Investor Lawyers Blog

SEC Says At Least 200 Private-Equity Firms Imposed Bogus Fees

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

According to the US Securities and Exchange Commission, over half of the approximately private-equity firms that it examined have charged unjustified expenses and fees to investors without their knowledge. The regulator’s findings are from its review of the $3.5 trillion industry.

It was the 2010 Dodd-Frank Act that gave the SEC more oversight over money managers, which allowed the agency to scrutinize some firms for the very first time. By the end of 2012, examiners had discovered that certain advisers were wrongly collecting money from companies included in their portfolio, improperly calculating fees, and using assets from the funds to pay for their own expenses. Bloomberg reports that a source in the know about the regulator’s findings said that while some of the issues seem to stem from mistakes, others might have been intentional.

SEC to Look Even More Closely At Private Funds

US Supreme Courts Broadens SOX Whistleblower Protections

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

In Lawson v. FMR LLC, the US Supreme Court held that the Sarbanes-Oxley Act does extend its whistleblower protections to include employees of privately held contractors that do work for public companies. The Supreme Court case was filed by two ex-employees of privately held companies engaged in mutual funds investments.

The plaintiffs contend that their employers acted against them for bringing up issues they had related to mutual funds. Meantime, their former employers tried to have the lawsuits dismissed, contending that because the plaintiffs had been employees of privately held companies, they could not avail of the whistleblower protections under the SOX Act. Such protections prohibit retaliation against an employee by any officer, contractor, employee, agent, or subcontractor of a public company.

Although previous to Lawson, other federal district courts had made the same assertion, in this latest case, the district court said that the whistleblower provision does in fact protect the employees of any related entity of a public company. This protection would therefore apply to the Lawson plaintiffs.

PNC Bank Sues Morgan Stanley & Ex-Trust Adviser For “Surreptitious Conspiracy”

Published on: April 3, 2014 | by Shepherd Smith Edwards & Kantas, LLP

In U.S. District Court for the Western District of Pennsylvania, PNC Bank (PNC) is suing Emily Daly, one of its ex-trust advisers, and her employer Morgan Stanley (MS). According to InvestmentNews, The bank contends that Daly allegedly stole trade secrets, solicited its clients, and violated her employment agreement when she switched firms. Meantime, Morgan Stanley is accused of helping her bring over the confidential data about clients.

Banks don’t like it when advisers take their customers with them when they go to another firm and nonsolicitation agreements can be violated as a result. Also, under PNC’s employment contract, employees are not allowed to take data that isn’t general industry knowledge or from a public source when they leave a firm. The bank contends that Daly helped transfer over $250 million in client assets to Morgan Stanley, which allowed the firm to make fees of about $ 1 million.

Daly even purportedly used her cell phone to take pictures of her computer screen when internal measures made it impossible to download lists of clients. Boxes of client data that were in Daly’s office are said to have gone missing.

$550M Securities Fraud Case Between Texas’ Wyly Brothers & SEC Goes to Trial

Published on: April 2, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The civil trial is underway between the Securities and Exchange Commission and brothers Sam and Charles Wyly (The latter is deceased after he died in a car crash in 2011). The regulator is accusing the Texas siblings of using offshore trusts to hide over $750M of stock sales in companies in which they are board members and engaging in a $550M securities fraud.

In its Texas securities case, the SEC claims that between 1992 and 2004 the Wylys concealed stock trading in Sterling Software Inc., Sterling Commerce. Inc., Michaels Stores Inc., and Scottish Annuity & Life Holdings Ltd. by using entities and offshore trusts. The brothers also are accused of making $31.7 million in insider trading profits involving Sterling Software after the company was sold in 1999.

At issue is whether the Wylys were in control of the offshore trusts and if so then they may have also violated US tax laws. That said, the statute of limitations for charges involving tax evasion is six years.

SEC Says Investment Advisors Can Publish Third-Party Endorsements Online

Published on: April 1, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission says that investment advisers are allowed to publish comments from the public about their services on an independent social media website but that they must include both negative and positive reviews in unedited form. Also, the adviser must not have any affiliation with the site or the ability to influence it. The SEC made the announcement this week in a guidance update.

SEC rules typically don’t allow “testimonials.” The guidance, however, now says that Commission-registered advisers can direct potential clients to the reviews as long as certain conditions are met. The changes are in part because of the rapidly evolving social media market and the fact that this area is becoming a primary way that businesses communicate with prospective customers.

The regulator said that client reviews could only appear on review sites or independent social media. This means, for example, that they cannot be published on an adviser Facebook page. Also, an adviser cannot promise a customer anything in return for favorable reviews and employees are not allowed to write these testimonials.

FBI Probes Possible High-Speed Trading, Insider Trading Link

Published on: April 1, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Federal Bureau of Investigation is continuing to look at whether high-speed trading firms are insider trading when they avail of fast-moving market data to which other investors don’t have access. The agency is concern that the limited availability of material nonpublic information could be placing these traders at an advantage, including giving them access to extremely rapid data feeds. The probe is called the High-Speed Trading Initiative.

Since computer programs initiate high-speed trades, it can be harder to identify suspect activities and prove that they were done on purpose. According to The Wall Street Journal, FBI officials are looking for patterns to indicate that any trading activities took place that might have broken the law. The government would then have to prove that fraudulent intent was a factor.

Trading activities under examination include the placing of trades in groups and then cancelling them to make it appear as if market activity actually went on. This type of practice could potentially be considered market manipulation because others might buy trades because of these false orders. Also under scrutiny is the use of high-speed trade orders to hide that transactions are a result of an illegal tip.

Bank of America, Its Ex-CEO To Pay $25M to Settle Securities Case with NY Over Merrill Lynch Deal

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

Bank of America Corp. (BAC) and its ex-CEO Kenneth Lewis have consented to pay $25 million to settle the remaining big securities fraud case accusing them of misleading investors about the financial state of Merrill Lynch & Co. during the 2008 financial crisis. The New York securities case accuses the bank of deceiving shareholders by not disclosing Merrill’s increasing losses before the acquisition deal was closed or letting them know that the deal let Merrill give its officials billions of dollars in awards.

As part of the settlement, the bank will pay the state of New York $15 million and it will enhance its oversight. Lewis, meantime, has consented to pay $10 million and he cannot work at or serve as a director of any public company for three years.

Also named as a defendant in the securities lawsuit but who refused to settle is ex-Bank of America CFO Joe Price. NY Attorney General Eric Schneiderman intends to pursue a summary judgment against him, as well as ask a judge to reach a decision without a trial. Schneiderman reportedly wants Price permanently banned from serving as a director or working at a public company.

Bank of America Settles Mortgage Bond Claims with FHFA for $9.3B

Published on: March 29, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Bank of America (BAC) will pay $9.3 billion to settle securities claims that it sold faulty mortgage bonds to Freddie Mac (FMCC) and Fannie Mae (FNMA). The deal, reached with the Federal Housing Finance Agency, includes $3.2 billion in securities that the bank will buy from the housing finance entities and a cash payment of $6.3 billion.

The mortgage bond settlement resolves securities lawsuits against the bank, Countrywide, and Merrill Lynch (MER). FHFA, which regulates both Freddie Mac and Fannie Mae, accused Bank of America of misrepresenting the quality of the loans behind residential mortgage-backed securities that the mortgage financing companies purchased between 2005 and 2007.

This is the 10th of 18 securities lawsuits reached by the FHFA over litigation involving around $200 billion in mortgage-backed securities. To date, it has gotten back over $10 billion over such claims.

Puerto Rico Bonds Are at Record Low Prices After FINRA Announces It Is Looking At Transactions

Published on: March 27, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to Bloomberg, Puerto Rico bonds that were issued this month are now at record low prices after the Financial Industry Regulatory Authority announced that it is looking at transactions involving the new securities. The US territory sold $3.5 billion of general obligation bonds, which is the largest junk bond offering in the history of the municipal market.

According to numerous financial news sources, the offering documents for Puerto Rico’s newly issued bonds stated there would be a $100,000 minimum order allowed so that the purchasers of the junk bonds would be limited largely to institutional buyers. Their prospectus says that bonds were to be issued at a $100,000 minimum and “integral multiples of $500,000 in excess thereof” unless Standard & Poor’s, Moody’s Investors Services, and Fitch Ratings raise Puerto Rico’s credit to investment grade. All three credit ratings agencies recently declared the US territory’s credit ratings “junk.”

Nevertheless, many transactions under the $100,000 amount have been reported, despite the lack of an upgrade in the bonds. As a result, scores of Puerto Rico bond transactions issued this month were cancelled. There is also data indicating that some brokers are trading under the $1,000 minimum established by the prospectus.

Madoff Ponzi Scam: Five Ex-Aides Convicted of Securities Fraud, Victims to Recover $349 Million

Published on: March 26, 2014 | by Shepherd Smith Edwards & Kantas, LLP

In a new round of payments by Bernard L. Madoff Investment Securities LLC trustee Irving Picard, victims of the $17 billion Madoff Ponzi Scam are slated to receive around $349 million. The US Bankruptcy Court in New York must still approve the distribution, which would bring total payouts to $6 billion-34% of the principal lost.

A hearing for the distributions is scheduled in April. Payouts by Picard include up to $500,000 in advances each to victims that were made by the Securities Investor Protection Corp. Picard said that he hope to give victims full reimbursements.

One way he is doing this is by pursuing claims of approximately $3.5 billion from HSBC Holdings PlC (HSBA), UBS AG (UBS) and UniCredit SpA (UCG), which allegedly benefited from the multibillion-dollar Ponzi scam. In January, JPMorgan Chase & Co. (JPM) arrived at $325 million accord with Picard over allegations that the bank was negligent in not identifying the fraud and made money money from Madoff’s scam. Picard was able to recover $10 billion-59% of the principals lost by thousands of Madoff customers. The financial firm also consented to pay another $218 million to settle two related class actions filed with the help of Picard.