Investor Lawyers Blog

Wells Fargo, LPL Financial, and Raymond James to Pay Investors of Retirement Accounts and Charities Over $30M for Mutual Fund Overcharges

Published on: July 6, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority said that LPL Financial, LLC (LPLA), Raymond James & Associates (RJF), Raymond James Financial Services, Wells Fargo Advisors, LLC (WFC), and Wells Fargo Advisors Financial Network, LLC must pay over $30M in restitution plus interest to customers who were impacted when the firms did not waive mutual fund sales charges for certain retirement and charitable accounts. According to the self-regulatory organization, between July 2009 and the end of 2014 the financial firms either improperly overcharged certain investors who had purchased Class A mutual fund shares or sold them Class B or C shares instead. The latter two come with ongoing, high back-end fees.

Mutual funds typically offer different share classes for sale. Each class has its own sales fees and charges. Although Class A shares come with an initial sales charge, they usually have lower annual fees than Class B and C shares. However, mutual funds will usually waive Class A sales charges when selling them to charities and some retirement accounts.

The broker-dealers offered these waivers for the retirement and charitable plan accounts under limited conditions. The waivers also were disclosed in prospectuses. Yet, according to FINRA, at various times since at least July 2009, the firms did not actually waive the sales charges for these customers when they were offered the Class A shares.

Because of this, contends the agency, over 50,000 eligible retirement accounts and charitable organizations either paid sales charges for the Class A shares or bought other share classes that required them to pay higher ongoing fees and other expenses. FINRA said that the firms did not properly supervise the sale of these mutual funds and depended on its brokers to offer the waiver discounts even though they weren’t properly trained.

FINRA Orders BNP Paribas Securities to Pay Retired Couple $16.6M for Unsuitable Investment Sale

Published on: July 4, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority says that BNP Paribas Securities Corp. has to pay retirees James and Margaret Eringer $16.6 million for selling them a leveraged derivative call option, which was not a suitable investment for them. This securities claim, which was brought in 2010, is the longest running case that FINRA has presided over. The arbitration panel finally issued a ruling after over 90 days of hearings.

The Eringers made their money when they sold a bakery business that belonged to one of their parents. The British couple spent about 60% of their investible assets on the investment in 2007.

According to their securities attorney, they made the purchase through Ontonimo Limited, which is a corporate entity that BNP Paribas mandated they create since the firm could not directly sell this kind of security to retail investors. This type of investment product is usually sold to institutional clients and hedge funds.

The Eringers paid BNP over $2 million for costs and fees. The firm also purportedly made James Eringer sign an agreement indicating that he was an investment adviser himself even though he had no professional financial experience nor did he have a securities license. Within 18 months, the Eringers’ contend, their investment became “worthless.”
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Two Former-Bank of Oswego Executives are Indicted for Fraud

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

A federal grand jury has indicted ex-Bank of Oswego president and CEO Dan Heine and former CFO Diana Yates with running a widespread, five-year conspiracy to hide the Oregon-based bank’s troubled financial state from regulators. According to the indictments, the two of them authorized secret deals to conceal bad loans in the bank’s portfolio from the Federal Deposit Insurance Corp and its own board of directors.

According to the indictment, from September 2009 through last year, Yates and Hein conspired to defraud the bank. The reason for the allege conspiracy was to deceive its shareholders, board of directors, the public, and regulators by making the bank seem more financially robust.

Among their alleged acts:

• Using a bank employee to act as a straw man in a bogus real estate transaction.

• Having the bank make loans to a middleman. The latter would allegedly send loan proceeds to other beleaguered bank borrowers so that they could make their loan payments.

• Having the bank make loans and withdrawals from customer accounts without customer approval or knowledge.

• Mischaracterizing assets in reports to the Board and the FDIC, as well as making false entries in the report about the status of different loans and transactions.

• Hiding information about loans from bank insiders

SEC Appeals Its In-House Agency Judge’s Decision to Throw Out Charges Against Financial Advisers Paid by Fidelity to Push Specific Mutual Funds

Published on: July 2, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Commission employees are appealing a ruling by an administrative law judge dismissing charges against two financial advisers accused of not notifying clients that Fidelity Investments (FNF) had paid them to sell specific mutual funds. In the Texas securities case, SEC Administrative Law Judge James E. Grimes rejected claims that The Robare Group and two of its owners violated the law by failing to adequately disclose that they had a financial relationship with the brokerage firm. Grimes said that from listening to Mark L. Robare and his son-in-law Jack L. Jones Jr. testify, he was hard pressed to imagine them attempting to bilk anyone. This is one of the few cases presided over by one of its judges that the SEC has lost.

Fidelity is The Robare Group’s custodian. For the last 11 years, the registered investment advisor has been part of a program in which Fidelity pays it a portion of the revenue earned from the sale of certain third-party mutual funds. The payment goes to the adviser who made the mutual fund sale happen.

Advisors are given access to the funds without any transaction fees. As the custodian, Fidelity refers to payments made to advisers not as commission but as compensation for shareholder administrative fees.

In their appeal, the SEC staffers said that they feared Grimes’ ruling in this case establishes a troubling precedent that shifts the burden of full disclosure of a conflict interest from an investment adviser to a compliance consultant. They said this could allow an investment adviser to be excused from certain securities violations as long as he has a compliance consultant that has not “affirmatively” objected to a “particular disclosure.”
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As Puerto Rico Asks Creditors for Concessions, S & P Downgrades the Territory’s Debt and Investors Get Ready for More Losses

Published on: July 1, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Puerto Rico Governor Alejandro García Padilla says that the U.S. territory cannot pay back its $72 billion debt without concessions from its creditors, including U.S. mutual funds and hedge funds. According to the Governor, the Commonwealth’s efforts to restructure its debt and cut spending have failed.

Following the Governor’s announcement, credit rater Standard & Poor’s Ratings Services downgraded Puerto Rico’s credit rating from CCC-plus to CCC-minus. The rating covers the island’s entire debt, including the debt of its Employees Retirement System and the Municipal Finance Agency.

García Padilla and Puerto Rico’s government development bank also issued a report backing his statements. The executive summary was written by Anne Krueger, a former World Bank Chief Economist and the International Monetary Fund’s first deputy managing director, as well as Ranjit Teja and Andrew Wolfe, who are both economists.

In their “Krueger Report,” the economists said that they found the territory’s debt to be unsustainable. Based on the report and Puerto Rico’s own analysis, García Padilla wants to defer debts so that Puerto Rico can continue to negotiate with creditors. Some payments could be deferred for up to five years. The Governor said, “This is not politics, this is math.”
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Hedge Fund Advisory Firm to Pay the SEC $5M to Settle Fund Valuation Scam Allegations

Published on: July 1, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging AlphaBridge Capital Management and its two owners with fraudulently inflating the prices of securities in hedge fund portfolios that the firm managed. The feeder funds involved are the private funds AlphaBridge Fixed Income Partners, LP and the AlphaBridge Fixed Income Fund, Ltd.

The securities in question are inverse, interest-only floaters and interest only floaters. Both are tranches of collateralized mortgage obligations. To settle the charges, the Connecticut-based investment advisory firm and its owners, Michael J. Carino and Thomas T. Kutzen, will pay $5M.

According to the regulator, AlphaBridge told investors that broker-dealers provided it with independent price quotes for residential mortgaged-backed securities that were thinly traded and unlisted even though the firm derived these valuations internally. The hedge fund advisory firm purportedly told brokers to say that the valuations came from their brokerage firms.

KKR & Co. Will Pay Nearly $30M to Settle SEC Charges of Misallocating Broken Deal Expenses

Published on: June 30, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission announced that Kohlberg Kravis Roberts & Co. (KKR) would pay close to $30 million, including a $10 million penalty, to settle charges that it misallocated over $17 million in “broken deal” expenses to its flagship private equity funds. According to the regulator, over a six-year period ending in 2011, KKR incurred $338 million in diligence expenses, also known as broken deal costs, related to buyout opportunities that were unsuccessful, as well as other similar expenses.

This is the first time the SEC has charged a private equity adviser over the misallocation of broken deal costs. During the period in question, KKR was overseeing two money pools—the private equity funds and its co-investment vehicles. As the private equity funds invested $30.2 billion, KKR co-investors put in $4.6 billion alongside the funds. Yet even though the firm raised billions of dollars of deal capital from co-investors, it was the flagship funds funds that ended up bearing all the costs of these broken deals.

The SEC said that as a result of the firm’s allocation practices, firm insiders and certain major clients who had invested via the co-investment vehicles benefited as none of the broken deal costs were allocated them for years even as they also availed of deal sourcing activities. The regulator said that not notifying investors of its allocation practices was a breach of fiduciary duty by KKR.

Goldman Sachs to Pay $7M Over Market Access Rule Violation Allegations

Published on: June 28, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Goldman Sachs (GS) has agreed to pay a $7 million penalty to settle SEC charges accusing the firm of violating the market access rule on August 20, 2013. According to the SEC, on that day, in under an hour, the firm mistakenly executed thousands of options contracts executions resulting in incorrect orders.

The regulator said that Goldman did not have the adequate safeguards in place that could have prevent it from accidentally sending about 16,000 options orders that were wrongly priced to different options exchanges. According to the SEC, the mistaken transactions occurred after Goldman put into place new electronic trading functionality that was supposed to match client orders with internal options orders.

Because of a configuration error in the software, contingent orders were turned into live orders. All of the orders were given a $1 price.

The orders were sent to options exchanges during pre-market trading. Minutes after regular market trading opened, about 1.5 million options contracts were executed. Because of the rules regarding erroneous options trades, many of the executed trades received price adjustments or were cancelled. The losses might have otherwise cost the firm $500 million.

Federal Judge in Texas Says Law Firms Must Face Lawsuit Seeking Creditor Payments in Stanford Ponzi Fraud

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

Four years after Allen Stanford’s $7 billion Ponzi scam was uncovered in 2009, investors who lost money in the scheme are still trying to recover their funds. The 65-year-old Stanford is serving 110-years behind bars for selling investors bogus high-yield CD’s through his Stanford International Bank based in Antigua. Prosecutors said he used customers’ money to fund his expensive lifestyle.

This week, U.S. District Judge David Godbey in Dallas said that law firms Proskauer Rose and Chadborne & Parke will have to contend with claims brought by a committee of these investors and Ralph S. Janvey, the court-appointed receiver for Allen Stanford’s companies.

Chadborne and Prosakuer had sought to have this lawsuit, which seeks to hold the two law firms liable for legal malpractice, dismissed. The plaintiffs contend that Thomas Sjoblom, who worked at the two firms, allegedly obstructed regulator probes into the Ponzi Scam and helped Stanford conceal the SEC’s investigation from auditors.

Now, the Texas-based judge has decided that Janvey and the investor committee can pursue claims of negligent supervision, professional negligence, civil conspiracy, and aiding and abetting fraud against the two firms. Judge Godbey stated that the allegations suggest that Sjobolm knew that Stanford was potentially running a Ponzi scam, and this awareness was imputed to both firms. Godbey said that the plaintiffs have alleged that the defendants knew that Stanford was engaged in sufficient wrongdoing.
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BaFin Report Accuses Deutsche Bank Executives of Negligence in Libor Rigging

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

According to a report by German financial regulator BaFin, senior management at Deutsche Bank (DB) allegedly behaved “negligently” related to the rigging of Libor rates. The European regulator has been investigating the bank over its possible involvement in the manipulation of the inter-bank rate setting process.

The BaFin report contends that Deutsche Bank’s outgoing joint leader Anshu Jain may have lied to the European nation’s central bank, the Bundesbank, by purposely making inaccurate statements” about rate rigging during a 2012 interview. The regulator wants Deutsche Bank to be subject to special supervisory measures.

The Financial Times reports that, Jain, who resigned from his position and will officially step down at the end of the month, is accused of telling Bundesbank that he did not know about the rumors about possible rigging even though e-mails about a meeting on this matter were forwarded to him in 2008. Deutsche Bank, however, maintains that Jain did not lie or mislead the German central bank during the interview. The bank said that the BaFin report confirms its own findings that no current or ex-members of its Management Board or Group Executive Committee directed firm employees to rig intra-bank offered rate submissions or knew of any attempted manipulations before June 2011.

Deutsche Bank has paid over $9 billion in fines to resolve claims of Libor rigging. In April, the bank was fined $2.5 billion for manipulating interest-rate benchmarks.