Investor Lawyers Blog

SEC Suspends 225 Dormant Shell Companies to Prevent Pump-and-Dump Scams

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

The Securities and Exchange Commission said that as part of Operation Shell-Expel, its initiative to fight microcap fraud, it is suspending trading in 255 dormant shell companies that it says are “ripe for abuse in the over-the-counter market.” The regulator’s Office of Market Intelligence in its Enforcement Division has been looking through penny stocks and finding inactive companies.

Already, several hundred dormant shell companies have been suspended to protect them from fraudsters and from pump-and-dump scams, which is common with microcap companies. Schemers will use misleading and false statements to talk up a company’s thinly traded microcap stock. They will then buy the stock at a low figure to inflate the price to make it appear as if there is market activity. The next step involves getting rid of the stock by selling at that higher price and making huge profits.

These latest suspensions involve companies in two foreign countries and 26 US states. If a stock gets suspended from trading, relisting is not possible unless the company gives current financial data to show that it is still in business. Because many dormant shell companies are unlikely to do this, the shells become worthless to fraudsters.

Morgan Stanley to Pay $1.25B in Mortgage-Backed Securities Lawsuit by FHFA

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

Morgan Stanley (MS) will pay $1.25 billion to the Federal Housing Finance Agency to resolve the latter’s securities fraud lawsuit accusing the firm of selling mortgage bonds to Freddie Mac (FMCC) and Fannie Mae without apprising them of the risks. A lot of the loan involved in this MBS lawsuit against Morgan Stanley came from subprime lenders, such as IndyMac and New Century. The loans were packaged into bonds.

The brokerage firm, which sold $10.58 billion in mortgage-backed securities that were issued between September 2005 and September 2007, is the eighth financial firm to settle with FHFA over the more than $200 billion in securities that came with offering materials that purportedly misled the two government-backed lenders about the quality of the loans behind their investments. FHFA sued 18 financial institutions asking for unspecified damages in 2011.

To date, the government agency has collected about $9.1 billion. Recent settlers include Deutsche Bank AG (DB), which is paying $1.93 billion and JP Morgan Chase (JPM), which settled for $4 billion. Among those that have yet to settle with FHFA is Bank of America Corp. (BAC), which is being sued, along with two of its firms—Merrill Lynch & Co. (MER) and Countrywide Financial Corp.—for over more than $57.4 billion in securities. FHFA wants at least $6 billion from them.

SIFMA Tells Labor Department To Wait For SEC on Fiduciary Rulemaking

Published on: February 3, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities Industry and Financial Markets Association wants the US Labor Department to hold back on putting out its expected proposed rule modifying its definition of fiduciary standard of care until the Securities and Exchange Commission decides whether it will put out its own standard for financial professionals. SIFMA is worried that new DOL rules might harm brokers that purchase and sell bonds and stocks in addition to offering investment advice.

The SEC and DOL are both working on fiduciary rules. While many agree that brokers such have fiduciary duties to their clients, there are those who worry that this could make commission-based professional relationships in which a financial representative offers products from his/her employer more challenging. SIFMA says it would like a business model that includes a uniform fiduciary standard that doesn’t prevent a client from buying such products if desired.

The Labor Department, which is accountable for enforcing Employee Retirement Income Security Act rules over qualified plans, is expected to propose a stronger standard than the SEC. Already, ERISA places high care standards and loyalty on the fiduciaries of IRAs and pension plan and the DOL makes it a priority to protect customers from the conflicts of interest of advisors.

Seniors and Retirees Suffer Massive Losses in Puerto Rico

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

Many of the people hit hardest by the massive collapse of the market for Puerto Rico bonds have been seniors and retirees, for two main reasons. First, seniors and retirees have the most amount of money available to invest on average. They have worked for their entire lifetimes, dutifully and diligently saving for a comfortable retirement. This means that these individuals are highly desirable and sought after clients for brokers, whose income is largely dependent upon how much money they are managing for people. This also means that when brokers give bad advice, seniors and retirees have the most to lose. Sadly, they are also the least able to recover from those losses, as they have little, if any, time left working to try to save and replace what was lost.

For the last several years, UBS Puerto Rico has been pushing Puerto Rico bonds and UBS’s proprietary Puerto Rico bond funds on many if not most of its clients. Previous posts have discussed what many of those recommendations have entailed, and why they were inappropriate for most people. The second reason seniors have been some of the hardest hit is that the sales pitch for those bonds were very simple. Brokers would explain that municipal bonds are traditionally one of the safest investments available. Brokers would explain that retirees could also use those bonds to generate regular income for themselves, and, best of all, the income was tax free! The bonds practically sell themselves.

However, what most seniors and retirees did not understand, and what the UBS brokers apparently were not telling them, is that Puerto Rico bonds were actually very high risk investments. UBS was artificially propping up the market for the bonds so that they appeared safer and more stable than they truly were. Moreover, the bonds are backed by Puerto Rico, in varying ways. UBS was well aware that Puerto Rico was suffering massive problems with its economy and tax base, making it very difficult, if not impossible, for Puerto Rico to support the debt it was carrying. Finally, UBS’s recommendations to invest heavily, if not exclusively, in Puerto Rico bonds changed what is commonly a conservative investment, municipal bonds, into a speculative investment.

FINRA Issues Investor Alert on IRA Rollovers

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

The Financial Industry Regulatory Authority has put out an alert to help investors figure out whether an IRA rollover is the right choice. Gerri Walsh, the self-regulatory organization’s senior VP for Investor Education said that comparing investment choices and costs can prevent “unnecessary cracks” to one’s “nest egg.”

FINRA offers 10 tips when deciding about an IRA Rollover:

• Assess your transfer options: do you keep in an ex-employer’s plan, move assets to a new employer’s plan, roll over plan assets into an IRA, or cash out your balance?

Bank of America’s $8.5B Mortgage Bond Settlement Gets Court Approval

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

A judge has approved an $8.5B mortgage-bond settlement between Bank of America (BAC) and investors. The agreement should settle most of the bank’s liability from when it acquired Countrywide Financial Corp. while the financial crisis was happening and resolves contentions that the loans behind the bonds were not up to par in quality as promised. Included among the 22 investors in the mortgage-bond deal: Pacific Investment Management Co., BlackRock Inc. (BLK), and MetLife Inc. (MET.N). Under the agreement, investors can still go ahead with their loan-modification claims.

The trustee for over 500 residential mortgage-securitization trusts is Bank of New York Mellon Corp. (BK), which had turned in a petition seeking approval for the deal nearly three years ago for investors who had about $174 million of mortgage-backed securities from Countrywide. Now, Judge Barbara Kapnick of the New York State Supreme Court Justice has approved the mortgage-bond deal.

Kapnick believes that the trustee had, for the most part, acted in good faith and reasonably when determining the settlement and whether it was in investors’ best interests. However, she is allowing plaintiffs to continue with their claims related to loan-modification because, she says, Bank of New York Mellon Corp “abused its discretion” on the matter in that even though the trustee purportedly knew about the issue, it didn’t evaluate the possible claims. Also, the judge said that it makes sense for this one-time payment because it was evident that Bank of New York Mellon was worried Countrywide wouldn’t be able to pay a judgment in the future that came close to the $8.5 billion settlement.

$11M Award Against CitiGroup is Vacated by the New York Supreme Court

Published on: January 30, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The New York Supreme Court has vacated the $11M FINRA arbitration award against Citigroup Global Markets Inc. (C) and one of its employees. The securities case is Citigroup Global Markets Inc. v. Fiorilla.

Judge Charles Ramos vacated the award after determining that the parties had agreed to settle the arbitration case for $800,000 before arbitration. He said that it did not benefit the public interest to honor arbitrations of disputes that were settled before they were arbitrated.

The securities case involves a complaint filed by former legal adviser to the Holy See John Fiorilla. He contended that he turned over approximately $16 million of Royal Bank of Scotland PLC (RBS) stock-an inheritance from his dad-to Smith Barney adviser Robert Loftus. The latter is not a party in this arbitration claim.

SEC Accuses Private Equity Manager of $9M Securities Fraud

Published on: January 30, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The SEC says that Camelot Acquisitions Secondary Opportunities Management and owner Lawrence E. Penn III of stealing $9 million from a private equity fund. Also named in the securities fraud complaint are Altura Ewers and three entities, two of which are Camelot entities owned by Penn.

The regulator says that Penn, a private equity manager, reached out to overseas investors, public pension funds, and high net worth individuals to raise funds for Camelot Acquisitions Secondary Opportunities LP, a private equity fund that invests in companies that want to become public entities. He was able to get about $120 million of capital commitments.

According to the Commission, Penn paid over $9.3 million of the money to Ssecurion, a company owned by Ewer, as fake fees/ The two of them purportedly misled auditors about the fees that were supposedly related to due diligence, even forging documents up to as recently as last year.

A History of UBS Bad Bets

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

The current quagmire of UBS Puerto Rico offloading billions of dollars in speculative Puerto Rico bonds onto its unsuspecting clients is by no means a new or limited occurrence for UBS. UBS has a history of taking huge gambles and often passing the bad bets onto its clients.

Between 2002 and 2007, UBS and its U.S. subsidiary UBS Real Estate Securities were issuing and underwriting massive amounts of investments backed by, and based upon, U.S. residential mortgages. In essence, UBS was bundling together groups of private mortgages where U.S. residents were buying or refinancing a home. UBS then turned around and sold those bundles to investors as safe and conservative investments, despite the fact that many of those loans carried tremendous risks and were very likely to default. All told, UBS faced potential liability approaching $45 billion in connection with this activity. Aside from the legal liability, UBS was also forced to write off approximately $50 billion in bad debt held in its own inventory in these securities.

In 2011, UBS lost another $2 billion as a result of a trader who was making massive bets trading in derivative securities. Generally speaking, derivatives are investments whose price is based upon the value of other securities. These include things such as futures, options, and swaps. All of these instruments are commonly considered high risk instruments. In this case, the UBS trader was betting on the direction that various exchange traded funds, or “ETFs” would go in the future. Except this trader was placing these bets on a massive scale with huge amounts of leverage, to the point that relatively small changes in the price of the ETFs resulted in massive losses to UBS.

Ex-UBS Global Wealth Chief Exposed by Whistleblower Pleads Not Guilty To Tax Fraud Conspiracy

Published on: January 28, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Raoul Weil, who previously served as head of UBS (UBS)’s Global Wealth Management division, has pleaded guilty to fraud conspiracy charges related to a US tax investigation probe involving the Swiss bank. Weil, 54, is accused of conspiring to help thousands of American citizens hide $12 billion at the bank.

Until his arrest last year, Weil was listed as a fugitive in the United States. In federal court in Florida, he was allowed a $10.5 million bond. His first court hearing will be in December. He has until February 12 to reverse his plea to guilty. If convicted, however, he could end up in prison for conspiracy to commit tax fraud for up to five years.

Weil was indicted because of information that UBS whistleblower Bradley Birkenfeld provided to the US Department of Justice and the Internal Revenue Service. The latter, also a former UBS banker, has since been awarded $104 million for helping the federal government start an international crackdown on tax evasion that wealthy Americans had been engaging in for decades through Swiss banks.