Investor Lawyers Blog

Securities Cases: Class Action Lawsuit Charges Fidelity with Duty Breach, Billionaire Ira Rennert in Court Over Alleged $70M Pension Fund Fraud, and Dole Sued Over Merger Fraud

Published on: December 15, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Fidelity Investments Unit Faces ERISA Fiduciary Breach Claims
Fidelity Management Trust Co. has been named a defendant in a class action securities case under ERISA law. The plaintiffs claim that the Fidelity Investments unit is in fiduciary breach under ERISA because it included a stable value fund as an investment alternative for 401(k) plan accounts. They believe that low investment returns and high fees made the fund an unwise investment for participants in a 401(k) plan.

William Perry and James Ellis are the lead plaintiffs. At different times through the Barnes & Noble Inc. 401(k) plan, they were invested in the Fidelity Group Employee Benefit Plan Managed Income Portfolio Commingled Pool (MIP) fund. Plaintiffs believe that the high fees and poor results were because of the deliberate omissions and actions of Fidelity Management Trust as MIP’s fiduciary and trustee.

According to the complaint, before 2009 Fidelity executed an investment strategy that proved unsuccessful when it placed mortgage-backed securities, asset-backed securities, and collateralized loan obligations, and others securitize debt in the portfolio. MIP lost value when the financial crisis struck. After that, Fidelity changed up its asset allocation to lower risk to the fund’s wrap providers, including AIG Financial Products, Monumental Life Insurance Company, JP Morgan Chase Bank, State Street Bank and Trust, and Rabobank Netherland. Plaintiffs believe it is this conservative strategy that led to lower returns. They said that excessive fees, which were paid to wrap providers, hurt them.

Plaintiffs represented by the class include everyone involved in ERISA-governed plans that use the fund.

Billionaire In Court Again for Pension Fund Fraud
Ira Rennert, the billionaire industrialist, is once again accused of pension fraud. This time, the allegations involve $70 million and the fund of another family-controlled company. According to the allegations, Rennert was able to avoid responsibility for pension expenses of his RG Steel company when he lied to the Pension Benefit Guaranty Corporation. The independent US government entity, which is the plaintiff in this pension fraud case, said it would have terminated RG Steel’s pension plan if it had known that the company was about to be sold. If that had occurred, Rennert’s Renco Group would have had to take care of pension costs.

The government entity claims that Renco president, Ari Rennert, omitted key information and lied when he told PBCG that he would keep them updated of changes. A week later, about 25% of Renco was bought by Cerberus Capital and the former no longer had a pension liability. Renco denies the allegations.

Focused Credit Junk Bond Collapses, Leaving Investors in the Lurch

Published on: December 14, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Just days after the collapse of Third Avenue Management LLC’s junk bond fund the Focused Credit Fund (TFCVX), the company’s CEO David M. Barse is out, says the Wall Street Journal. The news comes following Barse’s announcement that redemptions to the high yield mutual fund’s investors would be frozen. The media outlet says that Barse was fired and is not allowed to reenter the building.

This week, the Massachusetts Securities Division issued a subpoena saying that it was probing the fund closure and liquidation strategy. Secretary of the Commonwealth William F. Galvin, says he wants to find out to what extent the state’s investors have been affected by this “unprecedented decision.” It was on December 9 that they were sent a letter announcing that the redemptions would be stopped and the assets that were left would be liquidated.
This is an unusual move for a mutual fund. Such funds typically have to abide by tight regulations that mandate that investors be provided liquidity daily.

The reasons for the changed policy are investor net withdrawals and heavy losses in the underlying investments. There is also speculation that the large position that the Focused Credit Fund had taken in what are known as Level 3 assets, which are securities that trade so infrequently it’s hard to know exact prices, were becoming an issue. It reportedly got to the point that Level 3 assets in the portfolios went from 15% of what was held to about 25%, which regulators typically consider too high.

The New York Times reports that the decision to prevent investors from getting their money back has caused concern among the market, which have been getting ready for the Federal Reserve’s anticipated interest rate increase. The fear is that the Focused Credit Fund’s demise is not an isolated incident, and other mutual funds holding a significant number of junk bonds, emerging market debt, and leveraged debt may find themselves in the same predicament.
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Securities Fraud News: Texas REIT’s Share Price Drops Following Ponzi Allegations, Morgan Stanley, Ex-Broker Are Found Jointly Liable in $1M Elder Fraud Case, and Brokerage Firm Resolves Variable Annuities Claims for $475K

Published on: December 12, 2015 | by Shepherd Smith Edwards & Kantas, LLP

United Development Funding IV Shares Fall After Allegations of Texas Ponzi Scheme
United Development Funding IV (“UDF IV”), a Texas-based real estate investment trust (“REIT”), saw its share price drop after Harvest Exchange published a post that said the REIT had been run like a Ponzi scheme for years. United Development was a nontraded REIT that became traded when it listed on Nasdaq last year under the symbol “UDF”.

In the report on the Harvest site, the anonymous author said that the UDF umbrella had traits indicative of a Ponzi scam, such as, it uses new capital to pay distributions to current investors and UDF companies and gives substantial liquidity to earlier UDF companies to pay earlier investors. The article said that once the funding of retail capital to the most current UDF stops, the earlier UDF companies do not seem able to stand on their own. This purportedly indicates that the structure will likely fail and investors will be the ones sustaining losses.

After the report by the online professional network of investors, UDF IV saw its share price plunge from $17.53 to $10.10. It later dropped further to $8.55/share.

Over $1M Awarded in Senior Financial Fraud Case Against Morgan Stanley and a Former Financial Adviser
A Financial Industry Regulatory Authority Inc. arbitration panel has awarded 92-year-old Genevieve Lenehan (“Mrs. Lenehan”) over $1M in her claim against Morgan Stanley (MS) and former Morgan Stanley advisor Justin Amaral (“Amaral”). Mrs. Lenehan accused Amaral of churning and reverse churning her account. Amaral also advised Mrs. Lenehan’s husband until his death five years ago.
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Hedge Fund News: Millennium Global Wants Citigroup to Pay $53M Over Shut Out Trades, Stone Lion Capital Suspends Redemptions Following Withdrawal Requests

Published on: December 12, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Millennium Global Emerging Credit Fund Ltd. is suing Citigroup (C). The hedge fund’s liquidators claim that the bank undervalued assets when it closed out certain trades during the financial crisis in 2008. They believe that Citigroup did this at rates that failed to reflect the true market value. Millennium sustained nearly $1 billion in losses. Now its liquidators want $53 million in damages.

The positions at issue were linked to the debt of Uganda, Sri Lanka, a brewer from the Dominican Republic. and a sugar company in Zambia. Citibank says the positions were illiquid and difficult to value even when the market was good. While the bank has admitted that it improperly valued certain trades, it maintains that the adjustments are not as great as what the hedge fund is claiming.

Millennium Global Emerging Credit Fund maintains that Citigroup did not use procedures that were “commercially reasonable” when it shut down the positions. The bank offered to pay Millennium about $6.8 million after more than fifty open transactions were closed out, but the fund believes that amount is way too low.

Morgan Stanley to Settle Mortgage Backed-Securities Claims Involving Credit Unions for $225M

Published on: December 11, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley (MS) will pay $225 million to resolve claims brought by the National Credit Union Administration (NCUA) for Western Corporate Federal Credit Union, U.S. Central Federal Credit Union, Southwest Corporate Federal Credit Union and Members United Corporate Federal Credit Union. The credit unions contend that the firm left out material facts and made false statements when selling mortgage backed securities (MBS). The credit unions argued that their purchase of the faulty MBS led to their demise.

Structured products, such as MBS, that are tied to residential mortgage-backed securities (RMBS) played a major part in credit unions failing after the 2008 financial crisis. U.S. Central, which was the largest credit union to fail in 2009, sustained billions of dollars of losses after purchasing faulty MBSs.

As of 9/25/15, the unpaid balance of the securities was approximately $194 million, with losses incurred by the certificates at $31 million. As part of the MBS settlement, pending lawsuits against the firm will be dropped in New York and Kansas. Proceeds from the settlement will go toward claims made against the corporate credit unions.

Congress Introduces Two Bills to Address $70B Puerto Rico Debt Crisis

Published on: December 10, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The United States Congress is considering two bills to help Puerto Rico out of its more than $70 billion debt crisis. The first bill, proposed by the Senate Finance Committee and spearheaded by Republican lawmakers, would offer the island’s government $3 billion in emergency cash, reduce the federal employee tax for the territory’s residents from 6.2% to 3.1%, and provide federal oversight to make sure that Puerto Rico continues to have debt plans in place that are sustainable.

While this bill would provide much needed relief to the island, Puerto Rico’s leaders would rather be able to restructure their debt in court. They want the U.S. territory to be able file for Chapter 9 bankruptcy, a protection it does not have at the moment, unlike all 50 U.S. states. Because it cannot avail of this option, Puerto Rico is having to negotiate with each group of bondholders individually. This is proving a slow and arduous process that could go on for years.

Under the second Congressional bill, presented by U.S. Rep Sean Duffy (R – WI), Puerto Rico would be able to file for Chapter 9. However, this bill offers the territory no financial aid. And, as CNN points out, because a lot of the island’s debt belongs to the central government, much of what it owes wouldn’t fall under the Chapter 9 umbrella. To qualify, the debt has to be owed by local towns or institutions.

Puerto Rico has a $1 billion debt payment coming up on January 1, 2016. Already, Governor Alejandro Garcia Padilla has warned that it would be “very difficult” to make that payment. After January, the next debt payment deadline for the island is in May.
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Alleged Immigration Scams Lead to SEC Fraud Charges

Published on: December 8, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed enforcement actions against a number of attorneys for offering EB-5 investments even though they are not registered brokers. As SEC Enforcement Division Director Andrew J. Ceresney noted, individuals who conduct certain services and get commissions when raising funds for EB-5 projects have to be officially registered.

Under the EB-5 Immigrant Investor Program, foreign investors are given an opportunity to gain U.S. residency if they invest in a designated projected that preserves or establishes at least 10 jobs for workers in this country. In its complaint, the SEC accused Hui Feng and his firm, the Law Offices of Feng & Associates of acting as unregistered brokers when selling EB-5 investments to over 100 investors. The Commission said that they bilked clients by not disclosing that they were paid commissions on the investments, which is a breach of their legal and fiduciary obligations. The regulator also said that they bilked certain entities that do offer such investments. Feng and his law offices are based in New York.

The SEC also filed charges against Mehorn P. Azarmehr and his Azarmehr Law Group, Michael Bander and his Bander Law Firm, Miami, Fla. lawyer Roger Bernstein, Hoboken, NH lawyer Allen Kaye, Los Angeles-based lawyers Taraneh Khorrami, Mike Manesh and this firm Manesh and Mizrahi, and Kefei Wang, who is based on China. All of these individuals and entities have agreed to cease and desist from acting as unregistered brokers. Most of them have consented to pay disgorgement, prejudgment interest, and/or a penalty.

NY Man Convicted in $800K Hedge Fund Fraud

Published on: December 7, 2015 | by Shepherd Smith Edwards & Kantas, LLP

New York Attorney General Eric Schneiderman has issued a statement announcing the conviction of Mazzam Ifzal Malik, also known as Mark Malik, on 28 criminal charges that involved him stealing over $800,000 from investors. According to the state, the hedge fund manager set up fake hedge funds so he could take investors’ money.

During cold calls to investors in the United States and abroad, Malik claimed that he had extensive experience on Wall Street, including having managed over $5 billion in assets. Schneiderman, however, said that the 33-year-old only had been a financial consulting trainee. He also was a registered broker but for just two years.
Malik’s real job experience involved working as a traffic agent, waiter, and security guard.

Yet with this lack of experience, from ’11-’15 Malik managed the following bogus hedge funds:

• Wall Street Creative Partners • Wolf Hedge LLC.
• American Bridge Investments L.P.
• Seven Sages Capital, L.P.
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SEC Investigating Whether Banks Were Involved in Credit Swap Collusion

Published on: December 5, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Bloomberg reports that the U.S. Securities and Exchange Commission is looking into whether financial firms colluded together so that prices in the $6 trillion credit default swaps indexes market became skewed. According to the news outlet’s source, the regulator is trying to figure out whether dealers misrepresented index prices. The SEC is reportedly examining indexes that are less-liquid and actively traded.

With the credit-default swaps benchmark, investors can make bets on whether companies, mortgage-backed securities, or countries will default. Trading in swaps index contracts has increased in recent years because investors have been looking for easy ways to make bets via speculation.

At the conclusion of every trading day, benchmark prices for indexes are calculated by third-party providers according to dealer quotes. This sets the level at which traders are able to make their positions. This process resembles the way markets that don’t trade on exchanges establish benchmark prices.

SEC Approves Change to FINRA’s BrokerCheck On When to Publish Firings

Published on: December 3, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has approved the Financial Industry Regulatory Authority’s plan to shorten the waiting period for when certain information reported on Form U5 can be released on BrokerCheck.com from 15 days to three days. This includes information about broker firings. The modification will go into effect on December 12.

Brokerage firms use Form U5 to give notice of when a broker has been let go. This notification is published on BrokerCheck, which is a public database that includes background information about registered brokers, as well whether any of them have a disciplinary history and what that may be.

The 15 days was so that brokers could have time to explain why they were fired. FINRA, however, has now decided that it is important to notify the public of such terminations sooner than that so that the investors who are thinking hiring these brokers receive this employment history right away. The self-regulatory organization says that it believes three business days still gives a broker a chance to comment on his/her firing.

BrokerCheck.com is an excellent resource for looking up information about a broker and his/her history. It’s important as an investor that you do your due diligence when considering whether to have someone handle your investments and finances. You can also get information about a broker from the Central Registration Depository, which is a computerized database. Another way to find out about a broker is to call your state securities regulator and request access to his/her registration, disciplinary, and employment information. You can get information about how to reach your state regulator through the North American Securities Administrators Association’s website.
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