Investor Lawyers Blog

FDIC Sues Bank of NY Mellon, Citigroup, and US Bancorp for soured RMBSs Purchased by Guaranty Bank

Published on: August 27, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Federal Deposit Insurance Corp. is suing Bank of New York Mellon Corp. (BK), Citigroup (C), and US Bancorp (USB) for residential mortgage-backed securities that were purchased by the former Guaranty Bank.

The Texas-based bank closed shop in 2009 and the FDIC, which is its receiver, arranged for its deposits to be taken on by BBVA Compass, a U.S. unit of Spanish institution Banco Bilbao Vizcaya Argentaria SA (BBVA.MC). The regulator estimated that the shutdown would cost its deposit insurance fund $3 billion.

The 12 mortgage-backed trusts involved in this RMBS lawsuit were issued by Countrywide Home Loans and Bear Stearns Cos’ (BSC) EMC Mortgage Corp unit. In 2008, JPMorgan Chase & Co. (JPM.N) purchased Bear Stearns while Bank of America Corp. (BAC) purchased Countrywide.

SEC Says Broker-Dealers Need to Do a Better Job of Monitoring High Risk Products

Published on: August 26, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has put out an alert warning brokerage firms that they need to better monitor the sale of high risk complex investments to retail investors. The regulator said that its analysis of 26,600 transactions of $1.25 billion of structured securities products revealed that there has been quite a number of times when the investments were sold to investors for whom they were not appropriate.

According to InvestmentNews, the Commission examined 10 branch offices of brokerage firms. The assessments took place from January 2011 through the end of 2012. In one firm, they discovered $96 million of structured-product sales that were made to conservative investors. At two other broker-dealers, the SEC discovered high concentrations of structure products in the accounts of older investors. One representative purportedly modified a customer’s investment goals without that person’s consent after a sale went through to make the complex product purchases appear justified.

Brokers are required to abide by suitability standards, which mandate that investment products that are sold meet each client’s risk tolerance and investment goals. The SEC said that in exams that were conducted, there were firms that appeared to have weak suitability controls.

The Commission wants broker-dealers to regard this alert as a wake up call so that they will take a closer look at their compliance programs. The regulator noted that while all the broker-dealers that were scrutinized had written procedures and policies for suitability, the controls were not consistently or properly implemented. In some instances, suitability controls differed among the different branches of a firm.
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Former Merrill Lynch Broker Must Pay $1.4M for Insider Trading

Published on: August 26, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Gary Yin, an ex-Bank of America Merrill Lynch (BAC) broker, must pay $1.4M in restitution for helping a client launder money made from insider trading. Yin admitted to helping former Qualcomm Inc. president Jing Wang conceal hundreds of thousands of dollars made in insider trading in that company and another company.

Yin set up brokerage accounts in the British Virgin Islands using a shell company to hide the scam and helped Wang transfer $525,000 to the shell account. He also transported documents to Wang’s brother in China to allegedly help hide the scheme from the FBI.

Now Yin must forfeit $27,000 in profits he made from trades in Qualcomm stock that were set up in a Merrill broker account in his mother-in-law’s name in the British Virgin Islands. He must also pay a $5,000 fine

Puerto Rico Delays $750M Bond Sale

Published on: August 25, 2015 | by Shepherd Smith Edwards & Kantas, LLP

According to The New York Times, Puerto Rico is again delaying a recent proposed bond issuance latest decision to stall the bond sale, this time because of trouble in the global markets. However, said the newspaper, the island’s government also seems to have come to the conclusion it could not borrow the $750 million by issuing the bonds at an interest rate that was affordable.

The delay in the Puerto Rico bond sale comes just two months after Gov. Alejandro Garcia Padilla declared the territory’s debts unpayable. Not only are the territory’s three big public utilities unable to pay off their debt but also they cannot shut down their operations. Earlier this month, the island defaulted on the bulk of a bond payment due on debt belonging to the Public Finance Corporation, which is another one of Puerto Rico’s government agencies.

On Tuesday, Puerto Rico asked the U.S. Supreme Court grant it the use of bankruptcy protection as the Commonwealth attempts to restructure $20 billion in public utility debt. Garcia Padilla and Secretary of Justice Cesar Miranda Rodriguez submitted a petition requesting that the court overturn previous rulings striking down the 2014 Puerto Rico Public Corporation Debt Enforcement and Recovery Act.

The Act granted Puerto Rican utilities and public companies bankruptcy protection not included under U.S. Chapter 9 bankruptcy laws. Meaning, while the territory awaits that decision, the September 1 deadline for Puerto Rico to outline its restructuring plan is just days ahead.
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Citco Settles Madoff-Related Securities Case With Fairfield Investors for $125M

Published on: August 24, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Citco Group Ltd. has agreed to pay $125 million to resolve a lawsuit related to the Bernard Madoff Ponzi Scheme. The plaintiffs in the case are investors of Fairfield Greenwich Ltd.

Investors in Fairfield’s funds sued Citco Group and others after Madoff was arrested in 2008 for running a multibillion-dollar Ponzi scam. Citco was a defendant because it was retained by Fairfield to monitor assets, as well as Madoff’s trading activities. The plaintiffs argued that Citco owed them a duty of care.

By settling, Citco is not denying or admitting to wrongdoing. It said that it consented to resolve the case to avoid further litigation.

The $125 million investor settlement is one of the largest with an administrator or custodian of a Madoff feeder fund. Fairfield placed about $7 billion with Bernard L. Madoff Investment Securities LLC.
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FSC Securities to Be Held Accountable for $1.2M FINRA Arbitration Award Issued to Victims of Ponzi Scammer Who Faked His Death

Published on: August 22, 2015 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority Inc. panel said that FSC Securities Corp. is responsible for a $1.2 million arbitration award for compensatory damages to investors that were bilked by Aubrey Lee Price, the infamous Ponzi scammer from Georgia who tried to fake his death to in 2012. FSC Securities is a broker-dealer with AIG Advisor Group (AIG).

The eight claimants contend that the brokerage firm did not supervise a number of brokers who sold them fraudulent securities that were part of Price’s $40 million Ponzi scam. According to their securities lawyer, Price and two other ex-FSC brokers persuaded clients to invest in the PFG fund, an unregistered investment fund, which was the main product of the scheme.

When the trading account sustained huge losses Price prepared account statements for investors that noted fake asset amounts and investment returns. The claimants believe that FSC failed to properly supervise its brokers and had numerous chances to detect that Price and the other brokers were selling away into the PFG fund while claiming “preposterous” return rates.

Price was an FSC broker from 2006 to 2008. Prior to that he worked at Citigroup Global Markets (C) and Banc of America Investment Services (BAC). Last year, a federal judge sentenced him to 30 years behind bars for bank fraud.
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Citigroup Global Markets to Pay $15M Penalty to the SEC for Surveillance and Compliance Failures

Published on: August 21, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission said that Citigroup Global Markets (C) will pay a $15M penalty to settle charges that it did not enforce procedures and policies that would stop and identify securities transactions potentially involving the wrongful use of material, nonpublic information. Citigroup agreed to the SEC’s order without denying or admitting to the regulator’s findings.

The firm also has paid $2.5 million to advisory client accounts that were affected. That amount is how much Citigroup made from the principal transactions that resulted because of the purported compliance and surveillance failures.

According to SEC, which conducted a probe, over a period of ten years, Citigroup failed to review thousands of trades that were made by a number of trading desks. Even though firm personnel looked at reports to assess trades daily, technological errors caused several information sources regarding thousands of key trades to be left out.

As the SEC noted in its order, advanced computer systems are often now involved in automated trading. Technology oversight is key to making sure that compliance is in effect.

FINRA Probes Broker Pay for Conflicts of Interest

Published on: August 20, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has sent a targeted exam letter seeking to examine possible conflicts of interest in the way firms pay brokers. About a dozen brokerage firms received the letter, which the regulator said is aimed at gathering information as opposed to seeking out violations.

In its letter, the self-regulatory organization inquires about each firm’s different compensation practices, including common payout grids, mutual fund fees, and recruiting incentives. FINRA also wants to know about any compensation that firms may receive from product sponsors and how certain products are promoted. It also wants to learn about production thresholds that allow certain brokers to get bonuses and more compensation for additional revenue earned, improved compensation tied to revenue from certain product types, and policies for monitoring conflicts of interest as they relate to compensation.

FINRA Executive Vice President of Regulatory Operations/Shared Services Dan Sibears said that the SRO is conducting the sweeps to see if firms are properly managing conflicts of interest or if additional guidance needs to be issued. Enforcement actions typically do not result from this type of sweep unless egregious violations are discovered.

Over 14,000 Massachusetts Investors Receive Checks for Losses in $1B TelexFree Ponzi Scam

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

The first checks for compensation in the $1 billion global Ponzi scam involving TelexFree Inc. have gone out to over 14,000 investors in Massachusetts. Victims received $2.9 million in total as part of a settlement with Fidelity Cooperative Bank. This is only a small portion of the alleged losses.

About 1.9 million investors are still waiting to get any financial relief in the case, which affected not just people in the US as the scam spread globally and virally online and by word of mouth. The alleged Ponzi scam involved fraudsters selling inexpensive Internet phone service for long distance calls. They were recruited as members for $1,400 increments. Big financial returns were promised to investors for bringing in other investors and using Internet ads to market the business. While early investors made money, many others suffered substantial losses.

Telex-Free was shut down in Brazil in 2013, but the Ponzi operation continued in Massachusetts where it was headed up by James Merrill and Carlos Wanzeler. Both deny the criminal and civil charges.
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Citigroup Affiliates to Pay $180M To Resolve Hedge Fund Fraud Charges

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

Citigroup Global Markets Inc. (CGMI) and Citigroup Alternative Investments LLC (CAI) have consented to pay close to $180M to resolve Securities and Exchange Commission charges accusing them of bilking about 4,000 investors in the Falcon fund and the ASTA/MAT fund. The two hedge funds went on to fail during the financial crisis. The settlement money will go to investors who were hurt in the purported fraud.

According to an SEC probe, the Citigroup (C) affiliates made misleading and false misrepresentations to investors. The two hedge funds, managed by Citigroup Alternative Investments, were highly leveraged and sold only to advisory clients of Smith Barney and Citigroup Private Bank. They were sold by financial advisers associated with Citigroup Global Markets. Together, the hedge funds raised close to $3 billion in capital from investors before they went on to fail.

In its order, the SEC said that the ASTA/MAT fund bought municipal bonds and hedged interest rates by employing a Treasury or LIBOR swap. It described the Falcon fund as multi-strategy, invested in fixed-income strategies (including collateralized loan obligations, collateralized debt obligations, asset-backed securities) as well as in the other hedge fund.

Investors claim that the two affiliates misrepresented the hedge funds as low-risk, safe, and suitable for bond investors looking for traditional investments, when, in fact, the funds were high risk. They contend that even as the funds started failing, CAI accepted close to $110 million in investments.