Investor Lawyers Blog

Ex-SAC Capital Manager Steinberg is Convicted of Securities Fraud & Insider Trading

Published on: December 23, 2013 | by Shepherd Smith Edwards & Kantas, LLP

A federal jury has convicted former SAC Capital portfolio manager Michael Steinberg for insider trading, conspiracy, and securities fraud. Prosecutors contend that he traded on confidential information that he received from another employee.

Steinberg is one of eight employees at the hedge fund’s Sigma Capital Management division charged with insider trading and the first to go to trial. Six of the others pleaded guilty, including SAC analyst Jon Horvath, who prosecutors said is the one that gave Steinberg the nonpublic information. Horvath, who turned witness for the prosecution, has admitted to exchanging illegal tips with people at different firms. He said that Steinberg pressured him to provide “proprietary” information about technology stocks.

Steinberg is accused of making a number of trades, including ones before Dell’s earnings report in August 2008 went out. He reportedly netted $1 million in trades from this after he started shorting the computer company’s stock following a tip that Dell’s gross margins would fall short of Wall Street’s expectations. Similar tips that Steinberg received about Nvidia reportedly netted the hedge fund over $400,000.

FDIC Sued by JPMorgan Chase in $1B Securities Case Involving Washington Mutual Purchase & Mortgage-Backed Securities

Published on: December 23, 2013 | by Shepherd Smith Edwards & Kantas, LLP

JPMorgan Chase (JPM) is suing the Federal Deposit Insurance Corp. for over $1 billion dollars related to the bank’s purchase of Washington Mutual (WMIH). The financial firm said that the FDIC did not honor its duties per the purchase agreement.

When Washington Mutual suffered the biggest bank failure in our nation’s history during the financial crisis in 2008, FDIC became its receiver and brokered the sale of assets. JPMorgan, which made the purchase for $1.9 billion, says that the FDIC promised to protect or indemnify the bank from liabilities. Regulators had encouraged the firm to buy Washington Mutual hoping this would help bring back stability to the banking system.

Since then, however, contends JPMorgan, the FDIC has refused to acknowledge mortgage-backed securities claims by investors and the government against the firm. The bank says that the cases should have been made against the receivership instead. (In its lawsuit, JPMorgan says there are enough assets in the receivership to cover a settlement with mortgage companies Freddie Mac (FMCC) and Fannie Mae (FNMA) and other claims, such as a slip and fall personal injury case involving a Washington Mutual branch.) Meantime, the FDIC maintains that JPMorgan is the one who should be accountable for any liabilities from its acquisition of Washington Mutual.

New Jersey Files Securities Lawsuit Against Credit Suisse Over $10B in MBS Sales

Published on: December 20, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The New Jersey Attorney General John Hoffman is suing a Credit Suisse Group AG (CS) for securities fraud. The state’s regulator contends that the bank misrepresented the risks on over $10B in home loan-backed securities.

According to the mortgage-backed securities lawsuit, Credit Suisse is accused of failing to disclose that loan originators it employed had records of delinquencies and defaults and that some had even been suspended from working with the bank. The state’s attorney general claims that even though Credit Suisse’s traders were unwilling to hold the securities on the books of the bank, the latter was selling them to customers. Also, alleges the complaint, the despite receiving tens of millions of dollars in reimbursement from loan originators for the faulty loans, Credit Suisse did not give the money to the trusts that owned the loans.

A representative for Credit Suisse says the mortgage securities case is meritless. The bank is facing a similar lawsuit filed against it by New York’s attorney general.

The JOBS Act: SEC Proposes Raising Small Stock Deal Limits

Published on: December 20, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission wants to up by 10 times how much money companies can raise via a simplified public offering. Under their proposal, firms could raise up to $50 million, instead of just $5 million, while giving investors less disclosures than what public companies are obligated to provide. The measure, which has just been issued for public comment, is the Jumpstart Our Business Startups Act’s last big requirement.

The JOBS Act was established to assist small business in going public and raising capital. Currently, it lets the SEC preempt states from overseeing Regulation A offerings if only “qualified” buyers are allowed to purchase the the deals or if they are offered via a stock exchange. However, the SEC has to approve the offerings and companies employing the exemption have to get approval by regulators in each state where shares were sold. It is this review by the states of Regulation A deals that reportedly have been a biggest hassle because each state has its own standards for whether to approve offers.

It was Congress and the 2012 Jumpstart Our Business Startups Act that mandated revisions to the Commission’s Regulation A so that investors will want to get behind smaller companies. According to a Government Accountability Office report, in 2011, the number of businesses trying to raise money under the current rule dropped to 19—way down from the 116 businesses that did in 1997. Some said that the requirements were too strict for how much money they were allowed to raise.

Ex-NFL Running Back Ricky Williams Files $6M Texas Securities Fraud Case Against His Financial Adviser

Published on: December 18, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Ricky Williams, the ex-NFL and University of Texas running back, is suing Peggy Fulford and King Management Group & Associates for securities fraud. He says that he and his wife were bilked of $6 million. Now, Williams wants an injunction, a restraining order, and damages for breach of contract, theft, and breach of fiduciary duty.

Williams claims that Fulford has been in control of most of his approximately $11 million fortune since 2007 when he and his wife went into an oral agreement with the financial adviser and King Management to have them manage their assets. He says that Fulford told them she had graduated from both Harvard Law School and Harvard Business Law School and that she was licensed to practice law in Texas. Williams is now saying that no record exists of Fulford attending either graduate program or having been admitted to the State Bar of Texas. Fulford lived in Houston between 2011 and 2013 before moving out of state.

Williams says that he and Fulford established a joint checking account at SunTrustBank and that without his knowing or consent she obtained and used a debit card linked to the account. It wasn’t until last year when the IRS called him to ask about his 2010 tax return that Williams discovered that Fulford had removed $6 million from his account via debts, wire transfers, cash withdrawals, and checks and that the money was used for mortgage payments, retail purchases, credit card bills, other debts, transfers to other accounts, and other purposes. She also purportedly pretended to be his wife when she spoke to the government agency.

The Volcker Rule May Already Be Affecting Financial Markets & The Economy

Published on: December 17, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to The Wall Street Journal, it’s just been a week since regulators approved the Volcker Rule and already investors and financial institutions are looking for new ways to finance municipal bond investments. The Volcker rule limits how much risk federally insured depository institutions can take, prohibiting proprietary trading, setting up obstacles for banks that take part in market timing, and tightening up on compensation agreements that used to serve as incentive for high-risk trading.

Now, says Forbes, Wall Street and its firms are undoubtedly trying to figure out how to get around the rule via loopholes, exemptions, new ways of interpreting the rule, etc. (One reason for this may be that how much executives are paid is dependent upon the amount they make from speculative trading.) The publication says that banks are worried that the Volcker Rule could cost them billions of dollars.

For example, with tender-option bond transactions, hedge funds, banks, and others employ short-terming borrowings to pay for long-term muni bonds. The intention is to make money off of the difference in interest they pay lenders and what they make on the bonds. While tender-option bonds make up just a small section of the $3.7 trillion muni debt market, it includes debt that has been popular with Eaton Vance (EV), Oppenheimer Funds, and others.

Merrill Lynch Settles with SEC Over CDO Disclosures for Almost $132M

Published on: December 16, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission says that Merrill Lynch Pierce Fenner & Smith Inc. (MER) will pay $131.8M to settle charges involving allegedly faulty derivatives disclosures. The regulator claims that the firm, which is the largest broker-dealer by client assets, misled investors about certain structured debt products before the economic crisis. By settling, Merrill is not denying or agreeing to the allegations. Also, the brokerage firm was quick to note that the matter for dispute occurred before Bank of America (BAC) acquired it.

According to the Commission, in 2006 and 2007 Merrill Lynch did not tell investors that Magnetar Capital impacted the choice of collateral that was behind specific debt products. The hedge fund purportedly hedged stock positions by shorting against Norma CDO I Ltd. and Octans I CDO Ltd., which are two collateral debt obligations that the firm was selling to customers.

The SEC contends that Merrill used misleading collateral to market these CDO investments. According to Division of Enforcement co-director George Canellos, the materials depicted an independent process for choosing collateral that benefited long-term debt investors and customers did not know about the role Magnetar Capital was playing to choose the underlying portfolios.

Moody’s Reassessment of Puerto Rico Bonds Does Nothing to Relieve Investor Worries

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

One day after Moody’s Investor Service placed Puerto Rico’s general obligation bonds rating of Baa3 on review for downgrade to junk status, the credit rating agency affirmed the ratings it had earlier in the year given four banks: Banco Santander Puerto Rico, Popular Inc. and its subsidiaries, FirstBank Puerto Rico, and Doral Financial Corporation, as well as the ratings for senior bonds put out by Doral Financial and Banco Santander Puerto Rico through the Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority. The ratings outlook for First Bank, Popular, and Doral Financial stayed negative, as did Banco Santander Puerto Rico’s BFSR/BCA. (However, the outlook on that bank’s supported deposit and debt ratings are stable due to the bank’s affiliation with Santander Bank NA, which is a US affiliate.)

Puerto Rico, which is a major municipal bond issuer, has been close to or in recession for nearly a decade and has over $70 billion in debt. Moody’s said it is worried about the territory’s growing dependence on outside short-term debt, “weakening liquidity,” limited market access, and its poor economy. The credit rater believes that the fiscal and economic challenges that the territory continues to face will keep threatening the “health of the banking system.” Noting that the banks’ non-performing assets continue to remain negative relative to banks in the US mainland, the agency said that this could result in more losses if things don’t get better.

Unfortunately, many investors who got involved in Puerto Rico muni bonds were not apprised of the risks or could have never handled the high risks to begin with. Some investors have lost their retirement or life savings as a result.

Fannie Mae Sues UBS, Bank of America, Credit Suisse, JPMorgan Chase, Citigroup, & Deutsche Bank, & Others for $800M Over Libor

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

Fannie Mae is suing nine banks over their alleged collusion in manipulating interest rates involving the London Interbank Offered Rate. The defendants are Bank of America (BAC), JPMorgan Chase (JPM), Credit Suisse, UBS (UBS), Deutsche Bank (DB), Citigroup (C), Royal Bank of Scotland, Barclays, & Rabobank. The US government controlled-mortgage company wants over $800M in damages.

Regulators here and in Europe have been looking into claims that a lot of banks manipulated Libor and other rate benchmarks to up their profits or seem more financially fit than they actually were. In its securities fraud lawsuit, Fannie Mae contends that the defendants made representations and promises regarding Libor’s legitimacy that were “false” and that this caused the mortgage company to suffer losses in mortgages, swaps, mortgage securities, and other transactions. Fannie May believes that its losses in interest-rate swaps alone were about $332 million.

UBS, Barclays, Rabobank, and Royal Bank of Scotland have already paid over $3.6 billion in fines to settle with regulators and the US Department of Justice to settle similar allegations. The banks admitted that they lowballed their Libor quotes during the 2008 economic crisis so they would come off as more creditworthy and healthier. Individual traders and brokers have also been charged.

Oppenheimer Told by FINRA to Pay $675,000 Fine, $246,000 Restitution over Municipal Securities Transaction Pricing, Supervisory Violations

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

The Financial Industry Regulatory Authority says Oppenheimer & Co., Inc. (OPY) must pay a $675,000 fine purportedly charging customers unfair prices in municipal securities transactions and not having a proper supervisory system in place to detect such activities. The firm must pay $246,000 in restitution, in addition to interest, to customers that were affected. The SRO is ordering David Sirianni, the head municipal securities trader at Oppenheimer, to pay a $100,000 fine and serve a 60-day suspension.

According to FINRA, from 7/1/08 through 6/30/09, Oppenheimer, via Sirianni, charged 89 customer transactions at 5.01% to 15.57% over its contemporaneous cost. (The markup was over 9.4% in over 50 of these transactions). The SRO said that it was Sirianni’s job to decide what prices the customers paid for these transactions. He was the one who bought the municipal securities for Oppenheimer, kept them in inventory, and then resold them to Oppenheimer clients.

FINRA contends that Oppenheimer should have but did not notice that customers were being charged prices that were unfair. The regulator believes it is because the firm has an inadequate supervisory system and that personnel only depended on a surveillance report showing intra-day transactions when assessing whether municipal securities transactions were fairly priced. It said that from around 2005 through the middle of 2009, sales made to some Oppenheimer customers were not included in the report or reviewed for fair pricing.