Investor Lawyers Blog

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.

FINRA Sees 10% Rise in Arbitration Cases, Puerto Rico Bond Claims A Factor

Published on: April 27, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to statistics put together by the Financial Industry Regulatory Authority, the number of securities arbitration cases brought by the self-regulatory agency is on target to exceed last year’s total. A likely contributor to the increase can be attributed to the numerous Puerto Rico municipal bond cases already filed by investors who sustained huge losses. More of these are inevitable, especially as FINRA just increased its arbitrator pool to deal with cases involving muni bonds from the US territory.

The broker-dealer regulator said that during this first quarter alone, 1,011 FINRA arbitration cases were submitted-a definite increase from the 919 securities arbitration claims filed during 2013’s first three months. However, the number of arbitration cases that were closed during this first quarter is less than in two years prior, with just 946 resolved. Compare that to the over 4,400 and 4,800 cases in 2013 and 2012, respectively.

That said, 5O% of arbitration cases decided during this initial quarter rendered damage awards, which is more than in the last two years. The most common claim in FINRA arbitration cases filed in 2014 so far is breach of fiduciary duty. Negligence, failure to supervise, and breach of contract are the other leading claims.

Ex-Bank of America CFO to Pay $7.5M to Settle with NY Over Merrill Lynch Acquisition Allegations

Published on: April 26, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Joe Price, the ex-chief finance officer of Bank of America Corp. (BAC) has consented to pay $7.5 million to settle allegations by the state of New York that the bank and its ex-executives misled investors over losses that were happening at Merrill Lynch even as shareholders were getting ready to approve its acquisition by the bank.

Bank of America’s decision to purchase Merrill as Lehman Brothers Holdings Inc. was collapsing was initially seen by many as a positive. However, after the deal was made public and Merrill’s problems soon became known, speculation over how much information was kept from those approving the deal mounted.

The state contended that Bank of America misled shareholders about Merrill’s losses to get the $18.5 billion deal approved. They then got the federal government to contribute bailout money from the Troubled Asset Relief Program to complete the sale. The bank has since become the subject of regulatory investigations and securities lawsuits over their actions. It even consented to pay $2.43 billion in 2012 to resolve a class action securities fraud case filed by investors over the Merrill acquisition. Settlements in total have to date surpassed $50 billion.

Charles Schwab’s Barring of Customers from Joining Class Actions Violated FINRA Rules, Says Board of Governors

Published on: April 25, 2014 | by Shepherd Smith Edwards & Kantas, LLP

In a victory for the Financial Industry Regulatory Authority, its Board of Governors has determined that Charles Schwab & Co. (SCHW) violated the self-regulatory organization’s rules when it added waiver language to agreements that prohibited customers from becoming part of any class action cases against the financial firm. Schwab has agreed to settle these claims with a fine of $500,000. Also, it will tell all its customers that the requirement is no longer in effect.

Schwab made amendments to the customer account agreement of over 6.8 million investors in 2011. The move came after it settled a class action securities case accusing the broker-dealer of misleading thousands of customers about its YieldPlus money market fund. (The fund sustained huge losses during the 2008 economic crisis, and to resolve the claims, Schwab agreed to pay $235 million.)

Included in the amendments were waiver provisions mandating that customers consent that any claims against the firm could only be arbitrated individually. Also, arbitrators would not be able to consolidate consolidated claims for more than one party.

Barclays Must Face Shareholder Lawsuit Over Libor Manipulation

Published on: April 25, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The 2nd U.S. Circuit Court of Appeals in New York says that Barclays Plc (BARC) shareholders can go ahead with their securities lawsuit claiming that the British bank caused them to suffer financial losses over manipulation of Libor. The ruling reverses a lower court’s decision.

The London Interbank Offered Rate is used to set interest rates on mortgages, credit cards, and student loans. It is also the average interest rate that banks can use to estimate what they would be charged if they borrowed from other banks. Regulators in Europe and the US have been investigating whether banks manipulated Libor when the 2008 financial crisis was happening.

In 2012, Barclays consented to pay British and American regulators $453 million and admitted that between August 2007 and January 2009 it frequently made Libor submissions that were artificially depressed. (Other big financial institutions that have settled Libor manipulation allegations included UBS AG (UBS), ICAP Plc (IAB), Rabobank, and Royal Bank of Scotland Group (RBS)).

Ex-Sentinel CEO is Convicted of $500M Fraud

Published on: April 24, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Eric Bloom, the CEO of Sentinel Management Group, Inc., the now bankrupt hedge fund, has been convicted of bilking over 70 customers of more than $500 million prior to the firm’s collapse. According to the U.S. Department of Justice, Bloom misappropriated securities that belonged to customers when he used the financial instruments as collateral to get a loan for Sentinel from Bank of New York Mellon Corp. (BK). The loan was partially used to buy risky illiquid securities for a trading portfolio to benefit Bloom, other Sentinel officers, corporations controlled by his family, and his relatives.

Also, says the DOJ, even though Bloom knew that Sentinel was at risk of defaulting on the loan from the bank, he caused the hedge fund to take over $100 million from customers while hiding its true financial state. A federal jury returned guilty verdicts against him on one count of investment adviser fraud and 18 counts of wire fraud.

The guilty verdict comes six months after Charles K. Mosley, Sentinel’s former head trader, pleaded guilty to two counts of investment adviser fraud related to the charges filed against Bloom. Mosely admitted to covering up their actions. In his plea agreement, he said that customers were sent statements according to interest income rates that he and Bloom had calculated rather than the performance of investment portfolios.

U.S. Wants Bank of America to Pay Over $13B Over Residential Mortgage-Backed Securities

Published on: April 24, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Bloomberg is reporting that U.S. prosecutors want Bank of America Corp. (BAC) to settle state and federal investigations into the lender’s sale of home loan-backed bonds leading up to the 2008 financial crisis by paying over $13 billion. The bank is one of at least eight financial institutions that the Department of Justice and state attorneys general are investigating for misleading investors about the quality of the loans that were backing mortgages just as housing prices fell.

A lot of Bank of America’s loans came from its purchase of Countrywide Financial Corp., a subprime lender, and Merrill Lynch & Co., which packaged a lot of the loans into bonds.

If there ends up being no deal, the government could sue the bank.