Investor Lawyers Blog

SAC Capital Advisors LP Expected to Plead Guilty to Insider Trading Criminal Charges

Published on: October 31, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to The Wall Street Journal, hedge fund SAC Capital Advisors is expected to plead guilty to criminal charges involving securities fraud allegations as early as next week. The multibillion-dollar hedge fund is owned by billionaire Stephen Cohen.

Sources told the WSJ that SAC will plead guilty as part of a settlement to resolve insider trading allegations made by federal prosecutors. Also, Cohen is expected to agree to stop managing money outside the fund and pay about $1.2 billion in government penalties—the largest penalty ever for insider trading.

Meantime, SAC and Cohen are still in the middle of hashing out the securities case filed by the Securities and Exchange Commission. That civil lawsuit also seeks a ban against Cohen from managing outside funds because he allegedly disregarded signs that insider trading was taking place at his firm. They say he inadequately supervised employees, allowing the fraud to happen.

Are Alternative Investments Good for Investors?

Published on: October 30, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Even as alternative mutual funds have become very popular among financial advisers and investors These investments employee a variety of complex investment strategies and opportunities to create portfolio diversification that are supposed to protect clients from steep market drops. Already, billions of dollars have gone into these funds in recent years. Their total assets, at around $234 billion right now, are a 33% increase from last year. However, just because so many people are interested in alternative mutual funds doesn’t mean they are good for the average investor.

According to The New York Times, there are some financial advisers who are cautioning customers to exercise great care for the same reason that a lot of investors decide not to go with traditional mutual funds that are actively managed-because it is tough to identify which alternative investment managers are talented/skilled enough to do the job right and which ones could end up getting lucky.

Also, it can be hard enough comprehending any fund prospectus. Multi-alternative funds have hedge-fund-like strategies and managed futures. Then, there are the nontraditional bond funds, which trade on anticipating what bonds will do next and hedging risks linked to rates. Seeing as it is important for investors to be able to comprehend what they are getting into, alternative mutual funds might not be the best choice for the average investor.

SEC Sanctions Three Investment Advisory Firms for Custody Rule Violations

Published on: October 30, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has sanctioned registered investment advisory firms Further Lane Asset Management, Knelman Asset Management Group, and GW & Wade with violating the rules that obligate them to fulfill certain standards while keeping custody of the securities or funds of clients. The regulator says that all three firms either did not keep up client assets with the help of a qualified custodian or failed to work with an independent public accountant to perform surprise exams. They also allegedly committed additional federal securities law violations. All three firms have consented to settle the charges against them.

Per the SEC order, although Further Lane Management, which is based in New York, and its CEO Jose Miguel Araiz did keep up custody of hedge fund assets that it managed along with Osprey Group Inc., they did not set up a yearly surprise exam to verify these assets. They also allegedly committed fraud involving fund-of-funds they controlled and other violations.

Araiz, Further Lane Management, and Osprey Group Inc. have consented to pay disgorgement and prejudgment interest of $347,122. Araiz also has to pay a $150,000 penalty and he is suspended from the industry for a year.

Massachusetts Securities Regulators Fine Merrill Lynch $500,000 For Alleged Failure to Stop Rogue Broker

Published on: October 29, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Merrill Lynch Pierce Fenner & Smith Inc. (MER) must now pay Massachusetts securities regulators a fine for allegedly failing to supervise a broker who went on to defraud customers. According to regulators and prosecutors, when she was with Merrill, now ex-broker Jane E. O’Brien borrowed over $2 million of clients’ funds. She pleaded guilty to fraud charges last year and is barred from the securities industry.

O’Brien received a thirty-three month prison term and was told to pay restitution of $240,000. She was the top producer at the firm’s Boston office, where she brought in close to $154 million in client assets and earned $903,734 in revenue during her first year with Merrill. Massachusetts Secretary of the Commonwealth William Galvin, whose office oversees the regulators there, said that this was another example of top producers “being held to a different standard” because of the money they make for their firms.

Although Merrill agreed to pay the “failure to supervise” fine, it has not admitted to violating any laws. A firm spokesperson says that as soon as they knew there might be a problem, an internal investigation was conducted and O’Brien resigned.

Is JPMorgan on the Verge of Settling A $5.75 Billion Mortgage-Backed Securities Case Filed by BlackRock & Neuberger Berman Group?

Published on: October 29, 2013 | by Shepherd Smith Edwards & Kantas, LLP

After its tentative $13 billion residential mortgage-backed securities settlement with the US Department of Justice, now JPMorgan Chase & Co (JPM) looks like it could be getting ready to settle yet another MBS fraud case, this time with bondholders, such as Neuberger Berman Group LLC, Allianz SE’s Pacific Investment Management, and BlackRock Inc. (BLK). Investors want at least $5.75 billion dollars.

The group of over a dozen bondholders already had reached a settlement in 2011 in an $8.5 billion mortgage-backed securities case against Bank of America Corp (BAC) over similar allegations. Now, the institutional investors want restitution over bonds that JPMorgan sold—those from the firm itself and also from Washington Mutual (WAMUQ) and Bear Stearns (BSC).

JPMorgan has been settling a lot of securities cases lately. Its $13B RMBS deal with the DOJ resolves a number of matters, including Federal Housing Finance Agency claims for $4 billion. The FHFA believes that J.P. Morgan gave Fannie Mae (FNMA) and Freddie Mac (FMCC) inaccurate information about the quality of the loans they bought from the bank ahead of the decline of the economy in 2008. $5 billion of the proposed RMBS settlement is for penalties and the remaining $4 billion is for the relief of consumers.

J.P. Morgan’s $13B Residential Mortgage-Backed Securities Deal with the DOJ Stumbles Into Obstacles

Published on: October 28, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Reuters is reporting that according to a source in the know, J.P. Morgan Chase & Co.’s (JPM) tentative $13 billion residential mortgage-backed securities settlement with the US Justice Department has hit a couple of stumbling blocks. The firm is reportedly trying to include a provision that would close any criminal probes into its packaging and sale of mortgage securities-except for an inquiry by California prosecutors. This counters the bank’s earlier decision to agree to keep criminal investigations out of the deal.

The settlement, preliminarily reached last week, includes $4 billion to resolve claims made by the Federal Housing Finance Agency, which contends that J.P. Morgan misled Freddie Mac (FMCC) and Fannie Mae (FNMA) about the quality of loans the latter two bought from the investment bank before the 2008 economic crisis. Another $4 billion is for consumer relief, while $5 billion is for penalties.

The agreement also would settle a separate mortgage securities lawsuit filed separately by NY AG Eric Schneiderman against the firm over Bear Stearns (BSC)-packaged mortgage bonds. The state’s top prosecutor contended that Bear Stearns misled investors about the faulty loans behind the securities, neglected to complete assess the debt, disregarded defects that were found, and concealed its failure to properly examine the loans or reveal their risks.

Puerto Rican Labor Groups Want the US Territory to Sue UBS over the Bond Debacle

Published on: October 28, 2013 | by Shepherd Smith Edwards & Kantas, LLP

UBS Financial Services, Inc. and its Puerto Rican divisions (UBS) continue to feel the heat in the Puerto Rico Bond crisis, as labor groups in the US territory call on its government to file a bond fraud claim against the bank. They are claiming that the financial firm “tricked” the Puerto Rican government into issuing products that they knew would fail.

Also, lawmakers from the New Progressive Party want the government to investigate UBS’ practices in Puerto Rico. Already Rep. Ricardo Llerandi Cruz is asking for a Capital Inquiry into the firm, while Rep. Ángel Muñoz Suárez announced he would file a bond fraud case with the Securities and Exchange Commission.

Meantime, Carlos Ubiñas, the CEO of UBS Puerto Rico, maintains that the firm is not accountable for “market events.” Issuing a statement, Ubiñas said that the loss in the Puerto Rico bonds’ value has more to do with the market and the lingering questions about the US Commonwealth’s credit.

Merrill Lynch, Morgan Stanley Call A Broker Recruiting Truce

Published on: October 26, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Bank of America Corp. (BAC) and Morgan Stanley (MS), which own the largest brokerage firms in the world, are declaring a cease-fire when it comes to using big bonuses to keep their own brokers and lure each other’s brokers away. Bank of America Corp. owns Merrill Lynch (MER).

After payments tied to Bank of America’s purchase of Merill Lynch expire in approximately two years, new retention bonuses will no longer be offered to the latter’s lead performers. Also, Morgan Stanley’s chief executive James Gorman has said that with brokers seeking to switch firms less often, compensation costs could fall.

A decline in recruiting could push up broker-dealer profits, which has been held back because of the fight between firms for the leading advisers. Some brokers have even been offered multiple times their yearly salary to move and bring their client roster with them.

FINRA Arbitration Panel Issues $1.2M in Awards in Case Against BBVA Securities of Puerto Rico, Inc.

Published on: October 25, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In a FINRA arbitration case filed by claimants Felix Bernard-Diaz, Julian Rodriguez and Luz Rodriguez against BBVA Securities of Puerto Rico, Inc., Jorge Bravo, Rafael Colon Ascar, Julio Cayere, and Sonia Marbarak, a Financial Industry Regulatory Authority Panel has awarded $1.2M to the claimants. The Rodriguezes and Felix Bernard-Diaz asserted unsuitable investments, breach of fiduciary duty, gross negligence related to an allegedly unsuitable naked option trading strategy, excessive trading, margin use, and churning.

The respondents denied the accusations and asserted a number of affirmative defenses. They also asked for the CRD files of two of the respondents, Bravo and Marbarak, to be expunged. Last year, respondent Cayere sought bankruptcy protection. The arbitrators did not issue a determination against him.

The FINRA panel said Ascar and BVA were liable, severally and jointly. Now, the respondents must pay Bernard-Diaz $635K in damages and $15K in expenses. The Rodriguezes were awarded $547K in damages and $15K in costs.

SEC Wants Comments About FINRA’s Proposed Rules About Broker-Dealer Supervision

Published on: October 24, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission wants comments on a proposed amendment to the Financial Industry Regulatory Authority’s broker-deal supervision rules. The latter wants to change the rules by consolidating some of them, including NASD Rule 3010 and NASD Rule 3012 into its proposed Rules 3110 and 3120 that have to do with supervisory controls and the supervision of supervisory jurisdictions’ office and branch offices. The proposed rule change would eliminate NYSE Rule 342, which is related to supervision, approval, and controls, Rule 401 about business conduct, and Rule 354 regarding control persons, Rule 351e about reporting requirements. The consolidation is taking place because the SEC says some of the rules are duplicative.

FINRA also wants to eliminate proposed Rule 3110.03, which is a provision about the supervision and control of registered principals at one-person OSJs by a designated senior principal on the site. The SRO also is proposing to amend rule 3110.05 so that an Investment Banking and Securities Business member doesn’t have to perform detailed reviews of transaction if the member is using risk-based review system that is designed in a way so it can focus on areas that have the greatest risks of violation.

Meantime, proposed Rule 3110(b)(6)(D) will be changed so that it is clear that the rule doesn’t establish a strict liability to identify and get rid of all conflicts as they relate to an associated person that is supervised by supervisory personnel. There will have to be procedures to make sure that conflicts of interest don’t compromise the supervisory system.