Investor Lawyers Blog

Hedge Funds Interested in Upcoming Puerto Rico Bond Offering Want The Territory to Borrow Money To Last Two Years

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

In the wake of Puerto Rico’s plans to sell $2 billion of general-obligation debt to try to balance its beleaguered budget, the hedge funds planning to get involved in this latest bond offering are asking the US territory to raise enough funds to last two years. Reportedly, the hedge funds also want the Commonwealth to surrender its sovereign immunity, which would let bondholders sue in New York court instead of dealing with the Puerto Rican judicial system.

The reported hedge funds’ requests point to the awareness that risks involving Puerto Rico have gone up. Just this month, Moody’s Investors Service, Fitch Ratings, and Standard and Poor’s all downgraded the U.S. territory to junk status. Aside from the planned Puerto Rico bond offering, which is being underwritten by Morgan Stanley (MS), Barclays Plc (BCS), and RBC Capital Markets (RBC), legislation is in the works to give the Commonwealth up to $3.5 billion of borrowing capacity.

As of the end of June, the US territory and its agencies had outstanding debt of roughly $70 billion. The downgrades by the credit rating agencies led to $940 million of accelerated payments on swap fees and debt, with close to half due in 30 days.

SEC Charges Two Wall Street Traders With Securities Fraud in “Parking” Scam

Published on: February 15, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging Ryan King and Thomas Gonnella with securities fraud over a bogus “parking” scam. According to its Enforcement Division, the two Wall Street traders tried to get a round a firm policy that places a penalty for holding securities too long, and one of them purportedly placed securities in the trading books of the other so such fees wouldn’t be imposed and end up affecting his annual bonus.

The two men worked at different firms. According to the SEC, Gonnella asked King to help him get around his firm’s policy by arranging for the latter to buy securities that he would then later buy from King’s firm at a profit. By parking the securities in King’s trading book to reset the holding period, Gonnella was seeking to avoid charges to his trading profits and bonus as a result of inventory.

Per the administrative orders, Gonnella parked about 10 securities with King. The alleged round-up trades purportedly caused Gonnella’s firm to lose about $174,000.

OppenheimerFunds Increases Its Exposure to Puerto Rico Debt Despite Downgrade by Moody’s, S & P, and Fitch to Junk Status

Published on: February 14, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Even though Puerto Rico’s debt has been downgraded to “junk” status by the three major ratings agencies (Standard & Poor’s, Moody’s, and Fitch Ratings), OppenheimerFunds (OPY) has increased its holding of Puerto Rican debt in two of its municipal bond funds that carry lower risk. The credit raters downgraded the US Commonwealth over worries about its failing economy and decreased ability to finance its deficits in capital markets.

According to Reuters, Lipper Inc. says that at the end of last year, the Oppenheimer Rochester Short-Term Municipal Fund’s (ORSCX) exposure to Puerto Rico’s debt had risen 13% from a year ago, while its Intermediate-Term Municipal Fund more than doubled its exposure to 17%. (Details of the holdings in both funds since then are still unavailable.) Both have a 5% limit on how much junk-rated debt they can contain. However, because the US territory’s debt was downgraded after the buys were made, Oppenheimer, which is part of MassMutual Financial Group, may not obligated to unload the assets.

The company has continued to support Puerto Rico municipal bonds, even as a lot of other mutual fund firms have lowered their exposure to Puerto Rico debt. This week, Oppenheimer downplayed the investment risk involved, noting that most bonds involved are insured (Reuters reports that 27% of the holdings in the intermediate-fund and another 4% in the short-term fund, do not have insurance).

FINRA Awards Nearly $1M in Florida Non-traded-REIT Cases

Published on: February 14, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority has ordered two Retirement Securities Inc. and Sterling Enterprises Group Inc. to pay an individual and two trusts over $900,000 in a Non-traded real estate investment trust case. The individual is investor Kristopher Brownlow and the two trusts are the Martha H. Mason Trust and the Derek Mason Trust. Both Retirement Securities and Sterling Enterprises are no longer registered with FINRA.

The two trusts and Brownlow brought the case to the SRO, contending that they lost money because of the investments that Sterling Enterprises and Retirement Securities recommended to them. Per FINRA documents, the investments were made in REITS offered by Inland American Real Estate Trust Inc. and they were non-tradable. Inland Real Estate Trust Inc. is one of the biggest non-traded REITs with over $11 billion in assets.

At the dispute resolution hearing, the claimants argued that the investment advisors breached their fiduciary duty, were negligent, took part in common law fraud, violated the Florida Securities and Investor Protection Act, and breached contracts. Except for the allegation involving the Florida act, all allegations were thrown out.

SEC Restructures Trial Unit in an Effort to Decrease Courtroom Losses

Published on: February 13, 2014 | by Shepherd Smith Edwards & Kantas, LLP

In the wake of recent losses in the courtroom, the Securities and Exchange Commission is changing up the way it gets ready for trial. The Wall Street Journal says that SEC Chairwoman Mary Jo White has retooled the agency’s trial unit. One of the reasons for the restructuring is so litigators and investigators can work more closely together.

The SEC’s victory rate has been dropping. The agency won just 55% of trials in the last four months, which a definite decline compared to the last three years when it had been winning over 75% of the time. Since October, however, juries and judges have ruled in favor of 10 out of 25 persons and firms in securities litigation against the SEC, and the government lost 5 of 11 trials. This is a definite downswing from the 12 months prior when just 5 of 34 defendants beat the regulator. Although the cases that the regulator lost were filed before White took over the helm, defense lawyers believe that the Commission’s current losing trend will compel more people to go up against it instead of settling.

The Commission’s trial unit has now been split into four groups so that this more closely mirrors the work of enforcement officials when they probe cases. Senior officials are also conducting practice openings for trials.

Ex-Bank of America Corp. Executive Enters Guilty Plea in Municipal Bond Rigging Scam

Published on: February 12, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Phillip D. Murphy, an ex-Bank of America Corp. (BAC) executive that used to run the municipal derivatives desk there, has pleaded guilty to wire fraud and conspiracy charges in a muni bond rigging case accusing him of conspiring to bilk the US government and bond investors. In federal court, he admitted to manipulating the bidding process involving investment agreements having to do with municipal bond proceeds.

The illegal activity was self-reported by his former employer. Bank of America has been cooperating with prosecutors that have accused bankers of paying kickbacks to CDR Financial Products to fix bids on investment contracts purchased by local governments. The contracts were bought using money from bond sales.

According to the indictments, from 1998 to 2006, Murphy and CDR officials conspired to up the amount and profitability of investment deals and municipal finance contracts that went to Bank of America. Murphy purportedly won actions for certain contracts after other banks consented to purposely turn in losing bids.

FINRA Seeks to Limit Definition of Public Arbitrator

Published on: February 11, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to Investment News and The Wall Street Journal, sources in the know say that the Financial Industry Regulatory Authority wants to limit how many brokerage industry insiders can act as arbitrators in investor disputes with broker-dealers and brokers. The amendment would keep anyone affiliated with the securities industry, including lawyers and ex-brokers, from representing themselves in the role of public arbitrator. FINRA’s board of directors will decide whether to approve a proposed rule changes on this matter at a meeting this week.

Under the FINRA arbitration system, there are two arbitarator categories: nonpublic and public. Public arbitrators usually don’t have a current insider industry connection with the securities industry. Meantime, arbitrators that are nonpublic can have current ties, even working as a banker or a broker or securities fraud lawyer.

Usually, there are three arbitrators on a panel presiding over an investor-broker dispute. The panel members are selected from a list of arbitrators. Respondents and claimants go through this list to eliminate those they don’t want on the panel.

$13B MBS Fraud Settlement Between JPMorgan and the US is Under Dispute in New Securities Lawsuit

Published on: February 10, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Better Markets, a non-profit group, is suing the US Department of Justice to block the $13 billion mortgage-backed securities fraud settlement reached between the federal government and JP Morgan Chase (JPM). The group wants the deal to undergo judicial review.

The settlement resolves DOJ mortgage bond claims with a $2 billion civil penalty and includes $4 billion of consumer relief, another $4 billion to settle claims related to Freddie Mac and Fannie Mae, and another $1.4 billion to settle a National Credit Union Administration-instigated securities case. JPMorgan sold the mortgage bonds in question in the years heading into the housing market collapse. The loans that were involved lost value or defaulted when the bubble burst.

As part of the agreement, the firm acknowledged that it made “serious misrepresentations” about the MBS to investors. While the deal doesn’t release the bank from criminal liability, it grants civil immunity for its purported actions. Now, Better Markets, which describes itself as a “Wall Street” watchdog, is saying that the record settlement between the US government and JP Morgan was “unlawful” because a court did not review the deal.

JPMorgan Will Pay $614M to US Government Over Mortgage Fraud Lawsuit

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

JPMorgan Chase & Co. (JPM) has agreed to settle securities allegations that it defrauded federal agencies by underwriting mortgage loans that were sub-standard. As part of the agreement with the US government, the bank acknowledged that for over 10 years it approved thousands of insured loans that were ineligible for insurance by the Department of Veterans Affairs of the Federal Housing Administration. The Justice Department claims that as a result of JPMorgan’s actions, both the VA and FHA sustained significant losses because loans that were not qualified failed.

The mortgage fraud lawsuit is over the financial firm’s involvement in US programs that let private-sector lenders approve mortgages for government refinancing or insurances. According to prosecutors, JPMorgan violated the rules on a routine basis when it approved loans that did not meet the program’s criteria. One example, noted by Bloomberg.com, is the bank’s decision to underwrite a loan for an Indiana property and approving it for FHA insurance even though the rules don’t allow for reliance on documents that are over 120 days old to verify the assets of the borrower. After just three payments, the borrower defaulted. Because JPMorgan was the note’s holder, the Department of Housing and Urban Development paid a $109,253 insurance claim.

The Justice Department says that as part of the securities settlement the bank has also admitted that it did not let agencies know that its own internal reviews uncovered over 500 defective loans that should not have been turned in for VA and FHA insurance. According to United States attorney in Manhattan Preet Bharara, JPMorgan put “profits ahead of responsibility.”

How Can you Recover Your Loss on UBS Puerto Rico Municipal Bonds?

Published on: February 7, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Previous articles have described the numerous problems that many investors currently face as a result of investments their broker at UBS or another brokerage firm made to invest in Puerto Rican municipal bonds. Other posts have discussed why UBS knew or should have known that those problems were imminent, and yet kept selling those bonds to virtually all of its clients. Those problems have even gotten worse, as Moody’s has followed suit from Standard & Poor’s and downgraded approximately $55 billion worth of Puerto Rico’s outstanding bonds, pushing many of those into junk bond status. The question becomes, now what? What options do investors have?

Broker-dealers, like UBS and UBS Puerto Rico, are regulated by the Financial Industry Regulatory Authority (“FINRA”). FINRA rules give customers of broker-dealers the option of filing complaints against their broker and his employing company in arbitration. Arbitration is a court alternative. It can be quicker and less expensive than a claim filed in a state or federal court; FINRA arbitration cases typically take between 12 to 18 months from when they are filed to when a decision is rendered by the arbitrators.

The proceedings are also much less invasive for the customer bringing the claim. Typically, customers are not required to respond to written questions under oath, submit to depositions, or in person questioning on the record, or other similar discovery procedures which occur in court litigation. Instead, the customers are generally only required to produce certain paper documents in their possession; things like statements from their broker, letters and/or emails between themselves and their broker, certain tax records, etc. The only other requirement is to attend a final, in person hearing, similar to a trial in court, where the customer will have the opportunity to explain their story before the arbitrators.