Investor Lawyers Blog

Goldman Sachs Under Investigation Over Hiring Practices, High-Frequency Trading

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

Goldman Sachs (GS) Group Inc. said it is under scrutiny in probes related to high-frequency trading and whether its hiring practices comply US antibribery laws. This is the first time the firm has publicly disclosed both investigations. The information was made available via Goldman’s quarterly filing with the SEC.

In the bank hiring practices investigation, Credit Suisse Group Ag (CS), Morgan Stanley (MS), UBS AG (UBS), and Citigroup (C) are also under scrutiny. The Securities and Exchange Commission wants to know whether the banks or their staff hired the relatives of well-connected officials in Asia, which could be a violation of the antibribery laws-in particular, the Foreign Corrupt Practices Act, which prevents companies from giving foreign officials items of value in exchange for business. Although it isn’t illegal to hire government officials’ relatives in Asia, hires cannot just be made for the purpose of earning new business.

As for the high-speed trading probe, the US Justice Department, the SEC, New York Attorney General Eric Schneiderman, and the Federal Bureau of Investigation are assessing trades that engage in fast algorithmic trading. Schneiderman wants to know if firms involved in high-speed trading have secret deals with trading venues, such as dark pools and stock exchanges, that lets them trade before other investors.

Citigroup Must Contend With $1B New York CDO Lawsuit, Says Appeals Court

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

A New York appeals court says that Citigroup (C) must face a collateralized debt obligation lawsuit accusing the firm of lying about the risks involved in nearly $1 billion of securities. The plaintiff is Loreley Financing, a group of investment companies in the Channel Islands that was set up to invest in CDOs. It has made similar allegations in separate CDO fraud cases against other banks.

In 2012, Loreley sued Citigroup Global Markets Inc. in New York State Supreme Court in Manhattan. The plaintiff alleged that the bank secretly selected the most high-risk mortgages for sale in CDOs while purchasing credit default swaps in order to bet against them. The investment group says that Citigroup employed a similar strategy to help clients get rid of mortgage-backed securities that were toxic.

According to Loreley, it purchased $965 million of notes through Citigroup, which then made money by charging fees and getting rid of loans that were likely to sustain losses. The investment group wants the purchases rescinded and its money returned.

State Senator Reprimanded For Violating the Texas Securities Act

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

The Texas State Securities Board has reprimanded Senator Ken Paxton and ordered him pay a $1,000 fine for soliciting investment clients even though he wasn’t properly registered. According to the board’s disciplinary order, Paxton, who is running for state attorney general, violated the Texas Securities Act. Under the Act’s Section 12.B, a person cannot act as an investment adviser representative unless he/she is registered as one for that investment adviser in particular.

The Texas Tribune reports that Paxton started working as a solicitor for companies belonging to Fritz Mowery in 2001. On three occasions, in 2004, 2005, and 2012, he took part in unregistered solicitations and referred the customers to Mowery Capital Management, LLC. The fine is for the last incident, which occurred within the last five years. (One of the incidents led to a Texas securities fraud case in 2009 when investors Teri and David Goettsche sued Paxton and Mowery for breach of duty.

In their Texas investment fraud case, the Goettsches claimed that Paxton recommended they invest with Mowery while failing to mention that he would get a 30% commission for the referral. The couple later dropped the securities lawsuit.

Securities Lawsuits Accuse BlackRock Of Charging Exorbitant Investment Advisor Fees

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

Timothy C. Davidson, a Florida investment adviser, is suing BlackRock (BLK). He says the money manager and other defendants breached their fiduciary duty by charging disproportionately high investment advisory fees for the BlackRock Global Allocation Fund (MDLOX). He says that the excessive fees had “no reasonable relationship” to the services that the firm provided.

Because of the alleged wrongdoing, Davidson contends, BlackRock Advisors was able to keep most of the benefits that stemmed from a growth in assets that were under management without properly sharing these with the fund or shareholders. The investment advisor also says that the fund’s board did not behave “conscientiously” when it approved markups and fees and this breaches certain obligations under the Investment Company Act of 1940.

The BlackRock Global Allocation Fund manages about $60 billion. Davidson said that a trust he helped establish owned $1 million of shares in the fund’s institutional share class. (David helped form the trust after he bought a lottery ticket that won the Powerball in 2011.)

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.