Investor Lawyers Blog

Massachusetts Regulatory Charges Realty Capital Securities With Fraud Related to Proxy Votes in Real Estate Deals

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

Massachusetts Secretary of the Commonwealth William Galvin is charging Realty Capital Securities with fraud involving the purported gathering of proxy votes to support AR Capital-sponsored real estate deals. Realty Capital Securities is part of RCS Capital Corp., also known as RCAP. Galvin wants to take away RCS’s registration as a brokerage firm in the state.

An RCS employee provided details about how colleagues pretended to be shareholders on proxy calls so they could vote for deals that were in management’s best interests. There was purportedly no training over how to deal with proxy solicitation. Oversight is said to have involved RCS management regularly asking employees for updates about proxy votes and whether any progress had been made.

The Massachusetts regulator said that Realty Capital Securities agents pretended to be shareholders and cast bogus votes for investment programs that were sponsored by Nicholas Schorsch’s AR Capital. Schorsch is a principal shareholder in RSC Capital, which is the wholesaler broker-dealer of RCAP.

For example, reports InvestmentNews, fake votes were cast in a September vote at a Business Development Corporation of America meeting. The vote was required so that Apollo Global Management could purchase real estate assets from Schorsch. Galvin said that BDCA paid RCS $375K for the solicitation of the proxy votes.

Although the deal failed this week—Apollo was supposed to buy a $378M majority stake in the company—the global management firm was able to buy RCS’s wholesaling business, including brokerage firms Strategic Capital and Realty Capital Securities, at a lower price of $6M.

Oil Companies Expected to Default

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

Unpaid debt incurred by oil companies to pay for new drilling equipment and rigs could lead to a number of them defaulting. According to CNN, many of these companies had expected prices for oil to hit the $100 range when they incurred the debt and are now contending with oil prices of about $45 and no sign of the original expectation being met in the near future.

Unlike a year ago, when low interest rates and junk bond markets helped spur the energy boom in the United States and inexpensive credit let companies invest in new technologies for oil drilling, there has been a rise in credit costs. At ETF.com’s recent Fixed Income Conference, DoubleLine Capital founder Jeffrey Gundlach said that while US production of oil has slowed, the inventories for domestic crude oil levels have stayed high.

In August, Moody’s Investors Services said that it expected more US oil companies to default because banks have become stricter about lending standards and contracts that had committed to higher crude prices for production in the future get set to expire. The credit rating agency said that the energy sector would be a main default driver in 2016.
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Securities Fraud Headlines: NBA’s Tim Duncan Sues Financial Adviser Again, JPMorgan Hackers Face Criminal Charges, and FINRA Warns Military Vets May Be Targeted by Their Own

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

Spurs Star Tim Duncan Says Ex-Financial Adviser Bilked Him of Millions

NBA star Tim Duncan is suing his former financial adviser again. The San Antonio Spurs player says that Charles Banks cost him millions of dollars because he persuaded him to invest $1.1 million in a cosmetics company. Banks purportedly told him that the company was profitable even though it was about to go bankrupt.

Duncan sued Banks in January in another Texas securities case accusing the latter of making unsuitable recommendations that cost him some $25 million. Banks gave financial advice to the NBA player for almost twenty years. Duncan claims that some of the recommendations made were in his former financial adviser’s best interests while detrimental to him.

FINRA Awards First United Bank & Trust Over $11.5M in Arbitration Case Against First Horizon National Involving CODs and Other Securities

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

A Financial Industry Regulatory Authority arbitration panel has awarded First United Bank & Trust and First United Corp. over $11.5M in their securities fraud case against FTN Financial Securities Corp., Hugh James Boone, and Franklin Benjamin Kennedy. The bank is claiming unsuitable investments, misrepresentations, omission, breach of fiduciary duty, failure to supervise, breach of implied contract, and common law fraud involving the claimants’ purchase of preferred term securities, trust preferred securities, and other collateralized debt obligations. Two of the preferred term securities at issue are the PreTSL Notes, also known as the I-PreTSLI notes, and the PreTSL XVII.

The claimants said that that purchase of the PreTSL Notes were among a number of transactions in their leverage strategy. They said that the respondents were aware that the notes had deteriorated after they were issued but did not inform the claimants. The respondents denied the claimants’ allegations. Boone and Kennedy in their response said that they acted properly as financial adviser.

Investors May Have Lost Up to 88% in Goldman Sachs BRIC Fund

Published on: November 9, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Goldman Sachs Group Inc. (GS) is folding its BRIC fund and merging it with a broader emerging market fund. The BRIC fund, which invests in Russia, China, Brazil, and India, has been losing money. In its filing to the SEC, the bank said that it doesn’t see the nine-year-old product experiencing “significant asset growth.” Unfortunately for some investors of the BRIC fund, depending on when you invested, you may have lost up to 88%.

The acronym for the fund comes from the names of the countries in which it invested. Goldman’s BRIC fund allowed investors to bet on growth in Brazil, Russia, India, and China. It was Goldman Sachs Chief Economist Jim O’Neill who invented the name, selecting the nations for their potential for growth and their importance to the economy some 14 years ago.

Following an investment boom, these large emerging markets are now starting to falter, as have investors’ previous gains. China is expected to experience its weakest expansion in 25 years and Brazil and Russia are going into recessions. While India has experienced growth, the nation’s prime minister is finding it challenging to put reforms into place.
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Republican Rep. Introduces Bill to Place Limits on SEC’s Use of In-House Judges

Published on: November 9, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Rep. Scott Garrett (R-N.J.) recently introduced legislation that would let defendants choose the option of having their case tried in federal court instead of by a Securities and Exchange Commission administrative law judge. Garrett believes that the regulator has been overusing its in-house courts, practically turning itself into “judge, jury, and executioner” in enforcement cases.

Garrett, along with others who oppose the use of SEC in-house judges, says that defendants have greater latitude when their cases go to a jury. His bill would also up the evidence standards for cases that are presided over by an SEC judge.

Several parties have filed lawsuits opposing the SEC’s administrative court process. They claim that the system is a constitutional violation. Some feel that the SEC has the upper hand when it comes to the outcome of enforcement cases because its own judges are deciding the rulings.

Securities Headlines: FINRA Seeking to Fine MetLife Over Variable Annuity Sales, SEC Accuses Scottish Trader of Sending Fake Tweets, Market Rigging, and Judge Orders Man to Stop Crowdfunding Fraud

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

FINRA Plans to Fine MetLife for Purported Variable Annuities Violations
The Financial Industry Regulatory Authority is looking to impose a significant fine against MetLife’s broker-dealer unit related to possible violations involving variable annuities. The company is cooperating with the regulator’s probe, which is looking at alleged suitability, misrepresentation, and supervision issues related to the selling and replacements of variable annuities.

According to MetLife’s quarterly regulatory filing, FINRA told the insurance giant that it plans to recommend disciplinary action. InvestmentNews reports that in an e-mailed statement, MetLife spokesperson John Calagna said that the company did not agree with the conclusions reached by the regulator and plans to defend itself.

SEC Charges Scottish Trader with Over Market Rigging Involving False Tweets
The Securities and Exchange Commission has filed securities fraud charges against James Alan Craig of Scotland for allegedly filing false tweets that caused sharp declines in the stock prices of two companies, even causing one of them to experience a trading halt. The regulator said that Craig sent out false statements via Twitter on accounts that he deceptively set up to make them look like legitimate Twitter accounts of known securities research firms.

According to the SEC’s complaint, Craig’s first bogus tweets caused the share price of one company to drop 28% until Nasdaq temporarily stopped trading. The next day, he sent out false tweets about another company that led to a 16% drop in the share prices of that company. Both days he purchased and sold shares of the companies he targeted to try to profit from the sharp price changes. He was mostly successful in his efforts.
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JPMorgan Ordered to Pay Family Trust Over $1M Related To Purported Violations Involving Short Trading, Leveraged ETFs and Ex-Firm Adviser Must Pay $22M for Fraud

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

A Financial Industry Regulatory Authority panel has awarded The Elliot Family Trust DTD, Eugene Elliot, Genraza LLC, and Shawn Elliot Over $1M in their securities arbitration case against J.P. Morgan Securities (JPM).

The claimants are contending fraud, breach of fiduciary duty, misrepresentation and omissions, failure to control and supervise, and violations of federal and state securities laws related to the alleged short trading of US Treasury securities and the unsuitable purchase and allocation of securities, including leveraged exchange-traded funds and unspecified options. They had initially sought compensatory damages no lower than $1.75M, rescission of the purportedly unsuitable investments, punitive damages, legal fees, and other costs. Meantime, the financial firm sought to have their case dismissed.

Following the pleadings, the FINRA arbitration panel decided that the respondent is liable for and must pay claimants over $1.145M in compensatory damages, interest on that amount, and over $43,000 in other fees.
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Fenway Partners to Pay Over $8M For Not Disclosing Conflicts of Interest

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

The Securities and Exchange Commission has filed charges against Fenway Partners LLC and four of its executives. According to the regulator, when fund and portfolio company assets were used to pay ex-firm employees and an entity to which the New York-based private equity firm is affiliated the parties did not disclose to a fund client and investors that there were conflicts of interest.

The SEC says that Fenway Partners, principals William Gregory Smart and Peter Lamm, CFO Walter Wiacek, and ex-principal Timothy Mayhew Jr. did not fully disclose to the client and investors that a number of transactions involving over $20M in payments had come out of portfolio companies or fund assets. SEC Enforcement Division Director Andrew Ceresney said that the investors and the fund client were not told that the firm and its principals had rerouted the portfolio company fees to affiliate Fenway Consulting Partners, LLC for services and that they failed to give the fund client the benefits of those fees via fee offsets for management.

Also, according to the SEC’s order, which institute a resolved administrative proceeding, Fenway Partners went into contracts with the certain portfolio companies that were held by Fenway Capital Partners Fund III L.P. Through these contracts, the companies paid Fenway Consulting Partners the fees at issue.

Securities Cases: More Brokers Identified by SEC in Stock Rigging Case, Former Ameriprise Broker Gets Prison Term for Fraud, and Boeing Settles 401K Case for Almost $57M

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

SEC Names More Brokers in Penny Stock Rigging Case Filed Last Year
The Securities and Exchange Commission is charging three more people related to a $300M penny stock rigging case that it filed last year. In federal court, the regulator sought to lift the stay in its civil case to submit an amended lawsuit and now also name brokers Ronald Heineman and Michael Morris, as well as lawyer Darren Ofsink.

The SEC says that Morris and Heineman executed the scam through their brokerage firm awhile Ofsink made money illegally by selling unregistered shares even though no exemption for registration was valid. Meantime, the U.S. Attorney’s Office in New York is fling criminal charges against Ofsink ad Morris.

Per the amended SEC complaint, in 2013 Abraxas Discala, Marc Exler, and brokers Craig Josephburg and Matthew Bell were involved in a scam to raise the price of CodeSmart Holdings stock. The men intended to make money at the expense of Josephberg’s customers and Bell’s clients. Heineman and Morris, who own Halcyon Cabot Partners-the firm where Josephberg was employed-allegedly were involved in the securities scam. The two men are accused of secretly consenting to buy shares of CodeSmart at pre-set prices so that Discala could liquidate his positions at prices that were artificially raised. Meantime, Ofsink, who played a part in the execution of the company’s reverse merger into a public shell company, made money by illegally selling securities of CodeSmart that were not registered.

Trading in CodeSmart has been suspended because the company hasn’t submitted periodic reports since late 2014 and due to purportedly suspect market activity.

Former Ameriprise Adviser Gets Prison Term for Defrauding Clients of Over $1M
Former Ameriprise (AMP) adviser Susan Elizabeth Walker wills serve more than seven years behind bars for defrauding at least 24 retirement accounts of over $1.1M. Walker was convicted of tax evasion and mail fraud. She pled guilty last year to the criminal accounts.

Walker offered financial planning services through the firm from October 2008 through March 2013. She also was registered with the Financial Industry Regulatory Authority and was a securities agent under the Minnesota Department of Commerce.
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