Investor Lawyers Blog

Morgan Stanley Must Pay Connecticut Regulators $5M for Supervisory Violations

Published on: June 18, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley (MS) must pay banking regulators in Connecticut $5 million over allegations that the broker-dealer did not properly oversee the communications of its brokers. According to The Connecticut Department of banking, there were a number of issues with the firm’s supervisory procedures. The firm is settling without denying or admitting to the securities allegations.

The state regulators say that Morgan Stanley, which has wealth management branch offices in Connecticut, gave them information about their supervisory procedures that either was “obsolete” or nonexistent. Connecticut Securities Division director Eric Wilder also said that the firm had not updated its written supervisory procedures or compliance manuals for a number of years.

Morgan Stanley is accused of depending on an unqualified third-party provider in India to review all email communications. According to Connecticut regulators, the brokerage firm neglected to make sure that whoever was overseeing the India provider had the proper license and was following the Financial Industry Regulatory Authority’s most current procedures. (Wilder said that the minimum criteria that someone in that country needed to fulfill the compliance function was the ability to speak English-Morgan Stanley has specifically denied this allegation.)

Retirees Hurt, Brokers Enriched by $300 Billion 401(k) Rollover Boom

Published on: June 17, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to Bloomberg.com, as 401(k) rollovers continue to boom, it is the brokers who are profiting while the retirees are sustaining losses. Now, these investors are speaking out.

It was in 2012 that former employees moved $321 billion from 401(K) plans to individual retirement accounts-a 60% rise from the last decade. Now, the IRA is holding about $6.5 million in 401(k)-like accounts.

Even though retirees typically can keep their savings in 401(K) plans, financial firm reps. do reach out to try and persuade them to move their funds to IRAs instead. Internet ads, cold calls, cash incentives, and storefront signs are used to draw retirees in, including the promise of wider investment choices compared to their current plans. In one example of an incentive promised, E*Trade (ETFC) Financial Corp. and Bank of America Corp.’s (BAC) Merrill Lynch offer anyone who rolls over a 401 (K) plan into an IRA up to $600. (However, this can result in additional expenses down the road.)

FINRA Orders Merrill Lynch to Repay $89M in Restitution, $8M Fine for Excessive Mutual Fund Fees for Charities, Retirement Accounts

Published on: June 17, 2014 | by Shepherd Smith Edwards & Kantas, LLP

FINRA says Bank of America (BAC) Merrill Lynch failed to waive mutual fund sales charges for a number of retirement accounts and charities. Now the wirehouse must pay as restitution $89 million and a fine of $8 million. The firm settled without denying or admitting to the findings.

The majority of mutual funds with the firm’s retail platform are supposed waive specific fees for charities and retirement plans that qualify for this consideration. However, Merrill Lynch neglected to ensure that its advisers were correctly implementing these waivers. This impacted 41,000 accounts.

The SRO says that from about ’06 – ’11, firm advisers put tens of thousands of accounts into certain funds, including Class A mutual fund shares, and promised to waive specific sales charges for charities and retirement accounts. It then did not act to ensure that all of the fees were actually waived.

NY Hedge Fund Adviser Faces SEC Charges Over Conflicted Transactions and Whistleblower Retaliation

Published on: June 16, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Candace King Weir and her hedge fund advisory firm Paradigm Capital Management will pay $2.2M to resolve Securities and Exchange Commission charges accusing the firm of executing prohibited principal transactions and acting against the whistleblower employee who notified the regulator about the conflicted activity. Weir is charged with causing the principal transactions to happen.

The agency contends that Weir facilitated the transactions between her firm and C.L. King & Associates, a brokerage firm that she also own, while trading for the hedge fund PCM Partners L.P. II. This type of transaction presents a conflict of interest between the client and adviser, and the latter is supposed to disclose that they are involved on both sides of the trade. The adviser also needs to get the client’s permission for this.

According to the Commission’s order, Paradigm did not give written disclosure to the hedge fund or obtain its consent. Paradigm’s head trader then reported the trading conduct.

Hedge Fund Fraud News: Ex-Osiris Partners Principals Must Pay $55M, Ex-SAC Manager Gets Prison Sentence for Insider Trading, Lawyer Goes to Prison Over Rothstein Fraud, and Former New Stream Capital Executives Plead Guilty

Published on: June 14, 2014 | by Shepherd Smith Edwards & Kantas, LLP

NJ Court Orders Former Osiris Partners LLC Principals To Pay Over $55M

A state court in New Jersey has ordered the ex-principals of Osiris Partners LLC, Ex-CEO Michael J. Spak, ex-Chairman Peter Zuck, and ex-controller Joseph C. Spak to pay more than $55 million in penalties and restitution for hedge fund fraud. Investors were bilked when the men fraudulently inflated the firm’s net asset value and diverted funds for personal spending.

Prosecutors contend that the men overstated the net asset value of the hedge fund so that management fees would be higher and losses could be hidden. Unregistered agents were hired to sell limited partnership interests. By the latter part of 2011, the net asset value of the fund was nearly nil because of the inflated management fees, the misappropriation of the money, investor payments, and trading losses. Dozens of investors were harmed.

Broker Headlines: Former Wells Fargo Broker Must Pay Back Firm $1.2M, Morgan Stanley CEO Wants to Lower Broker Compensation, & Representatives Oppose Best Interest Rules

Published on: June 13, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Ex-Wells Fargo Advisors Broker Must Pay Back Firm $1.2M

A Financial Industry Regulatory Authority panel says that Philip DuAmarel, a former Wells Fargo Advisor (WFC), must pay his former employer back almost $1.3 million. The panel denied his claim that the firm oversold its corporate stock plan services during his recruitment. They told him to pay back the unvested part of an upfront loan he received when he became part of Wells Fargo.

DuAmarel worked for the firm for less than three years when he left in 2010 for Bank of America (BAC) Merrill Lynch. He contended that when the firm was recruiting him he was misled about Wells Fargo’s ability to serve corporate stock plans and also regarding how much he could make for helping executives with their company’s stock trades. DuMarel’s attorney said that the broker left when it became obvious he wouldn’t be able to work with clients they way he did when he was at Citigroup (C) Global Market’s Smith Barney.

JPMorgan Investment Management’s Shareholders Claim The Firm Charged Excessive Mutual Fund Fees

Published on: June 13, 2014 | by Shepherd Smith Edwards & Kantas, LLP

In the US Southern District of Ohio, Eastern Division, JP Morgan (JPM) Investment Management shareholders are claiming that the firm charged them excessive fees in three of its funds:

• JP Morgan Core Bond Fund

• JP Morgan Short Duration Bond Fund

Regulator Headlines: SEC Commissioner Stein Wants Updated Capital Rules for Brokerage Firms, FINRA’s BrokerCheck Link Proposal Faces Opposition, & CFTC Appoints New Enforcement Head

Published on: June 12, 2014 | by Shepherd Smith Edwards & Kantas, LLP

SEC Commissioner Wants Big Broker-Dealers To Hold More Capital

Securities and Exchange Commissioner Kara M. Stein wants the regulator to modify its capital rules for large brokerage firms so that they would be required to hold more capital in the event of a funding crisis. Stein wants the regulation to better factor the risk involved in short-term funding markets on which brokers depend. She also would like the latter to protect against failures that could upset the financial system.

Right now, the SEC is looking at new funding rules for brokers and placing limits on leverage, not unlike what regulators require for banks. However, Stein believes that the agency’s current approach, which is to protect customers but without considering how to keep companies in operation, needs work. The SEC Commissioner believes that the agency’s capital rules for big brokers should be based on preventing the failure of “systemically significant” firms. Stein also wants the SEC to finally implement the rules that were called for by the 2010 Dodd Frank Ac, including those that would limit the risks involving swap contracts.

Ex-ArthroCare CEO and CFO Convicted in Texas Securities Fraud Case

Published on: June 11, 2014 | by Shepherd Smith Edwards & Kantas, LLP

A Texas jury has convicted to two ex-ArthroCare executives with operating a $400 million scam to bilk investors. Michael Baker, the former CEO, was found guilty of wire fraud, securities fraud, conspiracy to commit both, and making false statements. Michael Gluck, the ex-CFO, was found guilty of securities fraud, wire fraud, and conspiracy to commit both also. ArthroCare manufactures medical devices.

According to prosecutors, from 2005 until 2009 the two men and others inflated sales and revenue by tens of millions of dollars through transactions with several ArthroCare distributors. Some of the transactions occurred because the medical device maker had to satisfy sales forecasts and not to fulfill distributors’ product needs. As a result, ArthroCare sent million of dollars worth of devices to these distributors, reporting the deliveries as sales in yearly and quarterly filings. This let ArthroCare meet and sometimes even exceed predicted sales.

Meantime, the distributors consented to the extra inventory in return for cash commission, extended terms of payment, and a refund option. Gluk and Baker even compelled the company to acquire DiscoCare, a distributor, to hide the nature of these sales.

SEC Charges Chicago Investment Advisory Founder With Real Estate Investment Fraud

Published on: June 11, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging Attorney Robert C. Acri with Illinois securities fraud related to a real estate venture. Acri is the founder of Kenilworth Asset Management, LLC, a Chicago-based investment advisory firm. He has agreed to settle by disgorging the funds that were misappropriated from investors, as well as commissions, interest, and a penalty. Monetary sanctions total about $115,000.

The SEC brought the real estate investment fraud charges after detecting possible misconduct when it examined the firm. The regulator’s Enforcement Division was alerted and a probe followed.

According to the findings of the investigation, Acri misled investors over promissory notes that were issued to supposedly redevelop an Indiana shopping center, misappropriated $41,250 for other purposes, and failed to tell investors that the firm received a 5% on every note sale. This amount would total $13,750. He also purportedly did not let investors know a number of material facts, including that the reason there even was an investment offer is that he was trying to rescue funds that other clients had invested earlier in the same real estate developer.