Investor Lawyers Blog

SEC Stops Pyramid Scam That Targeted Investors Via Twitter, Facebook, Skype, and YouTube

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

The Securities and Exchange Commission has put out an emergency enforcement action to stop a pyramid scam that has already taken $300,000 from about 150 investors in the US. The scheme involves bogus companies pretending to be an international investment firm. Customers were solicited via Twitter, Skype, Facebook, and YouTube.

Now, the SEC has gotten a federal court order freezing the holding the funds that purportedly were stolen from investors by MWF Financial and Fleet Mutual Wealth Limited, known together as Mutual Wealth. The regulator claims that the company used social networking and its website to target investors, making false promises of returns of 2 to 3% a week if they opened accounts with the firm.

According to the Commission, Mutual Wealth made its fraudulent pitches via social media. Misrepresentations were published on the company’s Facebook page, including data about income yields of up to 8% weekly and HFT portfolios with ROI of a maximum of 25%/annum. Mutual Wealth purportedly touted its use of a high-frequency trading strategy that lets capital be put into securities for just minutes at a time. The company offered a commission or referral fee if investors became “accredited” and brought in new investors.

Credit Suisse Officials Accused of Telling Staff to Ignore Due Diligence Standards, Accept Questionable Loans Involving

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

According to documents filed by Credit Suisse (CS) in Massachusetts state court, reports The New York Times, top officials at the financial firm encouraged subordinates to ignore due diligence standards and approve questionable loans that ended up packaged into mortgage investments. Also included in the papers are finding that there were internal audits showing that activities at the mortgage unit got progressively worse in 2004 and the firm knew it could end up being exposed to higher risks as a result. The documents are part of a mortgage securities case in which Credit Suisse is a defendant.

In this mortgage securities lawsuit, brought nearly four years ago, Cambridge Place Investment Management is seeking $1.8 billion in damages on about 200 mortgage securities that it purchased from over a dozen banks leading up to the economic crisis. The asset management company has settled with most of the banks, with Credit Suisse among the few exceptions.

Issuing a statement, a spokesperson for Credit Suisse said that the firm felt confident that the evidence in its totality would demonstrate that its due diligence practices were dependable and healthy. However, the documents, once confidential, are causing some to wonder why the bank decided to combat rather than settle the different mortgage securities cases filed against it, including those submitted by the New York attorney general and the Federal Housing Finance Agency.

Muni Bond Investors Pay Twice More In Commissions than When Investing in Corporate Bonds, Reports The Journal

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

According to a study for The Wall Street Journal, investors in municipal bonds are paying trading commissions that are around twice as high as those for corporate bonds. Individuals continue to be the largest participants in the muni bond industry, currently valued at $3.7 trillion, because these bonds are considered pretty safe and have interest payments that are not taxed.

The municipal bond industry offers funding to cities, states, school districts, and hospitals. While regulators have largely overlooked municipal debt in the last two decades, lately they are scrutinizing these securities more closely. That said, unlike corporate bond and stock brokers, who are obligated to reveal market price and provide “best execution” on trades to individuals to make sure they get the best prices, brokers in the muni bond industry aren’t held to the same duties, making it easier for them to buy bonds at low prices and sell them at high ones.

This can leave many investors vulnerable to fees and pricing that they should be protected from. For example, The Journal cites an example of one Massachusetts man who sold bonds promising a 5% yearly interest from his home state in two lots at $100K each in July 2013. The next day, he sold the same amount of bonds to investor at $1060/bond—making about $112,000. Municipal Securities Rulemaking Board records show that for that month, brokers in Massachusetts sold $1 million in state bonds to investors with a 3% average markup than what they actually paid—that’s a $30,000 profit.

Ex-Jefferies Trader Found Guilty in Securities Fraud Case Over Bond Prices

Published on: March 8, 2014 | by Shepherd Smith Edwards & Kantas, LLP

A jury has convicted Ex-Jefferies Group LLC (JEF) trader Jesse Litvak of securities fraud. Litvak was found guilty of 15 criminal counts, including 10 securities fraud counts related to his misrepresenting bond prices to customers so he could make more money for him and his firm. He pleaded not guilty to all the charges. Jefferies Group is a Leucadia National Corp. (LUK) unit.

According to the government, the 39-year-old trader gave clients inaccurate information about the price of residential mortgage-backed bonds and kept the monetary difference. Litvak, who worked at Jefferies from April 2008 through December 2011, is accused of bilking customers of about $2 million, benefiting himself and his employer.

While Litvak’s legal team tried to persuade a jury that statements Litvak made no difference to customers or their decision of whether to buy the bonds, and that the tactics his client employed are “expected,” the government argued that Litvak’s statements did affect his clients. Litvak was also found guilty of a criminal charge accusing him of fraud related to the Troubled Asset Relief Program.

FINRA Deletes Certain Broker “Red Flags” From Records, Reports PIABA Study

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

According to a Public Investors Arbitration Bar Association study, the Financial Industry Regulatory Authority “routinely” erases certain red flags in the records of brokers from its online BrokerCheck resource-the same tool that it tells investors to go to check on the history of financial representatives. The PIABA study looked at data about brokers found on FINRA’s BrokerCheck and compared it to other reports on the same reps, also from FINRA’s database but accessible in states that have strong freedom of information laws.

The group found that warning indicators pertaining to tests flunked by a broker, investigations into possible sales abuses involving securities, internal reviews for fraud, or regulation and rule violations could be accessed through the states but no longer through FINRA. PIABA says that other red flags that the SRO has deleted from BrokerCheck include failed qualifications tests, personal bankruptcy filings older than 10 years, and federal tax liens that have since been satisfied.

FINRA’s BrokerCheck

SEC Director Warns About Recommending Alternative Mutual Funds To Certain Investors

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

The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations Director Andrew Bowden says that investment advisers should be careful when putting investors in alternative mutual funds. The agency says there has been a rise in complex trading strategies in mutual funds and nontraditional investments, with assets in alternative mutual funds reaching $168 billion in October. This is an increase from the $158 billion achieved the previous year.

While using these mutual funds may raise returns, investors can be placed at greater risk in the event that the market were to drop, especially if these products involved have limited secondary markets. Bowden says the agency intends to conduct a sweep of the $200 billion alternative find industry and examine the way it uses specific private fund strategies in public-traded investments.

It was last month that the SEC announced that it would look at both hedge fund and alternative investment strategies in exchange-traded funds, open-ended funds, and variable annuity structures. The regulator wants to look at if the ways that the funds are being promoted comply with regulations.

Fines for FINRA Sanctions Went Down 27%, Reports New Analysis

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

According to a review of Financial Industry Regulatory Authority actions in 2013, fines imposed by the self-regulatory organization dropped by 27% compared to the year before, even though the number of cases during both were almost identical. Sutherland Asbill & Brennan LLP, which completed the review, said that last year FINRA imposed $57 million of fines, compared to $77 million in 2012.

The fine total from 2013 was the lowest imposed since 2010, when the regulator fined member firms and associated individuals $45 million. Also, even though the fines went down, there was 1% less disciplinary actions brought by FINRA at 1,535 actions, compared to the 1,541 submitted made in 2012. Another decline occurred in the number of firms that FINRA expelled-24 in 2013 and 30 in 2012. That said, the SRO did suspend more individuals-670 last year, up from 549 the year before-and bar more persons from 294 in to 429 last year, which is a 46% increase.

Sutherland’s believes the fines went down because many of the cases generated by the financial crisis have been tackled. This means that even with so many cases, these aren’t necessarily resulting in fees that are as high.

US Supreme Court Considers Whether to Limit Securities Fraud Lawsuits

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

Although a decision is not likely until June in Halliburton v. Erica P. John Fund, it doesn’t look as if the US Supreme Court will seek to overturn the “fraud on the market” theory, set up in 1988 in Basic Inc. v. Levinson. In that earlier ruling, it was determined that investors are allowed to depend on a presumption that the stock price of a company reflected all public information about the entity. This theory has allowed investors to ban together through class action securities certification without having to provide individual reliance of evidence.

In the securities case before the court, the investors’ fund claims that Halliburton misrepresented its liability related to asbestos litigation, benefits obtained from a merger, and revenue from a construction contract. Meantime, Halliburton and its allies are contending that investors shouldn’t be able to bring a class action case because of an economic theory that is based on the efficiency of markets.

Four of the justices recently appeared to be welcoming a challenge to the fraud on the market theory. Justice Samuel A. Alito Jr. wrote in a concurrence in Amgen V. Connecticut Retirement Plans and Trust Funds that there has been evidence recently to indicate that such a presumption may be based on a “faulty economic premise.”

Ex-Merrill Lynch Adviser, Already Jailed for Massachusetts Securities Fraud, Now Indicted Over Ponzi Scam

Published on: March 4, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Even as she serves her 33-month sentence for securities fraud, Jane O’Brien, a former Merrill Lynch (MER) broker, has now been indicted for her alleged involvement in a Ponzi scam that purportedly ran for nearly two decades. The U.S. Attorney’s Office for the District of Massachusetts says that O’Brien is facing criminal charges for mail fraud, investment adviser fraud, and wire fraud involving the misappropriation of $1.3 million in client monies.

Per the indictment, between 1995 and 2013 and while she worked at Citigroup (C)’s Smith Barney and then later with Merrill, O’Brien persuaded a number of clients to withdraw money from brokerage accounts and their banks. She got their permission to invest the funds in private placements. However, instead, the 61-year-old allegedly used the money to repay other investors and cover her personal expenses.

O’Brien is also accused of making misrepresentations to clients, providing them with materially false statements, “making lulling payments,” and offering false assurances that their money was secure. She even in one instance, allegedly, got a client to invest in “Crooked Arrows,” a Hollywood film, in return for a promised 25% return, which did not happen.

Detroit, MI to Pay UBS and Bank America $85M Over Interest Swaps Settlement

Published on: March 4, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The city of Detroit has agreed to pay Bank of America Corp.’s (BAC) Merrill Lynch (MER) and UBS AG (UBSN) $85 million as part of a settlement to end interest-rate swaps, which taxpayers have had to pay over $200 million for in the last four years. Now, US Bankruptcy Judge Steven Rhodes must decide whether to approve the deal.

The swaps involved are connected to pension obligation bonds that were issued in ’05 and ’06. They were supposed to protect the city from interest rates going up by making banks pay Detroit if the rates went above a certain level. Instead, the rates went down, and Detroit has owed payments each month.

Under the swaps deal, the city owed $288 million. The settlement reduces the amount by 70%, which should help, as Detroit had to file for protection last year over its $18 billion bankruptcy.