Investor Lawyers Blog

Barclays and Deutsche Bank Under Scrutiny Over Barrier Options Transactions

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

The U.S. Senate Permanent Subcommittee on Investigations plans to conduct a hearing over what it believes are abusive transactions made by financial institutions. Bloomberg is reporting that Deutsche Bank AG (DBK), Barclays PLC (BARC), and hedge fund manager Renaissance Technologies LLC will have representatives testifying at the hearing.

The July 22 hearing is expected to focus on barrier options transactions between the banks and the hedge fund manager. There are tax benefits that allegedly came from the options, which the Internal Revenue Service and Renaissance are in dispute over.

Bloomberg reports that the transactions let the hedge fund manager’s Medallion fund borrow up to $17 for every dollar the fund owned, which is more than it could have in a traditional margin-lending relationship. Under Federal Reserve rules, stockbrokers are not allowed to lend over $1 for each client money dollar. Usually, hedge funds can borrow no more than $5 or $6 for each dollar it has and only if there is a special agreement with the banks.

Natural Blue Resources Inc. & Microcap Stock Scammers Accused of Hiding Previous Violations

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

The Securities and Exchange Commission has filed charges against microcap company Natural Blue Resources Inc. and four persons for purportedly hiding from investors that two of them had previously broken the law. The regulator has suspended trading in Natural Blue stock.

Natural Blue’s mission was to acquire, establish, or invest in companies that are environmentally friendly. However, investors weren’t told that Joseph Corazzi and James E. Cohen were running the operations.

Cohen had previously served time for financial fraud and Corazzi was charged with federal securities law violations. He is permanently barred from acting as a director or officer of a public company.

FINRA May Expel Ex-Broker For $6M Hedge Fund

Published on: July 15, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Dean Mustaphalli, an ex-Sterne Agee Financial Services Inc. broker, could be barred from the industry over allegations that he ran a $6 million hedge fund on the side. According to the Financial Industry Regulatory Authority Inc., Mustaphalli founded and got commissions from Mustaphalli Capital Partners in 2011 but did not tell his brokerage-firm.

Already, Mustaphalli has been named in at least two arbitration claims. He ran the hedge fund through Mustaphalli Advisory Group. It is not known time whether any of the 25 investors he solicited were Sterne Agee clients. Over a four-month period, he was paid about $41,800 in management fees.

Mustaphalli was fired from Sterne Agee in 2011. After he was let go, he purportedly kept soliciting clients for his hedge fund through the investment adviser.

Citigroup Settles Mortgage-Backed Securities Probe with DOJ for $7 Billion

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

Citigroup (C) has reached a $7 billion settlement with the U.S. Department of Justice over allegations it misled investors about mortgage-backed securities in the time leading up to the 2008 financial meltdown. The settlement includes a $4 billion penalty to be paid to DOJ, $2.5 billion in consumer relief, and $500 million to a number of states and the Federal Deposit Insurance Group.

According to the U.S. government, Citigroup knew it was selling mortgage-backed securities with loans that had “material defects” and hid this information from investors. Attorney General Holder called this misconduct “egregious.” He said the bank played a role in spurring the economic crisis.

The government released a statement of fact to which Citibank consented. In it are details about how the bank ignored its own warning signs that certain mortgages were subpar and made misrepresentations about the loans that were securitized. One U.S. attorney told The Wall Street Journal that the DOJ discovered 45 mortgage-backed security deals between 2006 and 2007 where inaccuracies about underlying loans’ and their quality were made.

SEC Accuses California School District of Misleading Municipal Bond Investors

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

The Securities and Exchange Commission is accusing Kings Canyon Joint Unified School District of not giving municipal bond investors the financial data and notices to which they were entitled. The California school district settled the SEC’s findings without denying or admitting to the charges. Kings Canyon has consented to an order to cease and desist from future violations of the Securities Act’s Section 17(a).

During a 2010 bond offering, Kings Canyon affirmed to investors that the school district was in compliance with previous continuing disclosure duties. In three bond offerings totally more than $30 million between ’06 and ’07-of 419 million, $4.5 million, and $6.7 million, respectively-Kings Canyon had a contractual duty to disclose specific yearly financial data and notices about certain bond-related events.

For example, says the SEC, when Kings Canyon performed a $6.8 million bond offering in 2010, the school district was obligated to describe whenever it hadn’t materially complied with previous disclosure duties. With its 2010 offering documents in a fourth, muni bond offering-this one of $6.8 million-the school district made statements that were inaccurate when it affirmed that in the last five years it had always complied materially with past ongoing disclosure duties. She SEC said that since Kings Canyon did not turn in certain contractually mandated disclosures related to the 2006 and 2007 bond offerings, the bond offering document in November 2010 had a statement about a material fact that wasn’t true.

SEC Prepares Money-Fund Rules, Will Review Alternative Mutual Funds

Published on: July 10, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Sources tell The Wall Street Journal that the U.S. Securities and Exchange Commission is getting ready to vote on rules that are supposed to stop investors from bailing out of money-market mutual funds, which is the reason that corporate lending became imperiled during the 2008 financial meltdown. Under the plan, certain money funds that cater to big institutional investors would have to lose the fixed price of $1/share an float in value the way other mutual funds do.

Municipalities, businesses, and individuals use money funds. Under the new rules, money funds would be allowed to place a temporary block on investors to keep them from taking their money out during stressful times. They would also be allowed to ask for a fee for share redemption.

The rules are set to make the money-fund industry less at risk of investor runs when the market is tumultuous. They would get investors accustomed to value fluctuations in their investments while making sure that funds are able to stop any outflows from turning into a flood.

Some Advisers Choose Alternative Investments Using Poorly Suited Benchmarks, Says Morningstar

Published on: July 9, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to a survey issued by Morningstar Inc., financial advisers may be using the wrong benchmark when evaluating and choosing alternative investments. The research firm and Barron’s magazine questioned 301 advisers and 372 institutional investors.

Right now, the most popular way that advisers assess their investments’ performance is with a standard benchmark index and not by measuring performance against customized benchmarks, competitor funds, or risk-adjusted analysis. While about 25% are using the Russell 2000, the S & P 500, or similar benchmarks, the rest of those who were surveyed work with different methods.

Now, however, there are industry executives and analysts who are saying the index benchmarks are not up to the job of assessing the funds’ performance. Alternative investments typically employ different strategies and may have distinct goals.

SignalPoint Asset Management to PAY SEC Fine for Breach of Fiduciary Duty

Published on: July 7, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is ordering the comptroller and principals of SignalPoint Asset Management to pay $215,000 for breach of fiduciary. The regulator claims that the Missouri-based registered investment adviser breached its fiduciary duty when it did not tell clients about certain conflicts of interest.

The SEC says that SignalPoint principals Dennis R. Walker, Jonathan C. Timson and John W. Handy Jr. failed to disclose that they had control of the RIA when they advised clients to invest in it. This failure to disclose the conflict is a violation of the Advisers Act.

Michael Orzel, SignalPoint’s comptroller, was responsible for filing and drafting the RIA’s Form ADVs that also failed to disclose that Walker, Timson, and Handy were not just the principals of the registered investment adviser but also its control persons.

Non-Traded REITs, Structured Products, and Private Placements Remain Under Regulator Scrutiny

Published on: July 7, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to state regulators, non-traded real estate investment trusts, structure products, and private placements, are some of the financial instruments that the states and insurance regulators are watching closely. First Deputy Commissioner of the Iowa Insurance Division Jim Mumford and Alabama Securities Commission director Joseph P. Borg recently spoke at a panel at the Insured Retirement Institute’s Government, Legal and Regulatory Conference.

Borg noted that a growing number of agents are now selling unlicensed financial products, with insurance agents selling private placements and getting clients away from insurance products and into Regulation 506 of Regulation D. The rule establishes a safe harbor for securities’ private offerings. Such instruments are only supposed to be made available to accredited investors and non-accredited investors that have enough sophistication to be able to assess this type of investment. Agents, however, have tried to circumvent securities laws by claiming that a (nonexistent) attorney gave them a letter stating that the private offering actually wasn’t a security.

Also up for sale lately are self-directed IRAs and promissory notes. Structured products have also been quite popular, although unfortunately, Borg noted, many agents and brokers don’t even understand what they are selling.

FINRA Official Says Variable Annuity Sales Top Investor Complaint List

Published on: July 3, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to Financial Industry Regulatory Authority chief risk officer Carlo di Florio, variable annuities continue to among the products named the most in customer complaints. He spoke at the Insured Retirement Institute’s Government Legal & Regulatory conference in D.C. on Monday.

Di Florio, who is also the head of strategy at the self-regulatory agency, said that some variable annuities are taking on features similar to complex structured products. This includes caps that restrict how high returns can reach during market rallies and buffers that place a limit on how much annuities are allowed to fall when the market drops.

Annuities that have caps and buffers are different from the more conventional annuities in that the two make a product even more complex by varying market volatility exposure. FINRA wants to make sure that investors know what they are getting involved in when they purchase any kind of variable annuity.