Investor Lawyers Blog

Supreme Court to Hear Texas-Based Halliburton’s Class Action Securities Fraud Case Again

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

The US Supreme Court has agreed to hear Halliburton v. Erica John Fund. In it, the Texas-based multinational corporation is appealing a class action securities lawsuit that tests the fraud-on-the market theory. That doctrine became part of securities law in 1988 after the highest court’s ruling in Basic v. Levinson.

The fraud-on-the-market theory is premised upon the efficient markets hypothesis, which is that the price of a stock is a reflection of all public data. This makes it possible for plaintiff attorneys to set up a class action for all the buyers of a stock without having to first prove in court that these purchasers depended upon untrue information from the company and that this caused their losses.

Instead, the doctrine assumes that a company’s stock price can reflect corporate assertions even if they are misleading. As a result lawyers are able to submit securities fraud classes while blaming corporate executives for certain changes in the market value of a company’s stock.

CFTC Votes to Restrict Commodities Trader’ Position Sizes in the Market

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

In a 3-to-11 vote, the Commodity Futures Trading Commission chose to favor restricting the size of any traders’ footprint in the commodities market. This is the CFTC’s second vote on a proposal over “position limit” rules. A rule that it proposed two years ago was turned down by the United States District Court for the District of Columbia after two Wall Street trade organizations sued claiming that the rule would cause prices to become erratic.

The proposal is related to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The CFTC already has rules to limit market speculation but before they were just applicable during the last days before a futures contract delivery and only to specific agricultural commodities.

Now, the agency’s new rules are proposing to set up limitations that are more broad so that they include derivative contracts for 28 kinds of commodities futures contracts, and not just agricultural contracts but also metal and energy ones and regardless of when the delivery date would be. Exemptions for traders with genuine hedging needs would be allowed, as it will be for firm-held positions involving banks with nearly 50% ownership. To avail of exemptions, trading firms would have to prove that they are not in control of an affiliate. Aside from that, just non-consolidated firms will get exemptions.

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.