher & Co., VSR Financial Services Inc., and Centaurus Financial Inc. Other firms also have sold UDF REITs to investors.

The allegations against UDF first surfaced in December in an anonymous post published on Harvest Exchange, an investor website. Among the accusations: that the UDF umbrella demonstrated traits “emblematic” of a Ponzi scam; new capital was used pay existing investors; and newer UDF companies were giving liquidity to earlier UDF companies to pay earlier investors. Noting that a hedge fund had created a short position in UDF IV shares, the company accused the fund of trying to illegally profit by depressing and manipulating UDV IV’s share price.

Recently, J. Kyle Bass of Hayman Capital also published a website about the allegations. On the site, Bass acknowledged that Hayman maintains a short position in UDV IV common stock.
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Raymond James Must Pay Investor $795K

Published on: February 24, 2016 | by Shepherd Smith Edwards & Kantas, LLP

In a Financial Industry Regulatory Authority arbitration case, Raymond James Financial Services Inc. (RJF) has been ordered to pay David B. Silipigno $593,540 plus 3 years and 9 months of interest. That’s an award of about $795,000. According to Silipigno’s attorney, the securities arbitration case involved an RIA who may not have not licensed with FINRA but worked out of the Raymond James independent contractor branch office.

The attorney said that such a work configuration may cause problems in that a non-registered adviser could effectively become a defacto employee of a brokerage firm. OnWallStreet.com names the broker involved as Karen Powell, who has been affiliated with Raymond James since 1999.

Silipingo, in his claim, asserted a number of causes of action, including common law fraud, breach of fiduciary duty, beach of contract, suitability, churning, failure to supervise, and violations of Rule 10b-5 of the Securities Exchange Act violation and The Florida Securities Investor Protection Act. Raymond James continues to deny the allegations. The arbitration panel denied the firm’s request to have Powell’s CRD expunged in this matter.
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