Investor Lawyers Blog

$550M Securities Fraud Case Between Texas’ Wyly Brothers & SEC Goes to Trial

Published on: April 2, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The civil trial is underway between the Securities and Exchange Commission and brothers Sam and Charles Wyly (The latter is deceased after he died in a car crash in 2011). The regulator is accusing the Texas siblings of using offshore trusts to hide over $750M of stock sales in companies in which they are board members and engaging in a $550M securities fraud.

In its Texas securities case, the SEC claims that between 1992 and 2004 the Wylys concealed stock trading in Sterling Software Inc., Sterling Commerce. Inc., Michaels Stores Inc., and Scottish Annuity & Life Holdings Ltd. by using entities and offshore trusts. The brothers also are accused of making $31.7 million in insider trading profits involving Sterling Software after the company was sold in 1999.

At issue is whether the Wylys were in control of the offshore trusts and if so then they may have also violated US tax laws. That said, the statute of limitations for charges involving tax evasion is six years.

SEC Says Investment Advisors Can Publish Third-Party Endorsements Online

Published on: April 1, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission says that investment advisers are allowed to publish comments from the public about their services on an independent social media website but that they must include both negative and positive reviews in unedited form. Also, the adviser must not have any affiliation with the site or the ability to influence it. The SEC made the announcement this week in a guidance update.

SEC rules typically don’t allow “testimonials.” The guidance, however, now says that Commission-registered advisers can direct potential clients to the reviews as long as certain conditions are met. The changes are in part because of the rapidly evolving social media market and the fact that this area is becoming a primary way that businesses communicate with prospective customers.

The regulator said that client reviews could only appear on review sites or independent social media. This means, for example, that they cannot be published on an adviser Facebook page. Also, an adviser cannot promise a customer anything in return for favorable reviews and employees are not allowed to write these testimonials.

FBI Probes Possible High-Speed Trading, Insider Trading Link

Published on: April 1, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Federal Bureau of Investigation is continuing to look at whether high-speed trading firms are insider trading when they avail of fast-moving market data to which other investors don’t have access. The agency is concern that the limited availability of material nonpublic information could be placing these traders at an advantage, including giving them access to extremely rapid data feeds. The probe is called the High-Speed Trading Initiative.

Since computer programs initiate high-speed trades, it can be harder to identify suspect activities and prove that they were done on purpose. According to The Wall Street Journal, FBI officials are looking for patterns to indicate that any trading activities took place that might have broken the law. The government would then have to prove that fraudulent intent was a factor.

Trading activities under examination include the placing of trades in groups and then cancelling them to make it appear as if market activity actually went on. This type of practice could potentially be considered market manipulation because others might buy trades because of these false orders. Also under scrutiny is the use of high-speed trade orders to hide that transactions are a result of an illegal tip.

Bank of America, Its Ex-CEO To Pay $25M to Settle Securities Case with NY Over Merrill Lynch Deal

Published on: March 31, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Bank of America Corp. (BAC) and its ex-CEO Kenneth Lewis have consented to pay $25 million to settle the remaining big securities fraud case accusing them of misleading investors about the financial state of Merrill Lynch & Co. during the 2008 financial crisis. The New York securities case accuses the bank of deceiving shareholders by not disclosing Merrill’s increasing losses before the acquisition deal was closed or letting them know that the deal let Merrill give its officials billions of dollars in awards.

As part of the settlement, the bank will pay the state of New York $15 million and it will enhance its oversight. Lewis, meantime, has consented to pay $10 million and he cannot work at or serve as a director of any public company for three years.

Also named as a defendant in the securities lawsuit but who refused to settle is ex-Bank of America CFO Joe Price. NY Attorney General Eric Schneiderman intends to pursue a summary judgment against him, as well as ask a judge to reach a decision without a trial. Schneiderman reportedly wants Price permanently banned from serving as a director or working at a public company.

Bank of America Settles Mortgage Bond Claims with FHFA for $9.3B

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

Bank of America (BAC) will pay $9.3 billion to settle securities claims that it sold faulty mortgage bonds to Freddie Mac (FMCC) and Fannie Mae (FNMA). The deal, reached with the Federal Housing Finance Agency, includes $3.2 billion in securities that the bank will buy from the housing finance entities and a cash payment of $6.3 billion.

The mortgage bond settlement resolves securities lawsuits against the bank, Countrywide, and Merrill Lynch (MER). FHFA, which regulates both Freddie Mac and Fannie Mae, accused Bank of America of misrepresenting the quality of the loans behind residential mortgage-backed securities that the mortgage financing companies purchased between 2005 and 2007.

This is the 10th of 18 securities lawsuits reached by the FHFA over litigation involving around $200 billion in mortgage-backed securities. To date, it has gotten back over $10 billion over such claims.

Puerto Rico Bonds Are at Record Low Prices After FINRA Announces It Is Looking At Transactions

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

According to Bloomberg, Puerto Rico bonds that were issued this month are now at record low prices after the Financial Industry Regulatory Authority announced that it is looking at transactions involving the new securities. The US territory sold $3.5 billion of general obligation bonds, which is the largest junk bond offering in the history of the municipal market.

According to numerous financial news sources, the offering documents for Puerto Rico’s newly issued bonds stated there would be a $100,000 minimum order allowed so that the purchasers of the junk bonds would be limited largely to institutional buyers. Their prospectus says that bonds were to be issued at a $100,000 minimum and “integral multiples of $500,000 in excess thereof” unless Standard & Poor’s, Moody’s Investors Services, and Fitch Ratings raise Puerto Rico’s credit to investment grade. All three credit ratings agencies recently declared the US territory’s credit ratings “junk.”

Nevertheless, many transactions under the $100,000 amount have been reported, despite the lack of an upgrade in the bonds. As a result, scores of Puerto Rico bond transactions issued this month were cancelled. There is also data indicating that some brokers are trading under the $1,000 minimum established by the prospectus.

Madoff Ponzi Scam: Five Ex-Aides Convicted of Securities Fraud, Victims to Recover $349 Million

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

In a new round of payments by Bernard L. Madoff Investment Securities LLC trustee Irving Picard, victims of the $17 billion Madoff Ponzi Scam are slated to receive around $349 million. The US Bankruptcy Court in New York must still approve the distribution, which would bring total payouts to $6 billion-34% of the principal lost.

A hearing for the distributions is scheduled in April. Payouts by Picard include up to $500,000 in advances each to victims that were made by the Securities Investor Protection Corp. Picard said that he hope to give victims full reimbursements.

One way he is doing this is by pursuing claims of approximately $3.5 billion from HSBC Holdings PlC (HSBA), UBS AG (UBS) and UniCredit SpA (UCG), which allegedly benefited from the multibillion-dollar Ponzi scam. In January, JPMorgan Chase & Co. (JPM) arrived at $325 million accord with Picard over allegations that the bank was negligent in not identifying the fraud and made money money from Madoff’s scam. Picard was able to recover $10 billion-59% of the principals lost by thousands of Madoff customers. The financial firm also consented to pay another $218 million to settle two related class actions filed with the help of Picard.

Citigroup and Royal Bank of Scotland Fail Federal Stress Test

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

A capital plan to reward investors with stock buybacks and dividends by Citigroup Inc. (C) was one of five to fail Federal Reserve stress test. The others that did not succeed were those involving the US units of Royal Bank of Scotland Group Plc. (RBS), HSBC Holdings Plc. (HSBA), Zions Bancorporation (ZIONS) and Banco Santander SA (SAN). The central bank, however, did approve plans for 25 banks, including those from Bank of America (BAC) and Goldman Sachs (GS) after both lowered their dividend and buyback requests.

Regulators have been trying to prevent another financial crisis like the one in 2008 by conducting yearly tests on the way the biggest banks would do in a similar crisis. According to analysts, banks had intended to pay out about $75 billion in excess capital to raise returns and reward shareholders. This is the second year in a row that the Fed has taken issue with certain plans.

While Citigroup requested the least capital return among the five biggest banks in the country last year after its plan was turned down in 2012, this year it could have passed on just quantitative grounds. However, the central bank found numerous deficiencies in Citigroup’s planning practices, including whether it could project revenues and losses while under stress, as well as be able to properly measure exposures.

LPL Financial Fined $950K by FINRA for Supervisory Failures Involving Alternative Investments

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

FINRA says that LPL Financial, LLC must pay a fine of $950,000 for supervisory deficiencies involving the sale of alternative investment products, such as oil and gas partnerships, non-traded real estate investment trusts, managed futures, hedge funds, and other illiquid pass-through investments. By settling, the independent broker-dealer is not denying or admitting to the FINRA charges. LPL however, has agreed to an entry of the self-regulatory agency’s findings.

A lot of alternative investments establish concentration limits and certain states have even stipulated their own concentration limits for alternative investment investors. LPL also has set its own limits.

According to FINRA, however, from 1/1/08 to 7/1/12 LPL did not properly supervise the sale of alternative investments that violated of concentration limits. The SRO contends that even though initially LPL employed a manual system to assess if an investment was in compliance with requirements for suitability, the brokerage firm sometimes relied on inaccurate and dated data. Later, when LPL put into place a system that was automated to conduct the reviews, the system was purportedly not updated to make sure current suitability standards were correctly reflected and the programming in the database was flawed.

Securities America Under Investigation by Pennsylvania in Nontraded REIT Probe

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

The Pennsylvania Department of Banking and Securities is looking into the sales of nontraded REITs by Securities America employees. Ladenburg Thalmann & Co. Inc., which owns the broker-dealer and two other independent brokerage firms, said in its yearly report that the state regulator wants the brokerage firm to provide data about nontraded REITs that Pennsylvania residents have been buying since 2007. The request was made in October.

According to InvestmentNews, it is not known at this time if Pennsylvania regulators are just looking at nontraded REIT sales at Securities America or the investigation extends to other firms. It was just last year that Securities America, along with other independent brokerage firms, settled with the Massachusetts Securities Division over nontraded REIT sales.

Securities America paid $8.4 million in restitution to clients in that state along with a $150,000 fine. According to that probe, firms had difficulties abiding by their own policies as well as to the Massachusetts rule that an investor’s purchase of REITs cannot go beyond his/her liquid net worth.