Investor Lawyers Blog

Madoff Ponzi Scam Victims Win Right to Appeal for Interest

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

A group of investors that were victimized in the Bernard Madoff Ponzi scam has won the right to appeal directly to a federal court about a bankruptcy ruling that prevents them from factoring in the amount of time they invested with the financial fraudster as interest that they want back. According to the US Court of Appeals in New York, the plaintiffs met the criteria for a “direct appeal” so that they won’t have to go through the district court first.

U.S. Bankruptcy Judge Burton R. Lifland had said that “time-based” calculations might not be fair to creditors who are last in line for payments and that this could give a windfall to claims by traders even though they weren’t victims of Madoff’s scam. Lifland recently passed way.

Madoff’s victims want bankruptcy trustee Irving Picard to put aside about $1.4 billion to pay back interest they say they are owed. They believe that factoring in time when equating damages allows for inflation to be considered.

Family Pleads Guilty to $10M Massachusetts Ponzi Scam

Published on: January 22, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Steven Palladino, his wife Lori, and son Gregory have pleaded guilty to their involvement in a Massachusetts Ponzi scam that cost at least victims over $10 million, much of which can never be recovered. Defrauded investors included friends, acquaintances, and a veteran’s group.

In Suffolk Superior Court this week, Palladino pleaded guilty to criminal charges that implicated him as the lead player in the financial scheme, which he ran through Viking Financial Group. Lori and Gregory also entered their guilty pleas to charges related to the fraud.

Prosecutors claim the Palladinos promised high returns from high-interest, low-risk loans. The family used investors’ money to pay for a fancy lifestyle, including jewelry and expensive cars. Palladino also reportedly used some of the money for his mistress.

Goldman Sachs Must Contend with Proposed Class-Action CDO Lawsuit

Published on: January 22, 2014 | by Shepherd Smith Edwards & Kantas, LLP

U.S. District Judge Victor Marrero says that Goldman Sachs Group Inc. (GS) must face a proposed class action securities case accusing it of defrauding customers that purchased specific collateralized debt obligations at the beginning of the financial crisis. The lead plaintiff, Dodona I LLC, contends that the firm created two Hudson CDOs that were backed by residential mortgage backed-securities even though Goldman knew that subprime mortgages were doing badly.

The hedge fund claims that Goldman tried to offset its prime risk, even betting that subprime mortgages and the securities constructed around them would lose value—essentially making the CDOs to lower its own subprime exposure and simultaneously shorting them at cost to investors. Dodona purchased $4 million of Hudson CDOs.

Meantime, Goldman said that the proposed class action case should be dropped and that instead, Hudson CDO claims should be made independently. The bank said that the current case has too many conflicts and differences. Judge Marrero, however, disagreed with the bank.

UBS’s Anticipated Defenses in the UBS Puerto Rico Fund Cases

Published on: January 21, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Regardless of the research and industry standards that say that UBS should not have been selling Puerto Rico bonds the way that it was, inevitably UBS will still put forward a vigorous defense to the claims that investors are now bringing forward. Although each case will vary somewhat based upon the particular facts involved, almost surely UBS will raise three major defenses.

First, UBS will claim that the recommendations that its employees made to their clients to invest huge portions of their accounts in Puerto Rico bonds and UBS’s Puerto Rico bond funds was actually suitable and appropriate. According to industry standards, a broker is not actually required to make the “best” recommendation to a client; they just have to make a recommendation that is “suitable,” or essentially “good enough.” For these Puerto Rico bonds, UBS will point out that municipal bonds are generally considered relatively low risk investments, which is true, and that the bonds gave significant tax benefits to investors, which is also true. What this defense fails to account for, however, are very widespread concepts of asset allocation, which is essentially a finance term for “don’t put all your eggs in one basket.”

Secondly, no securities claim would be complete without the broker-dealer claiming that the investor is sophisticated in finance, with great experience and understanding of the intricacies and risks involved. UBS will argue that it disclosed the risks involved in these investments and that it disclosed the conflict of interest that UBS had in many of these transactions. Once again, to some extent these are true. Many, if not most, clients who purchased shares of UBS’s proprietary funds were likely given a prospectus, or formal statement of the security which included somewhere in it a difficult to understand statement of risks, and conflicts that UBS has. However, contrary to this statement, most investors rely heavily on the advice of their brokers, and lack the wherewithal to read and comprehend the risks located in a lengthy prospectus.

Detroit, MI Can’t Pay $165M to UBS & Bank of America For Swaps Deal, Rules Judge

Published on: January 21, 2014 | by Shepherd Smith Edwards & Kantas, LLP

A bankruptcy judge says is refusing to grant the city of Detroit, MI permission to pay $165 million to Bank of America (BA) and UBS AG (UBS) to end an interest-rate swaps deal that taxpayers have been paying $202 million for since 2009. U.S. Bankruptcy Judge Steven Rhodes says the payment, in addition to a fee of over $4 million, is too costly for the beleaguered city.

Rhodes said he doesn’t believe it is in the city’s best interests to make this deal. Detroit filed the biggest municipal bankruptcy in US history due to its $18 billion debt. Prior to seeking bankruptcy protection, the city had arrived at a deal to terminate the swaps contract that it had signed with Bank of America unit Merrill Lynch (MER), UBS, and SBS Financial Products Co. for $230 million.

According to their 2009 deal, the banks are entitled to seek control of Detroit’s casino taxes, which the city pledged as cash to UBS and Bank of America. Now, Detroit may have to submit an emergency motion asking the court to protect the cash so that the banks don’t take the funds.

Elder Financial Fraud: One Out of Five Seniors Victimized, Reports WSJ

Published on: January 20, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to the Wall Street Journal, a 2010 survey conducted by the financial education organization Investor Protection Trust reports that out of ever five Americans age 65 and over, one of them has been the victim of elder financial abuse. The paper is calling this an epidemic.

A tracking by the Federal Trade Commission in 2012 found that 26% of all fraud complaints involved seniors age 60 and older. Unfortunately, says the WSJ, investigators estimate that just 10% of elder financial fraud cases are reported, with most of these cases never undergoing investigation-a reason for this being that financial schemes are costly to probe. Often, there is little evidence and federal authorities will typically refuse to look into cases where under $100,000 was involved. Still, less than this amount is a lot for many people-especially retirees and those that are too sick to work anymore.

Older seniors can make easy targets. According to a Duke University study, over one-third of seniors, age 71 and older, have some type of cognitive impairment that can make it hard for them to manage their money properly. There are also many seniors who depend on fixed incomes and are in need of additional funding that can easily fall prey to fraud.

Advisors in the Spotlight: Ex-SAC Capital’s Martoma on Trial for $276M Insider Trading Scam, Financial Industry Recruiters Say LinkedIn Hurts Their Business, & A Fugitive Bank Director Wanted for Securities Fraud is Arrested

Published on: January 18, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Former SAC Capital Portfolio Manager Mathew Martoma On Trial for Securities Fraud

Mathew Martoma, the ex-SAC Capital Advisors portfolio manager accused in the insider trading scam that involved $276 million in Wyeth and Elan stocks, is now on trial. Martoma allegedly used tips from a doctor involved in Alzheimer drug trials. The government says that due to the information SAC liquidated a $700 million position and sold its stocks in the firms, which allowed it to make money while avoiding losses.

In court this week, one doctor testified that he was surprised that Martoma knew so much about the results of a clinic trial before they were publicly disclosed. Already, prosecutors have filed charges against 83 people and four SAC entities over what the US is calling the largest illegal trade in our nation’s history. There have been several convictions.

RCS Capital Corp to Buy Brokerage Firm J.P. Turner for $27 Million & Cetera Financial for $1.15B

Published on: January 18, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Nicholas Schorsch, the executive chairman of RSC Capital Corp.’s (RCAP) board of directors, has just announced that the brokerage firm is going to buy independent broker-dealer J.P. Turner for $27 million. The news comes one day after RSC announced it was buying brokerage firm Cetera Financial Group for $1.15 billion from Lightyear Capital LLC.

To acquire J.P. Turner, RSC Capital will pay 70% of the buying price in cash and the remainder in stock. This will add 325 advisers to the RSC’s roster.

RSC’s CEO is William Kahane. He co-founded American Realty Capital, a non-traded real-estate investment trust sponsor, with Schorsch, of which the latter is the head. Schorsch entered the independent brokerage scene last year when he acquired Legend Group, First Allied Securities, Investors Capital Holding, and Summit Brokerage Services.

Credit Suisse Could Settle with US Over Tax Evasion Allegations for Over $800M

Published on: January 18, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Credit Suisse Group AG (ADR) is currently in talks with the US Department of Justice to settle allegations that the Swiss bank helped American citizens evade taxes. Credit Suisse is one of a dozen Swiss banks under criminal investigation for allegedly helping US citizens use the bank secrecy laws of Switzerland to hide their assets so they wouldn’t have to pay taxes on them.

The financial institution is no longer taking private-banking clients from the US as authorities in this country continue to crack down on offshore tax cheats. Other Swiss banks under investigation include HSBC Holdings (HSBC) PLC and Julius Baer Group AG (JBAXY).

Because of the scrutiny, these banks cannot take part in a new US DOJ program that lets Swiss banking institutions disclose undeclared US assets in exchange for the possibility of huge fines but also the guarantee of no prosecution. Penalty is 20% of the maximum aggregate dollar value of non-disclosed US accounts still held on 8/1/08. This amount would go up to 30% for secret accounts established after that time but before February 2009. The penalty is 50% for secret accounts set up after this date.

How UBS Breached Its Duties with Puerto Rico Bond Funds

Published on: January 17, 2014 | by Shepherd Smith Edwards & Kantas, LLP

UBS’s continual, massive sale of Puerto Rico municipal bonds and UBS’s proprietary Puerto Rico bond funds involves a number of failures of its legal duties, some of which vary by the individual facts of each investor. According to the SEC investigation, UBS Puerto Rico was ordered by its parent company to massively sell off its inventory of Puerto Rico bond securities. In order to accomplish that, UBS Puerto Rico continually and intentionally undercut sell orders from its customers in these securities, ensuring that UBS’s securities sold, while other customers were unable to get out of their positions.

Despite the fact that UBS knew that these securities were becoming more and more illiquid, the SEC investigation indicates that UBS continued to sell massive amounts of the securities to its clients, in large part to ensure that UBS could offload its own holdings of the bonds before the bottom fell out of the market. This means that UBS was recommending that its clients buy securities that it knew were rapidly becoming difficult to sell, and which UBS knew had a seriously likelihood of significant value declines at the same time.

Many UBS clients were also being told to purchase these Puerto Rico bonds and bond funds in huge concentrations in their accounts. Many clients had 100% of their account in these securities. This type of investing violates very clear industry norms which require brokers to recommend that their clients diversify their portfolio, so that the failure or decline of one issuer or security, such as Puerto Rico, does not have a cataclysmic effect on the client’s entire account.