Investor Lawyers Blog

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.

Spotlight on FINRA: SRO Disciplines Brokerages That Ignore Red Flags, Warns About Retirement Plan Rollover Conflicts, & Investigates for Stock Trade Incentives

Published on: January 16, 2014 | by Shepherd Smith Edwards & Kantas, LLP

FINRA Fines COR Clearing LLC $1M for Disregarding Red Flags

The Financial Industry Regulatory Association is continuing to crack down on brokerage firms that don’t detect and investigate “red flags” indicating possible suspect activity. Earlier this month it fined COR Clearing LLC $1 million for its purported failure to put into place procedures to detect and report suspect account activity.

The self-regulatory organization said that while the broker-dealer used a “tagged identifier list” to identify the entities and individuals linked to high risk accounts, the list only worked effectively when cross-checked against a demographic AML system, which included customer data that the firm had collected but was maintained by a third-party. However, the DAML database was incomplete because it did not include the names of COR Clearing’s introducing brokers.

The Players in the UBS Puerto Rican Bond Fraud

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

UBS Puerto Rico

A catastrophic collapse of life savings such as many investors in Puerto Rico bonds have been experiencing does not just happen on its own. There are inevitably a number of different parties that are involved, often to varying degrees. For most affected investors, the main party is UBS Financial Services Incorporated of Puerto Rico (“UBS Puerto Rico”). UBS Puerto Rico is a broker-dealer, meaning that it is a company in the business of buying and selling securities for clients, either by pairing together individuals looking to buy a particular security with a seller looking to sell that same security, and thus acting as a broker, or by buying and selling securities to investors out of its own portfolio, thus acting as a dealer. As a broker-dealer, UBS Puerto Rico is required to, and has, registered with the Financial Industry Regulatory Authority (“FINRA”), which is the regulator of broker-dealers in the United States and its territories. However, UBS Puerto Rico is licensed to operate solely within Puerto Rico.

Without delving into the legal issues involved, some of which have been discussed in previous posts and some of which will be addressed in subsequent ones, a broker-dealer can be legally liable for losses that its clients suffer under some circumstances. These situations can either because applicable laws and regulations covering broker-dealers in the United States require broker-dealers to properly supervise their brokers, and put in place various compliance systems to make sure the brokers are doing what they are supposed to be doing. Liability can also exist simply if the employees of the broker-dealer act improperly, even if the broker-dealer had no knowledge that it was going on, under legal theories such as respondeat superior.

MSRB to Implement Municipal Advisory Regulatory Framework in 2014

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

As part of its broader mandate under the Dodd-Frank Wall Street Reform and Consumer Protection Act, this year the Municipal Securities Rulemaking Board will concentrate on implementing a regulatory framework for municipal advisors that will encompass professional qualification standards, rules, and education. Already, the MSRB has made a priority the development of five rules for muni advisors.

The rules are intended to protect municipal entities and investors.They have to do with fiduciary duty, fair dealing standards of conduct, municipal firm supervisory requirements, pay-to-play activities, solicitor duties, and gift and gratuity limits to municipal issuer employees. The board intends to provide outreach and education to municipal advisors to assist them in getting ready for regulatory oversight and participating in rulemaking and professional qualification standards.

Just last week, the MSRB put out a draft rule to govern municipal advisor conduct. Draft Rule G-42 codifies the Dodd-Frank Act’s language that places a fiduciary responsibility on municipal advisors to put the interest of their clients above their own—and that they them owe not just a duty of care but also a duty of loyalty. If the draft rule, also called the Duties of Non-Solicitor Municipal Advisors, passes, this would prevent municipal advisors and affiliates from taking part in a transaction other than in a principal role with a client. According to BondBuyer.com, some market participants are worried that this means municipal advisors won’t be allowed to take part in non-fiduciary business relationships concurrent with the municipal advisory agreement.

Stifel, Nicolaus & Century Securities Must Pay More than $1M Over Inverse and Leveraged ETF Sales

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

Financial Industry Regulatory Authority says that Century Securities Associates, Inc. and Stifel, Nicolaus & Company, Inc. must pay almost $1 million over the sale of inverse and leveraged exchange-traded funds. Stifel Financial Corporation (SF) owns both firms.

According to the SRO, for more than four years Century and Stifel recommended non-traditional ETFs that were not suitable to customers because a number of its representatives did not fully comprehend the products’ features or the risks involved. The instruments were marketed to retail investors with conservative investment goals. A number of customers ended up holding the investments for long periods and they suffered net losses.

The regulator says that Century and Stifel failed to set up proper training for their representatives and lacked the reasonable supervisory systems for the sale of these non-traditional ETFs. Instead, the firms oversaw these investments the way they did traditional ETFs. Also, they did not set up a procedure to deal with the risk for the longer-term holding periods involving these complex investments.

Securities Fraud Court Matters

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

While a district court allowed the securities fraud claims brought under securities law against LightSpeed Environmental, Inc. & other defendants to go forward, the claims brought against the company under Section 12(a)(2) of the Securities Act were thrown out. The securities case is Wang v. LightSpeed Environmental, Inc.

The court said that while the plaintiff, Tonglin Wang, sufficiently alleged justifiable reliance, specific misrepresentations, and scienter, so that certain claims could proceed, he did not succeed in his claims that there was a prospectus or a public offering or that there was any verbal exchange made about the prospectus.

Wang is a Chinese businessman who wanted to invest in a US entity to obtain immigration status here via a federal program. In 2011, two individuals, who were LightSpeed agents (Wang did not know this), purportedly told him they would act as his translators and advisors. He then was introduced to David Tarrant, CEO of ASG. He had the majority of voting shares in LightSpeed.