Investor Lawyers Blog

Morgan Stanley to Pay $8.8M in Parking Scam

Published on: December 19, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley Investment Management (MISM) will pay $8.8 million to resolve SEC charges accusing a firm portfolio manager of engaging in a parking scheme that gave preferential treatment to certain client accounts. Also, as part of the settlement, SG Americas, who is accused of helping in the fraud, will pay over $1 million to resolve the charges.

The portfolio manager, Sheila Huang, has consented to an industry bar. According to an SEC probe, while overseeing accounts that had to liquidate certain positions in 2011 and 2012, Huang arranged for the sale of mortgage-backed securities to Yimin Ge, an SG Americas subsidiary, at prices that were predetermined so she could buy back the positions at small markups in other accounts that Morgan Stanley advised.

Huang sold more bonds at prices that were above market so she would not suffer losses for certain accounts. She then bought the positions back at prices that were unfavorable in a fund she oversaw without disclosing this to the client whose fund had been disadvantaged.

Huang is accused of engaging in prearranged transactions for five bond trade sets. As a result of her parking scam, some Morgan Stanley clients benefited more than others. Purchasing clients were generally the ones that profited from the market saving, while buying and selling clients did not.

Securities Fraud Cases: Investment Adviser Faces SEC Charges, Woman Pleads Guilty to $1.1M Financial Scam, and NJ Man is Accused of $13M Pump-and-Dump Scam

Published on: December 18, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Connecticut Firm Accused of Conflict of Interest Involving $43M Fraud
The Securities and Exchange Commission is filing fraud charges against Atlantic Asset Management LLC (AAM). The regulator says that the Connecticut-based investment advisory firm got clients involved in certain bonds that resulted in an undisclosed financial benefit to a brokerage firm whose parent company is part owner of AAM.

The firm is accused of investing over $43M of investor money in illiquid bonds that were issued by a Native American tribal corporation. The sales provided the brokerage-firm with a private placement fee.

The SEC says that investors should have been notified of the financial gain that resulted and the firm violated its obligation to them when it placed its own financial interests before client’s interests.

In its complaint the SEC says that it was a representative from BFG Socially Responsible Investing Ltd., which partially owns AAM, who suggested that the investment advisory firm buy the illiquid bonds for clients. AAM purportedly knew that the bond sale proceeds would to go toward an annuity that the parent company provided.

The Commission says that after finding out that their money had been placed in the bonds, several AAM clients demanded that the investments be unwound but their requests were unsuccessful.

Ex-Investment Adviser Pleads Guilty to Securities and Annuities Scam
Janet Fooshee has pleaded guilty to 31 charges related to a $1.178M financial scam involving securities and annuities. The 63-year-old former New Jersey investment adviser admitted to fraudulently servicing over 100 financial account statements that increased 14 client accounts by about $818K collectively. She also admitted to stealing about $151K from clients, keeping over $190K in unlawful fees, defrauding another investor of almost $81K, and stealing the identities of about eight corporations. Fooshee said that she illegally took funds from over two dozen retirees and others over a period spanning a decade.

Fooshee also used the names Janet Katz and Janet Gurley. As part of the plea deal she must pay $415K in restitution. A seven-year prison term is recommended for her.
Continue Reading ›

J.P. Morgan Chase Settles SEC and CFTC Charges Alleging Client Steering for $307M

Published on: December 18, 2015 | by Shepherd Smith Edwards & Kantas, LLP

J.P. Morgan Chase & Co. (JPM) will pay $307M to resolve Securities and Exchange Commission and Commodity Futures Trading Commission charges accusing two of its units of not telling wealthy clients about certain conflicts of interest. The JPM businesses are J.P. Morgan Securities LLC, its wealth management investment advisory business that offers investment products to clients that have a net worth of $250K – $5M, and JPMorgan Chase Bank N.A., its U.S. private bank that deals with clients that have a $5M net worth or greater.

According to the agreement, the investment advisory service did not tell wealth management customers that its Chase Strategic Portfolio, which is a program for wealth management customers, favored mutual funds managed by the firm. For several years, the program put about $10 billion of $32.6 billion in proprietary funds, and until the earlier part of 2012, at least 47% of the assets were in such funds.

The private bank also showed a similar preference toward the bank’s products. It was not until 2011 that it told clients that language in its disclosures noting that it preferred managers affiliated with JPM had been “mistakenly” removed. The language was not put back until last year.

LPL Financial to Pay $750K in Nontraded REIT Case Involving Elderly Investor in New Hampshire

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

New Hampshire’s Bureau of Securities Regulation says that LPL Financial has consented to pay $750,000 to resolve charges involving the sale of nontraded real estate investment trusts to an elderly investor. The state says that transactions were not only unlawful but also they were suitable for the 81-year-old customer.

The state says that the sale of the nontraded REITs were unsupervised, causing the investor to sustain substantial losses in 2008. Aside from the $750K, which includes $250K to the bureau, $250K in administrative fees, and $250K to the investor education fund, LPL will offer remediation to any client in New Hampshire that bought a nontraded REIT through the firm since 2007 if the sale did not meet the firm’s product-specific limitations or guidelines.

Nontraded REITS
Nontraded REITs can be high-risk investments. They are liquid and may come with substantial front-end fees of up to 15%. Distributions are not guaranteed and are determined by the alternative investments’ board of directors. REITs are not traded on exchanges and there is a limited secondary market for them, which can make them difficult for investors to sell.
Continue Reading ›

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.
Continue Reading ›

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.
Continue Reading ›

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.
Continue Reading ›