Investor Lawyers Blog

SEC Goes After Alleged Ponzi Scammers

Published on: November 15, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is pursuing securities fraud charges against Wendy Ko and Yin Nan Wang and certain entities over their alleged involvement in a Ponzi-like scam. The regulator is asking for an asset freeze against Velocity Investment Group, its managed funds, and Rockwell Realty Management, Inc. These entities are controlled by Wang and Ko.

The SEC claims that the two of them offered and sold over $150 million securities as unsecured promissory notes through Velocity and its unregistered investment funds. The offerings promised a substantial investment return rate. That said, to fulfill these interest obligations the funds needed to make returns higher than the market average.

Wang purportedly ordered that an accountant be given financial information that included material overstatements of fund receivables. He also is accused of publishing false financial data on a website.

Hedge Funds Are Moving in on Municipal Debt, Including Puerto Rico Debt

Published on: November 15, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to The Wall Street Journal, hedge funds are starting to bet big on municipal debt by demanding high interest rates in exchange for financing local governments, purchasing troubled municipalities’ debt at cheap prices, and attempting to profit on the growing volatility (in the wake of so many small investors trying to get out because of the threat of defaults). These funds typically invest trillions of dollars for pension plans, rich investors, and college endowments. Now, they are investing in numerous muni bond opportunities, including Puerto Rico debt, Stanford University bond, the sewer debt from Jefferson County, Alabama, and others.

Currently, hedge funds are holding billions of dollars in troubled muni debt. The municipal bond market includes debt put out by charities, colleges, airports, and other entities. (Also, Detroit, Michigan’s current debt problems, which forced the city into bankruptcy, caused prices in the municipal bond market to go down to levels that appealed to hedge funds.)

Hedge fund managers believe their efforts will allow for more frequent trading, greater government disclosures, and transparent bond pricing and that this will only benefit municipal bond investors. That said, hedge fund investors can be problematic for municipalities because not only do they want greater interest rates than did individual investors, but also they are less hesitant to ask for financial discipline and better disclosure.

Securities Whistleblower Roundup: Retaliation Lawsuit Against Thompson Reuters Gets Go Ahead & SEC Issues Its Sixth Bounty Award

Published on: November 14, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York has rejected Thomson Reuters (Markets) LLC’s motion to have a whistleblower retaliation case dismissed. Instead, Judge Shira A. Scheindlin agreed with the Securities and Exchange Commission’s rule that a whistleblower doesn’t have to tell the regulator to be able to qualify for Dodd-Frank Wall Street Reform and Consumer Protection Act. The judge, however, did throw out the plaintiff’s claim for punitive damages, which he says Dodd-Frank doesn’t allow.

The plaintiff, Mark Rosenblum, is an ex-redistribution specialist who was allegedly let go from his job after he suggested that changing up the distribution time for certain consumer survey data to certain customers was tantamount to insider trading. Rather than telling the SEC he reported his worries internally and to the FBI.

Rosenblum believes he was fired because of what he reported and he says this is unlawful. Thomson Reuters tried to get the lawsuit tossed out claiming that because Rosenblum didn’t tell the SEC and the company, he therefore wasn’t protected under Dodd-Frank. Thomson Reuters cited the Fifth Circuit’s ruling in Asadi v. GE Energy USA, LLC that determined that Dodd-Frank only gives whistleblower protection to those who notify the SEC. That said, the appeals court also admitted that its interpretation wasn’t in line with the SEC or of other courts .

JPMorgan and Institutional Investors Agree to $4.5B Mortgage-Backed Securities Settlement

Published on: November 14, 2013 | by Shepherd Smith Edwards & Kantas, LLP

JPMorgan Chase & Co. (JPM) says it will pay $4.5 billion to investors for losses that they sustained from mortgage-backed securities that were purchased from the firm and its Bear Stearns Cos. during the economic crisis. The institutional investors include Allianz SE (AZSEY), BlackRock Inc. (BLK), Pacific Investment Management Group, MetLife Inc. (MET), Goldman Sachs Asset Management LP, Western Asset Management Co., and 16 of other known institutional entities. This is the same group that settled their MBS fraud case against Bank of America Corp. (BAC) for $8.5 billion.

The $4.5 billion will be given to 330 RMBS trusts’ trustees over investments that were sold by the two financial institutions between 2005 and 2008. A number of the trustees, including Bank of New York Mellon Corp. (BK) still have to approve the agreement, as does a court.

Still, the claims related to the Washington Mutual-sold MBS have yet to be resolved.

SROs at Work: MSRB Prioritizes Fiduciary Duty When Setting Up New Muni Advisor Regime & FINRA Puts Out Closed-End Funds Alert to Investors

Published on: November 13, 2013 | by Shepherd Smith Edwards & Kantas, LLP

MSRB Makes Defining Fiduciary Duty Central to Developing Municipal Advisor Regulatory System

Municipal Securities Rulemaking Board says that in coming up with a regulatory system for municipal advisors it’s number one priority is to get clear about the statutory fiduciary duty that these entities would owe to their local and state government clients. The MSRB’s board of directors has asked staff to create a rule proposal that would give guidance on the fiduciary obligation that municipalities have to municipal entities.

Following the release of the fiduciary duty proposal for comments, there also will be proposals about rules addressing possible pay-to-play activities in the industry, municipal advisory firms’ supervisory requirements, limits on gratuities and gifts to those who work for municipal securities issuers and other participants in the market, and solicitor duties. Along with the proposals, the MSRB plans to create a professional qualifications program geared for municipal advisors and perform outreach and education initiatives.

SEC Members Discuss Agency’s Core Mission, New Penalty Policy, and Private Offerings in the Wake of General Solicitation

Published on: November 12, 2013 | by Shepherd Smith Edwards & Kantas, LLP

SEC Member Presses Regulator to Stick to Its Core Mission When Figuring Out Priorities

Securities and Exchange Commission member Daniel Gallagher wants the regulator to focus more on its mission when determining its regulatory agenda. He said that the SEC’s three mandates must always be considered: maintaining markets that are efficient and fair, making capital reform happen, and protecting investors.

Speaking at a AICPA/SIFMA Financial Management Society Conference, Gallagher said the agency should remove credit rating references from its rules, start reassessing the US market structure, put into place proxy advice reform, set up a new Regulation A Plus exemption, take a closer look at fixed-income regulatory issues, and reassess its disclosure regime. He believes that excessive credit rating dependence was a central cause for the failure of securitized products that led to the 2008 economic crisis. Gallagher says that the SEC should have taken out the credit ratings references years before the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Advice to Advisors: Financial Advisors Taught Ways to Avoid SEC Scrutiny

Published on: November 11, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to the Securities and Exchange Commission Office of Compliance Inspections and Examinations Director Andrew J. Bowden, next year the regulator intends to examine about 4,000 registered investment financial advisors who have never been visited by its inspectors before. Bowden said that the agency will target about 50% of firms that have yet to be examined. Some of these investment advisers have been registered for over three years.

Of the close to 11,000 financial advisors that the SEC oversees, nearly 40% have never undergone inspection by the regulator. Still, some are questioning whether Bowden’s office even has the resources to perform all these inspections.

In InvestmentNews, Ascendant Compliance Management partner Keith Marks lists the compliance issues that these yet to be inspected RIAs should deal with now so that they are ready should the agency come knocking:

SEC May Propose New Swaps Margins & Title VII Rules

Published on: November 11, 2013 | by Shepherd Smith Edwards & Kantas, LLP

At a Securities Industry and Financial Markets Association conference last month, the Securities and Exchange Commission’s Division of Trading and Markets acting director John Ramsay said that the regulator will likely consider reworking a 2012 proposal that would establish margin requirements on specific swap trades now that international financial supervisors have established new margin requirements. It was The International Organization of Securities Commissions and the Basel Committee on Banking Supervision that issued the document setting up a final framework for margin requirements related to non-centrally cleared derivatives.

Ramsey said that in the wake of this document, the proposed rules that the SEC might withdraw are the ones that affect margin requirements as they pertain to certain swaps. The structure set up by the Basel-IOSCO document partially puts into place specific margin requirements on financial firms and the systematically integral non-financial entities that take part in non-centrally cleared derivatives transactions.

The regulator’s earlier proposal would have established margin requirements for security-based swap dealers and major swap participants while upping the minimum net capital requirements for brokerage firms allowed to implement the alternative internal model-based method to compute net capital. Now, however, said Ramsey, the agency could propose a new rule to make sure there is comment on a “full range of initiatives,” including the ones addressed in the Basel-IOSCO document.

AIG Settles Ex-Executive’s $274M Lawsuit Over Alleged Failure to Pay Him During 2008 Economic Crisis

Published on: November 8, 2013 | by Shepherd Smith Edwards & Kantas, LLP

American Insurance Group and one of its ex-executives, Kevin Fitzpatrick, have reached a settlement deal over his $274 million lawsuit against the insurer. Fitzpatrick, the former president of the AIG Global Real Estate Investment Corp. unit, claims that his then-employer would not pay him during the 2008 economic crisis. The insurer’s refusal to pay occurred not long after the US government said yes to the first part of what would turn into a $182 billion bailout.

Fitzpatrick, who worked for American Insurance Group for 22 years, said that the company breached agreements it had with him and entities under his control. He claims the agreements entitled him to a share of profits made on the insurer’s real estate investments but that on October 2008 they stopped paying him and others who were entitled to profit distributions. Fitzpatrick then quit.

Fitzpatrick sued in 2009, claiming that the company owed him $274 million and that he wanted interest and punitive damages, which is right around the time that the insurer was trying to get past public disapproval over $165 million in bonuses that were paid to employees in the AIG Financial Products unit. That is the group that handled the complex financial instruments that led to its huge losses.

AIG denied wrongdoing and said that Fitzpatrick was paid what he was owed. The insurer contended that Fitzpatrick actually was fired and that he stole data that was confidential and belonged to the company.

In other AIG-related news, a district court judge just threw out a shareholder lawsuit accusing Bank of America (BAC) of not telling them that the insurer was planning to sue the bank with a $10 billion fraud lawsuit. AIG accused Bank of America of misrepresenting the quality of more than $28 million of MBSs that AIG bought from the latter and its Countrywide and Merrill Lynch (MER) units.

Also, there are reports that AIG might file mortgage-backed securities case against Morgan Stanley (MS) over $3.7 billion of MBS.

Morgan Stanley Says AIG May Sue Over Mortgage-Linked Investments, Bloomberg, November 4, 2013

Bank of America wins dismissal of lawsuit on AIG disclosures, Reuters, November 4, 2013

AIG Sued by Its Own Executive as Tragedy Turns to Farce, CBS, December 10, 2009

ICE CEO Says US Equity Markets Lets Traders Advantage of Small Investors

Published on: November 7, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Intercontinental Exchange Inc. CEO Jeff Sprecher says there is a problem with US equity markets in that they allow sophisticated traders to take advantage of small investors. Speaking to analysts a conference call, he spoke about how new structure markets hurt small investors because the current atmosphere is not kind to people who need to trade but are not as privy to as much information as are others.

According to data gathered by Bloomberg, nearly 40% of volume in trading across markets occurs on private platforms, and years of technological and regulator changes have caused fragmentation in trading. This has resulted in firms that employ computerized algorithms to execute transactions faster than is humanly possible. Meantime, penny increment quotes of stock prices are undermining profits and compelling exchanges to look to automated firms to provide liquidity, while alternative venues have been legitimized (following a 2007 rule change that ordered stocks) to trade wherever the price was best. Sprecher said that this modified market structure and such new innovations are what now make it easy for sophisticated firms to take advantage of ordinary investors.

However, the ICE CEO is certain that the New York Stock Exchange can help change the industry. NYSE is the only US stock exchange where humans still help with trading on the floor and Sprecher believes this “human touch” is still necessary. ICE is about to acquire NYSE Euronext (NYX), which is the largest owner of US stock exchange.