Investor Lawyers Blog

FINRA Warns Investors About High-Yield CDs

Published on: February 15, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has put out a new investor alert warning about advertisements that are marketing higher-than-average CD yields. The self-regulatory authority says that some of the ads might be an attempt to get investors to buy a much more much more expensive investment, such as a fixed or equity-indexed annuity, that is not risk free. Often, the alternative investments are insurance products.

FINRA warned that with most CD promotions that are marketing ploys, an investor would be required to go to an office or talk to a salesperson, who may try to convince the prospective buyer to purchase an alternative product that is not a CD. Typically, the minimum purchase amount is high, such as $25K. Such ploys would also tout a “bonus”-a sum the salesperson would pay you plus the average percentage yield of the CD. FINRA warns that this bonus is actually an incentive to get you to hear the pitch for the more complex product. Meantime, the seller may be earning a high commission for making the sale.
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Hedge Fund Manger Files Whistleblower Lawsuit Blames Carlyle Group For Almost $2B of Investor Money

Published on: February 15, 2016 | by Shepherd Smith Edwards & Kantas, LLP

In his whistleblower lawsuit, ex-hedge fund manager Nikhil Dhir claims that the Carlyle Group fired him for complaining that the global asset management group’s executives had allowed close to $2B of investment funds to shrink to less than $50M without notifying account administrators. The Carlyle Group disputes his accusations.

According to the complaint, Dhir was initially hired by a company called Vermillion as an energy portfolio manager for the Viridian Fund. The fund was supposed to concentrate on trading derivatives, physical commodities, and stock options in the soft commodities, metal, freight, and energy industries.

When the Carlyle Group purchased a 55% stake in Vermillion, Dhir became a Carlyle employee, while the Viridian Fund was marketed as a diversified investment fund with low volatility and the promise that no more than 30% of the portfolio ever would be allocated toward just one commodity.

The fund invested in freight position four years ago. According to Dhir, between ’12 and ’14, the percentage of the Viridian Fund that went to freight reached over 90%. Yet, said Dhir’s lawyer, the fund’s partners continued to tell investors and the portfolio manager that the position was liquid and there would be “minimal market impact” if it were to be exited.

Securities Fraud: Ex-Broker Jerry McCutchen Under Investigation for REIT Sales, Hedge Fund Manager Must Pay $18M to SEC, and NASAA Steps Up Fight Against Elder Financial Fraud

Published on: February 13, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Former Broker Is Subject of Numerous Securities Claims
If you are an investor who sustained losses after purchased real estate investments trusts with the help of former broker Jerry McCutchen, you may have grounds for a securities claim. According to the Financial Industry Regulatory Authority’s BrokerCheck Report, McCutchen is accused of making unsuitable investment recommendations and he has been the subject of over a dozen broker fraud claims alleging negligence, misrepresentations, and other claims.

In one case, McCutchen, while registered with Berthel Fisher & Company Financial Services, Inc., is accused of placing a couple’s retirement funds in speculative, illiquid, alternative investments that he misrepresented as safe investments in line with the husband and wife’s investment goal to keep their money safe. In reality the Tier REIT, the Icon Leasing Fund Twelve LLC, and others, did not have proper diversity or allocation and were not suitable for the couple.

McCutchen is not registered with any firm at this time nor is he a licensed broker at the moment. He was registered with Berthel Fisher & Co., Bay City Securities, Next Financial Group, First Funds Inc., FSC Securities Corp, Central Brokerage Services, Commonwealth Equity Services, MML Investors, Proequities Inc., and Walnut Street Securities.

NY Hedge Fund Manager Ordered to Pay $18M
Moazzam “Mark” Malik, and his American Bridge Investment Group LLC are facing SEC charges accusing them of bilking 19 clients of over $1M through the sale of limited partnership interests in a fake hedge fund that was run under different names. The SEC said that Malik claimed that the fund held $100M when that amount was never more than about $90,000. Now, the regulator is ordering Malik to pay $18M.
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Aequitas Lays Off More Employees in the Wake of Faulty Subprime Bets

Published on: February 12, 2016 | by Shepherd Smith Edwards & Kantas, LLP

In the second round of layoffs, Aequitas Capital Management announced that it is letting of even more workers in the wake of financial problems. A week after disclosing that it would lay off about a third of its workers, the investment firm told employees that almost everyone else would have to go. Workers were given 60 days notice. A spokesperson for Aequitas explained that the Oregon-based investment firm was modifying its strategy and changing its business model.

The firm which manages investments for rich individual investors appears to be having serious cash flow issues. This is a definite about-face for a company that once held $500 million in assets under management. Not only was it a challenge for Aequitas to make payroll during the first month of this year, but also the firm angered investor clients last year when it told them that it couldn’t meet scheduled payouts because of liquidity issues. Company officials claimed that the delays were unexpected because of “incoming investments” and “timing mismatches involving cash flow.”

Over the last few years, the investment firm has become more focused on subprime credit to purchase consumer healthcare debt, student debt, and motorcycle loans. In total, investors have bet close to $600M on Aequitas’ subprime lending strategies.

Aequitas was also connected Corinthian Colleges Inc., which has been accused by federal regulators of using deceptive and predatory tactics to get students to enroll and borrow money for tuition. According to The Oregonian, a firm affiliate purchased over $500M in Corinthian student loans at a reduced rate and charged the college chains millions of dollars in fees for its assistance. The company had set up the Campus Student Funding LLC to purchase the debt from Corinthian.

Bondholder Group with $17.3B in Puerto Rico Debt Proposes Debt Restructuring Plan

Published on: February 11, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Puerto Rico Sales Tax Financing Corporation (COFINA) has submitted a plan to restructure the financially beleaguered island’s debt. COFINA, which is comprised of investors who possess debt backed by sales-tax revenues, has issued $17.3 billion in Puerto Rico debt-$7.5 billion in senior debt and $9.7 billion in second lien debt.

COFINA’s proposal is in response to another plan submitted by the island’s development bank earlier this month. With its proposed plan, COFINA is asking Puerto Rico to suspend repayments to members of the bondholder group until 2018, when payments would steadily grow to at least $600 million by 2021.

In exchange for the delayed payment, the bondholders are asking for the preservation of the notes’ tax-backed guarantee. Already, COFINA’s payments due this fiscal year have been put aside with its bond trustee.

The bondholder’s group includes creditors such as Whitebox Advisors, Metropolitan Life Insurance and Golden Tree Asset Management. The bondholder group believes that delaying repayments for two years should give the island time to recover financially.

Judge Refuses to Overturn Conviction of UK Traders for Rigging Libor

Published on: February 11, 2016 | by Shepherd Smith Edwards & Kantas, LLP

U.S. District Judge Jed Rakoff in New York has upheld the guilty convictions of former Rabobank (RABO) traders Anthony Conti and Anthony Allen for wire fraud and conspiracy. They are accused of involvement in the scam to rig the yen Libor rates and the U.S. dollar to benefit Rabobank’s trading positions. In 2014, the Dutch lender settled European and US probes into Libor rigging for $1B.

Allen and Conti, who face up to ten years behind bars, are claiming that they didn’t receive a fair trial because Paul Robson, the federal government’s star witness, read 300 pages of statements that the two British citizens were required to give during a parallel probe in the U.K.

Chesapeake Energy Corp. Stops Investor Payouts After Its Shares Plummets

Published on: February 10, 2016 | by Shepherd Smith Edwards & Kantas, LLP

U.S. natural gas driller Chesapeake Energy Corp. (CYC) has been halting investor payouts and cutting jobs to keep its cash flow from drying up. Now, with its shares dropping 51% following reports by Debtwire that the company has hired restructuring attorneys to help deal with its $9.8 billion debt, investors may have a reason to worry. During the first hour of trading alone on Monday, $838M in market value was eliminated.

Chesapeake has a debt load that is eight times larger than its market value. Even though it pumps more gas in the U.S. than any driller besides Exxon Mobil Corp., Chesapeake has $1.3B in debts that are scheduled to mature by the end of next year.

Last month, Standard & Poor’s reduced Chesapeake’s credit rating to CCC+, while issuing a negative outlook that gas and oil prices would stay on the weak end. S & P declared the natural gas driller’s debt leverage “unsustainable.

Investors are not the only ones at risk now that Chesapeake is in trouble. Oil and gas pipeline companies, many of which are master limited partnerships, with contracts worth billions of dollars could also take a hit. Companies with contracts with Chesapeake include Kinder Morgan Inc., Williams Companies Inc., Marathon Petroleum Corp’s unit MPLX LP, Columbia Pipeline Partners LP, and Spectra Energy Partners LP. Reuters reports that according to federal filings, Chesapeake said it is on the line for about $2B a year for pipeline space run by MLPs.
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UK Regulator Fines Ex-JPMorgan Executive $1.1 Over London Whale Debacle

Published on: February 9, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The UK’s Financial Conduct Authority is fining former JPMorgan Chase (JPM) executive Achilles Macris approximately $1.1M for failing to cooperate and communicate properly with regulators during the agency probe into the London Whale fiasco. Although Macris is now agreeing to settle the securities charges, he continues to defend himself. He insists that he stayed “above and beyond any reasonable” transparency standards and that he is only agreeing to resolve this case because the F.C.A. had accepted his contention that he did not mislead anyone on purpose. The FCA would not comment on Macris’ statements about the settlement.

The former JPMorgan executive was in charge of the firm’s chief investment office in London, which was supposed to invest funds for the bank and help offset possible losses. Unfortunately, a bad bet made by the unit on credit derivatives cost the bank $6.2B.

Texas Hedge Fund Manager Accuses United Development Funding IV of Ponzi Scam

Published on: February 8, 2016 | by Shepherd Smith Edwards & Kantas, LLP

J. Kyle Bass, the hedge fund manager who runs the Dallas-based Hayman Capital, has set up a website accusing Texas-based REIT United Development Funding IV of running a Ponzi-like real estate scam. On the site, Bass published a letter to readers, claiming that his firm had conducted research and found that the nontraded real estate investment trust displayed characteristics in line with a billion-dollar Ponzi scheme.

Bass contends that UDF used money from a public affiliate to rescue its first fund. According to Business Insider, Bass also claims that UDF management has been distorting its poor track record and the financial state of its affiliates going as far back as the financial crisis. He alleges that UDF has been taking advantage of retail investors and using UDF- controlled entities and real estate backed loans to conceal the fact that new investors money is b used to pay existing investors.
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FINRA Cases: Firms To Pay $1.2M Over UIT Sales, Broker Charged for Lying to a Native American Tribe, and Morgan Stanley Ordered to Pay Clients $825K

Published on: February 6, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Brokerage Firms to Pay $1.2M for Not Applying UIT Discounts
The Financial Industry Regulatory Authority has charged Next Financial Group Inc., Stephens Inc., and Key Investment Services with failing to grant sales charge discounts when certain customers that were buying unit investment trusts were eligible for the reduced rates. The three broker-dealers are also face charges for inadequate supervision. The self-regulatory organization is ordering the three firms to pay $1.2M in restitution and fines. The FINRA settlements stated that Stephens did not give the discounts from 1/10 to 5/15 and the other two firms did not give them from 5/09 to 4/14.

Unit Investment Trusts
A UIT is a fund that combines a fixed portfolio of income-producing securities that are bought and held to maturity and an actively managed fund. These funds usually issue securities, also known as units that are redeemable-meaning that the UIT will repurchase the units from an investor at the approximate net asset value.

FINRA has been looking into whether firms are giving clients that are entitled to purchase discounts the reduced rates. Last year, the SRO ordered a number of firms to pay $6.7M in restitutions and fines for not giving discounts to clients when selling them UITs.

Broker Accused of Fraud, Targeting Native American Tribe
Broker Gopi Krishna Vungarala is facing FINRA charges for lying to a Native American Tribe about the $11M in commissions they paid him when he sold the tribe $190M of business development companies (BDCs) and nontraded REITS. The SRO said that from 6/11 to 1/15 Vungarala, who was the tribe’s treasury investment manager and registered representative, lied to the tribe about investments he recommended to them.
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