Investor Lawyers Blog

FSOC Worries Crackdown on Banks is Creating New Risks

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

Regulators belonging to the Financial Stability Oversight Council are looking at the new practices of asset managers, mortgage services companies, and insurers to search for potential threats related to certain high risk investment areas. The group just issued its yearly report to Congress, highlighting certain risks, both current and emerging ones. According to The Wall Street Journal, there is concern that the US government’s efforts to clamp down on banks could be sending risky activity outside the reach of legal recourse.

Since the 2008 financial crisis, banks are now subject to stricter rules. Two of the added requirements are that these financial institutions lower their exposure to high risk businesses and keep more loss-absorbing capital as protection in case of another economic meltdown. Now, however, regulators are watching to see whether financial firms that aren’t banks have been stepping in to fill in the roles that the latter vacated because of the stipulations.

For example, some nonbanks are now involved in mortgage servicing rights, which involves the collection and billing of mortgages. These firms aren’t under the same kind of regulatory oversight as banks, nor are they obligated to carry a specific cushion of capital.

In the report, the council expressed worry over certain securities lending markets-related activities. Asset-management firms are now providing protection services to investors engaging in short-selling and hedging. However, these firms also don’t have to carry a capital buffer. The regulators also expressed cause for possible concern because life-insurance companies have moved tens of billions of dollars of policy holder obligations to captive affiliates, which generally are not subject to even minimal disclosure.

The FSOC said it would keep an eye on these “emerging threats.” Areas that regulators have already identified as risk points include money-market mutual funds, repurchase agreements, short-term wholesale funding, growing interest rates, and cyber security. Also noted as possible causes for worry were whether fire sales might cause instability, how certain firms might be impacted by interest rates rising, the inadequate overhaul of the housing finance market, tight access to mortgage credits, and the markets’ dependence on Libor.

The council also acknowledging that there have been successes, including better balance sheets for big bank holding companies, greater confidence levels thanks to the Federal Reserve’s stress tests to gauge whether a financial institution could survive another economic crisis, the completion of the Volcker rule, and new rules for swaps markets and bank capital.

The SSEK Partners Group represents institutional investors and high net worth individual investors with securities fraud claims. We help clients get their money back.

Regulators See Growing Financial Risks Outside Traditional Banks, The Wall Street Journal, May 7, 2014

Financial Stability Oversight Council (FSOC) Releases Fourth Annual Report, Treasury.gov

2014 Annual Report

Financial Regulators See Progress and Threats, NY Times, May 7, 2014

More Blog Posts:
Morgan Stanley Gets $5M Fine for Supervisory Failures Involving 83 IPO Shares Sales, Stockbroker Fraud Blog, May 6, 2014

Bank of America Ordered to Hold Off Giving Back Money To Shareholders After Incorrectly Reporting $4B in Capital, Institutional Investor Securities Blog, May 5, 2014

Lawyers, Investor Advocates Want to Know More About SEC Supervision Of FINRA’s Arbitrator Selections, Institutional Investor Securities Blog, December 2, 2013

Morgan Stanley Gets $5M Fine for Supervisory Failures Involving 83 IPO Shares Sales

Published on: May 6, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley Smith Barney LLC (MS) will pay a $5 million fine for supervisory failures involving its advisors soliciting shares in 83 IPOs to retail investors. The Financial Industry Regulatory Authority says that the firm lacked the proper training and procedures to make sure that salespersons knew the difference between “conditional offers” and “indications of interest.”

By settling, Morgan Stanley is not denying or admitting to the supervisory failures securities charges. It is, however, consenting to the entry of findings by FINRA.

FINRA believes these issues are related to Morgan Stanley’s acquisition of Smith Barney from Citigroup (C) a couple of years ago. In addition to inheriting more high net worth clients, the SRO contends that Morgan Stanley ended up with financial advisers who might not have gotten the needed training.

FINRA Panel Tells Ameriprise to Pay Elderly Couple $1.7M Over Unsuitable Real Estate Investments

Published on: May 5, 2014 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Arbitration panel says that Ameriprise Financial Services Inc. (AMP) must pay $1.17M to two senior investors for getting them involved in investments that failed. The panel said that the financial firm acted inappropriately when it advised Albertus Niehuis Jr., 82, and his wife Andrea, to put $1.03M into high-risk tenant-in-common investments involving hotels and office complexes six years ago. They are retired school teachers.

One of the investments failed. The other two lost significant value. Despite the ruling, the financial firm insists that it gave the Niehuises the appropriate investment advice and it stands behind the recommendations.

In 2012, ThinkAdvisor.com said that the number of senior investors is expected to reach 89 million in 2050. Currently, there are close to 40 million Americans belonging to the age 65 and over group. Unfortunately, elder financial fraud continues to be a serious problem.

Bank of America Ordered to Hold Off Giving Back Money To Shareholders After Incorrectly Reporting $4B in Capital

Published on: May 5, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Federal Reserve says that for now Bank of America (BAC) has to suspend its plans to give money back to shareholders because it did not correctly report capital ratios on recent stress tests. The mistake was a result of an “incorrect adjustment” connected to bad debts that the bank took on during the Merrill Lynch acquisition several years ago. This blunder caused Bank of America to report $4 billion more capital on its books than what actually exists.

The bank got $60 billion in structured notes as part of the Merrill deal. Because it did not lower its capital to factor in the losses related to the notes, the amount of capital was erroneously boosted.

Before the error became known, the Fed granted permission for the bank to up its quarterly dividend for the first time since the economic crisis. It also said BofA could repurchase $4 billion of stock. Now, BofA will have to develop a new capital plan.

FINRA Takes a Closer Look at Fixed Annuity Sales

Published on: April 30, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has decided to pay closer attention to the sale of fixed annuities in part because brokerage firms are selling a larger chunk of indexed annuities these days. Regulators want to examine the procedures and policies involving clients giving up or trading variable annuities to place the assets into equity indexed annuities and other products.

According to InvestmentNews, broker-dealers are becoming a force in the indexed annuities era. They were accountable for 11.4% of the market’s share last year, an 8.9% jump from the year before. In a report, the Insured Retirement Institute said that the US annuity industry made $220.9 billion in sales in 2013. Fixed annuity sales for that year was $78.1 billion. Indexed annuities sales hit $38.6 billion.

During this first quarter, reports InvestmentNews, LPL Financial (LPLA), which is the biggest independent brokerage firm, saw a surge in fixed annuities sales. Revenues of fixed income was $46.7 million-70.8% more than during the first three months of 2013.

SEC Files Fraud Charges Against American Pension Services and Its Founder Over $22M Investor Losses

Published on: April 30, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed charges against American Pension Services Inc., a third-party administrator of retirement plans based in Utah and its founder Curtis L. DeYoung. The regulator says that they caused clients to lose about $22 million in risky investments involving certain business ventures. American Pension Services is now under receivership.

The securities scam allegedly goes back at least to 2005. Customers with retirement accounts containing non-traditional assets usually not found via IRA custodians, such as traditional (401)K retirement plans, were targeted. The Commission says that APS and DeYoung solicited customers to set up self-directed IRA accounts with third party administrator. DeYoung purportedly said this was “genuine self-direction” for investors seeking other options besides stocks, mutual funds, and bonds.

These clients had to fill out IRS Form 5305-A, which say that a third-party administrator doesn’t have discretionary authority over assets and it is up to the depositor to direct the assets’ investments. Although clients’ funds were kept at a bank in two master trust accounts, the complaint claims that APS controlled the money and mixed clients’ money together.

NYSE Pays $4.5M to the SEC to Settle Allegations Over Compliance Failures, Exchange Rules Violations

Published on: April 30, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The New York Stock Exchange and other entities have agreed to collectively pay $4.5 million to settle Securities and Exchange Commission allegations over regulatory and compliance violations. This includes the claim that there was a failure to abide by the duties of self-regulatory organizations to make sure their businesses follow federal securities laws and SEC-approved rules. Also facing charges are charged are NYSE Arca, NYSE Market, IntercontinentalExchange Inc. (ICE), which owns the NYSE, and Archipelago Securities, which is an affiliated routing broker.

As part of the agreement, the NYSE will get an independent consultant. All parties settled without denying or agreeing to the findings.

According to the regulator, the NYSE exchange took part in business practices that either violated exchange rules or engaged in certain actions that required such a rule where none existed. For example, the exchange used an error account that Archipelago maintained to trade out of certain securities positions even though there were no rules that allowed for the use of this type of account. Other violations alleged include those involving the Securities and Exchange Act of 1934 over numerous acts of purported misconduct, including:

SEC Chair White Says High-Frequency Trading Markets Not Rigged

Published on: April 29, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Speaking before a US House of Representatives panel, Securities and Exchange Commission Chair Mary Jo White addressed allegations about the high-frequency trading markets saying they “are not rigged.” Her statement was in response to allegations made in Michael Lewis’ book “Flash Boys: A Wall Street Revolt,” which questioned the role of this type of trading and whether investors end up at a disadvantage because of it.

High-speed trading is computer driven and impacts over half of the volume of the stock market. Firms that engage in high frequency trading subscribe to data feeds that are superfast and can see the trades before other investors can, allowing them to avail of the information first. Lewis contends that high-speed traders are doing a kind of front-running that lets firms quickly determine whether there is investor desire to purchase a stock. He says this lets buy the stock first and then sell it back to the investor at a slightly higher cost.

Since the book’s release, the US Attorney General, the Federal Bureau of Investigation, the SEC and prosecutors in New York have all said that they are looking into the practices of firms that engage in high-speed trading. The FBI wants to see whether high-speed firms are in violations of prohibitions tied to insider trading, while NY Attorney General Erich Schneiderman is probing links between high-speed firms and the exchanges to see whether the markets are “catering” to these traders.

WG Trading Co. Manager Pleads Guilty To $554M Securities Scam That Targeted Institutional Investors

Published on: April 29, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Stephen Walsh, a WG Trading Co. money manager and principal has pleaded guilty to bilking institutional investors of more than $554 million over a period of 13 years. Walsh and EG’s ex-general partner Paul Greenwood were charged in 2009 with allegations accusing them of using the investment advisory firm and commodities trading to perpetuate their scam, which took place between 1996 and 2009. Charities, retirement plans, pension flans, and university foundations were among those bilked.

According to the Federal Bureau of Investigation, the two men raised $7.6 million, misappropriating hundreds of millions for their personal use. They were supposed to put the money in an equity index arbitrage program, which the represented as a conservative trading plan that had done very well for years.

Investors then either got promissory notes from WG Trading Company or became limited partners. Greenwood and Walsh made it seem as if interest would be paid at a rate that was the equivalent of investment returns made by a limited partner.

Fidelity Investment, BlackRock, Other Asset Managers Take Issue with Plans to Expand Too Big to Fail Rules

Published on: April 28, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to InvestmentNews, some of the largest asset managers in the world are complaining that draft proposals for identifying financial institutions besides insurers and banks that may be too big to fail would employ an erroneous analysis of the investment industry. Fidelity Investment, Pacific Investment Management Co.(PIMCO), BlackRock Inc. (BLK), and others wrote written responses to a consultation made by international standard setters. Pimco, whose response was published on the International Organization of Securities Commission’s web site, called the blue print “fundamentally flawed,” saying that it failed to accurately show the risks involving the asset management industry or investment funds.

The proposals regarding too-big-to fail come after efforts by global regulators in the Financial Stability Board to rank insurers and banks according to their potential to trigger a worldwide financial meltdown. Under the plans published earlier this year by Iosco and FSB, investment funds with assets greater than $100 billion could be given the too big to fail label. The proposals are also suggesting possibly making asset managers that oversee with big funds subject to additional rules.

However, BlackRock, in its consultation response, is arguing that a fund’s size isn’t a sign of systemic risk and many of the biggest funds are not likely to pose issues of systemic risk. It also contends that concentrating on asset managers is the ‘wrong approach” seeing as they are “dramatically less susceptible” to getting into financial distress than other financial institutions. BlackRock is one of the firms that believes that international standard setters should instead put their attention on figuring out which activities could prove systematically essential rather than trying to label certain funds and asset managers as too big to fail.