Investor Lawyers Blog

SEC Tells J.S. Oliver Capital to Pay $15M for Alleged Cherry-Picking Scam

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

SEC Chief Administrative law judge Brenda Murray has fined J.S. Oliver Capital Management $15 million for securities violations and breach of fiduciary duty related to an alleged cherry-picking scam that bilked clients of approximately $10.9 million. The registered investment adviser must also pay $1.4 million in disgorgement.

According to the regulator, the RIA awarded profitable trades to hedge funds associated with the firm, while other clients, including a charitable foundation and a widow, were given the less profitable trades that resulted in major losses. These hedge funds that benefited were those in which J.S. Oliver founder Ian Oliver Mausner was an investor. Mausner is also accused of using soft-dollar commissions inappropriately.

Mausner continues to deny the SEC charges. He claims that the profitable trades were disproportionately allocated because of market volatility and that clients’ investment goals played a part.

Kansas Settles SEC Charges Over Allegations it Misled Investors about Risks in Muni Bond Offerings Totaling $273 Million

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

The U.S. State of Kansas has agreed to settle U.S. Securities and Exchange Commission fraud charges accusing it of failing to disclose in offering documents that the Kansas Public Employees Retirement System (KPERS), its pension system, was very underfunded. The regulator says that this established a repayment risk for bond investors. At issue were eight bond offerings valued collectively at $273 million.

According to the regulator’s order, the bond offers were issued via the Kansas Development Finance Authority (KDFA). Not only did the bond offering documents purportedly fail to disclose KPERS’ unfunded liability but also the paperwork did not describe what effect this could have on payments. The SEC said these poor disclosures stemmed from inadequate communications and procedures between KDFA and the state’s Department of Administration, which let the former know what data should have gone into the offering materials.

As a result, said the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit chief LeeAnn Ghazil Gaunt, Kansas gave investors were given an “incomplete” picture of the state’s finances and its potential ability to pay back the bonds (because of other stresses on its budget). The state has since put into place new procedures and policies to make sure that the appropriate disclosures about pension liabilities are disclosed in offering documents.

Private Equity Firms, Including Blackstone, Settle ‘Club Deals’ Case with $325M Settlement

Published on: August 9, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Blackstone Group (BX) LP, TPG, and KKR (KKR) will collectively pay $325 million to resolve a securities case accusing several private equity firms of working together to keep the prices they paid to acquire companies down during the takeover frenzy right before the financial crisis. The firms settled without denying or admitting to wrongdoing just three months before the lawsuit was scheduled to go to trial.

Their settlements follow those reached with former case defendants Bain Capital LLC and Goldman Sachs Group Inc. (GC) (collectively, the two paid $121 million) and Silver Lake, which paid $29.5 million. Carlyle Group (CG) LP is the only defendant left. It maintains that the investors’ claims have no merit.

The plaintiffs, who filed their securities case in 2007, sold their shares in numerous companies to private-equity firms during the boom-era buyouts. They contend that firms collude together to acquire companies via club deals and agreed not to compete with each other to lower the shareholders were paid. The investors claim that, as a result, they lost billions of dollars.

Regulators Tell Deutsche Bank to Enhance Its Risk Controls and Reporting Systems

Published on: August 9, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Federal Reserve Bank of New York and the state’s Department of Financial Services want Deutsche Bank AG (DB) to improve its technology and compliance procedures and get rid of risk-management deficiencies. The U.S. regulators made the demand to the financial institution via a private memorandum.

The Wall Street Journal says the confidential pact went into effect two years ago. While it doesn’t appear that regulators plan to take other action against Deutsche Bank over this matter, the New York Fed did give the financial institutional a deadline of the middle of 2015 to remedy a number of priority issues. Sources tell The WSJ that there is worry that reporting or trading mistakes by the bank could result in bigger, unplanned losses for the financial institution and even impact the market.

The Wall Street Journal recently reported that the New York Fed discovered that Deutsche Bank’s U.S. operations has known that it had serious financial reporting problems for years but did nothing to remedy the matter. Last year, New York Fed senior vice president Daniel Muccia sent a letter to the bank’s executives saying that the firm’s reports were not accurate and of poor quality. The extent of their errors was such that “wide-ranking remedial action” is needed. Muccia called the deficiencies a “systemic breakdown.” He said that the regulator has been worried about Deutsche Bank’s US outfit for years.

SEC Wants Texas’ Wyly Brothers to Pay $750M For Securities Fraud

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

The U.S. Securities and Exchange Commission wants Sam Wyly and the estate of his brother Charles to pay $750M for securities fraud involving an offshore tax scam. The Texas billionaire siblings were found liable in civil court earlier this year. Now, the case has gone to trial to determine how much the Wylys must pay in damages.

According to the federal jury that issued the verdict, the Wylys are liable for the offshore trusts and other entities on the Cayman Islands and the Isle of Man that garnered them $553 million in profits between 1992 and 2004 via concealed trades. The fraud involved offshore transactions with four of their companies in which they sold shares. The sales should have been noted in regulatory filings but were not listed.

Now, the SEC is saying that it should be entitled to all unpaid taxes on the profits from the scam in addition to interest. Lawyers for the brothers, however, are contending that the proper penalty is $1.38 million and that the law does not support the regulator’s disgorgement theory. They are also arguing that the SEC cannot step into the Internal Revenue Service’s shoes. (During the fraud, the U.S. government was not aware that the Wylys owed taxes because they did not disclose their control of the trusts. )

SEC Gets Nearly $70M Judgment Against Richmond, VA Firms, CEO Find Liable for Securities Fraud

Published on: August 5, 2014 | by Shepherd Smith Edwards & Kantas, LLP

AIC Inc., Community Bankers Securities LLC, and CEO Nicholas D. Skaltsounis must pay a nearly $70 million judgment for securities fraud, in the wake of an earlier trial that found them liable. The Securities and Exchange Commission had accused them of conducting an offering fraud while selling millions of dollars in AIC promissory notes and stocks to investors in different states, including unsophisticated investors and elderly customers.

The regulator accused them of omissions and misrepresentations of material information about the investments, their risks, the return rates, and how the money would be used by AIC, which is a financial services holding company, and Community Bankers Securities, its subsidiary brokerage firm. The SEC argued that the companies were not profitable and new investors’ money was used in Ponzi scam fashion to repay returns and principal to earlier investors.

Last year, a jury ruled in the SEC’s favor against AIC, Community Bankers Securities and Skaltsounis. Now, AIC must disgorge over $6.6 million, over $969,00 in prejudgment interest, and a $27.95 million penalty. Community Bankers Securities disgorgement is $2.8 million, over $400,000 in prejudgment interest, and a $27.95 million penalty. Skaltsounis is to pay over $2.5 million dollars in total.

Judge Rakoff Approves Citigroup’s $285M Mortgage Securities Fraud Deal with the SEC

Published on: August 5, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Two months after the Second U.S. Circuit of Appeals ruled that he had made a mistake in blocking the $285 million mortgage securities fraud settlement between Citigroup (C) and the SEC, U.S. District Judge Jed Rakoff has approved the deal. Rakoff had originally refused to allow the agreement to go through in 2011, chastising the regulator for letting the firm settle without having to admit wrongdoing.

Following his decision, other judges followed his lead and began questioning certain SEC settlements. The regulator went on to modify a longstanding, albeit unofficial, policy of letting companies settle without having to deny or admit wrongdoing.

Even though Rakoff is approving the deal now, he was clear to articulate his reluctance. In his latest opinion he wrote that he worries that because of the Second Circuit’s ruling, settlements with governmental regulatory bodies, and enforced by the contempt powers of the judiciary, will not have to contend with any meaningful oversight. However, Rakoff said that if he were to ignore the Court of Appeals’ dictates this would be a “dereliction of duty.” Nonetheless, he noted that approving this settlement has left his court with “sour grapes.”

SEC Charges Ex-UBS Broker in $730K Elder Financial Fraud Ponzi Scam

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

The Securities and Exchange Commission has filed charges against ex-UBS Wealth Management Americas (UBS) broker Donna Tucker for a Ponzi fraud that allegedly bilked elderly investors of over $730,000. Tucker is accused of misappropriating the money from UBS customers over a five-year period while she worked at the financial firm.

According to the SEC, Tucker took part in unauthorized trading, made misrepresentations to customers about the status of their funds, and forged documents and checks. She allegedly gained customers’ trust by becoming friends with them.

For example, she helped one blind couple take care of their medical needs and pay their monthly bills. The latter action gave her access their checkbook. She used this authorization to forge checks written to cash that she then gave to herself.

Argentina Defaults, Misses Interest Payment Deadline on $13B of Restructured Bonds

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

Argentina has gone into default after not getting a $539 million payment to bondholders. A default has been likely since a number of New York hedge funds, demanding that the South American nation pay them back in full for government bonds that defaulted in 2001, won their claims in court.

A federal district court judge in Manhattan ruled in 2012 that Argentina could not keep regularly paying its main class of bondholders, without paying the hedge funds. They refused to accept new exchange bonds as a trade for the defaulted securities. The older bonds have far greater value.

Among those “holdouts” were individual investors and hedge funds, such as Aurelius Capital Management and Elliot Management’s NML Capital. Billionaire Paul Singer owns Elliot Management. Argentina owes the hedge funds over a billion dollars.

SEC Signs Off On FINRA Rule Restricting Expungement Of Customer Complaints

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

The U.S. Securities and Exchange Commission (“SEC”) has approved a Financial Industry Regulatory Authority (“FINRA”) rule that could make it tougher for brokers to expunge customer complaints from their records in settled arbitration cases. Rule 2081 bars brokers from making settlements with customers contingent upon the customer’s consent to not oppose the expungement of the dispute from the public record of the broker.

A record of arbitration complaints filed against brokers is kept as a part of the CRD system. The CRD system contains data about registered representatives and members, including their registration, employment, and personal histories. It also includes disclosure information pertaining to civil judiciary, disciplinary, and regulatory actions, criminal matters, and data about customer disputes and complaints.

The public can access this data through FINRA’s BrokerCheck website. Brokers can have a customer dispute erased from the CRD system and BrokerCheck only through a court order that confirms there has been an arbitration award that recommends such relief.