Investor Lawyers Blog

Ex-Nomura, RBS Trader Enters Guilty Plea to Bond Fraud

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

Matthew Katke, formerly of Royal Bank of Scotland Group Plc (RBS) and Nomura Holdings (NMR) has pleaded guilty to conspiracy to commit securities fraud for his involvement in a multi-million dollar bond scam to bilk customers. As part of his deal he will cooperate with prosecutors into its investigation of mortgage-linked bonds and collateralized debt obligations.

Katke traded securities that were backed collateralized loan obligations, which are high-yield corporate debt. The charge is related to activities he engaged in while at RBS. Prosecutors say that Katke and co-conspirators made misrepresentations to get customers to pay prices that were inflated and sellers to say yes to deflated bond prices. The scam took place from around 2008 to June 2014.

Court documents say that Katke and co-conspirators sought to profits on bond trades through the false statements they gave customers. They misrepresented the prices that RBS had paid to get a bond or what it was asking to sell it. They also misled clients about whether a bond was from RBS’s inventory or a third party. RBS is cooperating with the probe.

Wealthfront CEO Claims Schwab is Fooling Investors Over “Free” Automated Investment Platform

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

Adam Nash, the CEO of Wealthfront, claims that Charles Schwab & Co. (SCHW) is deceiving investors by claiming that Intelligent Portfolios, its automated investing platform, is free. Nash, whose company competes with Schwab’s new service, contends that the platform will cost consumers thousands of dollars in opportunity expenses involving expensive “smart beta” exchange-traded funds and high cash allocations. These costs, he argues, are concealed in disclosure documents.

Intelligent Portfolios lets consumers manage, rebalance, and oversee their portfolios through the Internet. The program allows investors to evaluate their goals and risk tolerances using specific questions. Investors must have at least $5,000 and they would get recommendations based on their responses.

Algorithms are supposed to help clients build and maintain their portfolios in low cost ETFs with asset classes of up to 20. Intelligent Portfolios joins Wealthfront and Betterment in the robo-field for automated investing.

Appellate Court Says Charles Schwab & Co. Must Face Financial Advisory Firm’s Lawsuit Over Mortgage Debt Involving Bond Funds

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

A panel of U.S. Judges says that Charles Schwab & Co. (SCHW) must face a lawsuit brought by Northstar Financial Advisors Inc. The investment advisory firm claims that Schwab invested the assets of a bond-index fund in high-risk mortgage debt prior to the financial crisis. The plaintiff is proposing that this case be a class action securities claim, which could include investors who have owned the fund since 2007. In particular, notes Northstar Financial Advisors Inc., the Schwab Total Bond Market Fund (SWLBX) placed lots of risky debt into the fund, resulting in losses of tens of millions of dollars, as well as underperformance against its benchmark.

Reuters reports that the plaintiffs claim that because Schwab invested over 25% of assets in non-agency mortgage securities and collateralized mortgage obligations, the firm’s portfolio managers disregarded the fundamental investment objectives of the fund to track the Lehman Brothers U.S. Aggregate Bond Index and stay away from industry bets. Because of this, they argued, the fund lagged its benchmark from 9/1/07 to 2/27/09, suffering a 4.80% loss while the index posted a 7.85% positive total return.

Northstar Financial Advisors Inc. filed its securities case in 2008 but the complaint was mired in procedural matters until now. This latest appeal was argued in 2013 in front of three federal judges of the 9th U.S. Circuit Court of Appeals in San Francisco. Their decision, finally—albeit nearly two years later—reinstates the breach of fiduciary duty, breach of contract, and other claims.

District Court Imposes $26M Commodity Pool Fraud Penalty

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

The U.S. District Court for the Southern District of New York says that Mark Evan Bloom and his North Hills Management, LLC (NHM) must together pay a $26 million civil penalty for running North Hills LP, a fraudulent commodity pool, and misappropriating customer monies.

It was in June 2010 that the court submitted a Consent Order of permanent injunction against the two defendants. The court said that both Bloom and his firm misappropriated around $13 million from North Hills, which they ran for at least seven years. During that period, Bloom kept up a fancy lifestyle, even buying a more than $5 million apartment in Manhattan.

Bloom and NHM were accused of hiding their misappropriation, making misrepresentations and material omissions to pool participants, and issuing false statements about North Hills. A permanent injunction, as well as permanent trading, registration, and solicitation bans were imposed.

Texas-Based Broker-Dealer Faces SEC Charges Over Supervisory and Customer Protection Violations

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

The Securities and Exchange Commission is charging H.D. Vest Investment Securities with violating customer protection rules. The regulator contends that the Texas-based broker-dealer did not adequately supervise registered representatives that are accused of misappropriating customer monies.

H.D. Vest will pay a penalty to settle the charges. It has consented to get an independent compliance consultant that will help the firm enhance its supervisory controls.

The SEC’s order, which institutes a settled administrative proceeding, said that the firm did not have proper procedures and policies to oversee the external business activities of representatives. This allowed some of them to use outside businesses to bilk the brokerage firm’s customers. Some even deposited or moved customer brokerage funds into these external business accounts.

Citigroup, Wells Fargo, JPMorgan Chase, And 27 Other Big Banks Pass Fed Stress Tests’ Phase One

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

The 31 biggest banks in the U.S. all passed the first phase of the Federal Reserve’s stress test. This is the first time since the tests have been conducted on banks with over $50 billion in assets that all of them stayed above capital requirements.

Banks have been building their capital reserves, based on tougher Fed requirements, to protect against any losses. Included among the firms that did well are Wells Fargo (WFC), Citigroup (C), JPMorgan Chase (JPM), and Goldman Sachs (GS).

Based on the results thus far, the Federal Reserve said the big U.S. banks are healthy enough to keep lending if there were to be a serious recession, even if corporate debt markets failed, housing and stock prices dropped, and unemployment were to reach 10%.

Doral Bank In Puerto Rico Fails

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

The Federal Deposit Insurance Corp. announced that The Office of the Commissioner of Financial Institutions of Puerto Rico has shut down Doral Bank in San Juan. The FDIC is now the bank’s receiver. Many investors have lost money through the Puerto Rico Conservation Trust Fund.

Banco Popular de Puerto Rico has now purchased $3.25 billion of Doral’s assets to acquire the defunct bank’s operations, including its deposits. A day after Doral shuttered its doors, 26 of its former branches reopened. Eight of them are now run by Banco Popular (OTCMKTS: BPESY), which resold the other 18 branches and their deposits to FirstBank Puerto Rico, Banco Popular North America, and Centennial Bank. The latter two now run Doral’s U.S. branches.

Doral Bank had approximately $5.9 billion in overall assets and $4.1 billion in deposits ending in 2014. Regulators determined that it was “critically under-capitalized.” After the FDIC notified the bank that it wouldn’t be able to use a $229 million tax refund for its Tier 1 capital, it was unable to raise more capital.

Broker and Adviser News: Morgan Stanley Sues Ameriprise Broker, Former UBS Broker Alleges Investor Risk Levels Were Mischaracterized, and Ex-Bank of America Merrill Lynch Trainees Seek Overtime

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

Morgan Stanley Accuses Ex-Broker, Now With Ameriprise, of Trying to Take Clients

Morgan Stanley Wealth Management is suing one of its ex-brokers, John McCallion, who is now with Ameriprise Financial Services (AMP). The wirehouse claims that McCallion went into Morgan Stanley’s (MS) computer system before leaving the firm and changed his clients’ phone numbers so he could take their business with him.

The firm contends that while McCallion gave it a list of his clients’ information, he put the data on a USB drive that could not be opened on Morgan Stanley’s computers because of security issues. The Ameriprise broker has consented to a temporary restraining order that blocks him from pursuing the firm’s clients. He also is facing a FINRA arbitration claim over the matter. McCallion had at first tired to argue against the temporary order and he denied taking the confidential list or trade secrets.

Texas Wyly Brothers Must Pay SEC $299.4M for Securities Fraud

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

Sam Wyly and his late brother Charles Wyly’s estate must pay $299.4 million for committing securities fraud. The final judgment comes months after a jury found them civilly liable.

The SEC sued the Texas billionaire brothers in 2010. The regulator accused them of making $553 million in undisclosed profits when they traded in four companies that used trusts in the Isle of Man. The companies included Scottish Annuity & Life Holdings Ltd., Sterling Commerce Inc., Michaels Stores Inc., and Sterling Software Inc.

The SEC contends that the Wylys established the complex trust system so they could make untaxed profits from concealed trades in companies that they controlled. The scam purportedly occurred over a period lasting a decade.

SEC Examines The Way Companies Deal with Whistleblowers

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

The U.S. Securities and Exchange Commission is looking at whether companies are stifling corporate whistleblowers. The regulator has submitted letters to companies to request a number of documents, including employment contracts, nondisclosure agreements, confidentiality deals, and settlement agreements entered into since the Dodd-Frank Act became law. SEC officials are worried that there has been a backlash against whistleblowers.

Some of the documents come with clauses that get in the way of an employee notifying the government about wrongdoing at the company, as well as about other securities law violations. Firms may even demand that employees give up their rights to benefits from government investigations, which takes away the incentive that is provided by the SEC whistleblower program.

Under the SEC whistleblower program, tipsters may be entitled to receive 10-30% of penalties collected if the information provided results in an enforcement action that brings in sanctions of over $1 million. In 2014, the regulator looked at over 3,600 tips about possible securities law violations. The number of tips has gone up in recent years. The Dodd-Frank Act bars companies from getting in the way of employees submitting such tips.