Investor Lawyers Blog

US Supreme Court Considers Whether to Limit Securities Fraud Lawsuits

Published on: March 5, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Although a decision is not likely until June in Halliburton v. Erica P. John Fund, it doesn’t look as if the US Supreme Court will seek to overturn the “fraud on the market” theory, set up in 1988 in Basic Inc. v. Levinson. In that earlier ruling, it was determined that investors are allowed to depend on a presumption that the stock price of a company reflected all public information about the entity. This theory has allowed investors to ban together through class action securities certification without having to provide individual reliance of evidence.

In the securities case before the court, the investors’ fund claims that Halliburton misrepresented its liability related to asbestos litigation, benefits obtained from a merger, and revenue from a construction contract. Meantime, Halliburton and its allies are contending that investors shouldn’t be able to bring a class action case because of an economic theory that is based on the efficiency of markets.

Four of the justices recently appeared to be welcoming a challenge to the fraud on the market theory. Justice Samuel A. Alito Jr. wrote in a concurrence in Amgen V. Connecticut Retirement Plans and Trust Funds that there has been evidence recently to indicate that such a presumption may be based on a “faulty economic premise.”

Ex-Merrill Lynch Adviser, Already Jailed for Massachusetts Securities Fraud, Now Indicted Over Ponzi Scam

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

Even as she serves her 33-month sentence for securities fraud, Jane O’Brien, a former Merrill Lynch (MER) broker, has now been indicted for her alleged involvement in a Ponzi scam that purportedly ran for nearly two decades. The U.S. Attorney’s Office for the District of Massachusetts says that O’Brien is facing criminal charges for mail fraud, investment adviser fraud, and wire fraud involving the misappropriation of $1.3 million in client monies.

Per the indictment, between 1995 and 2013 and while she worked at Citigroup (C)’s Smith Barney and then later with Merrill, O’Brien persuaded a number of clients to withdraw money from brokerage accounts and their banks. She got their permission to invest the funds in private placements. However, instead, the 61-year-old allegedly used the money to repay other investors and cover her personal expenses.

O’Brien is also accused of making misrepresentations to clients, providing them with materially false statements, “making lulling payments,” and offering false assurances that their money was secure. She even in one instance, allegedly, got a client to invest in “Crooked Arrows,” a Hollywood film, in return for a promised 25% return, which did not happen.

Detroit, MI to Pay UBS and Bank America $85M Over Interest Swaps Settlement

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

The city of Detroit has agreed to pay Bank of America Corp.’s (BAC) Merrill Lynch (MER) and UBS AG (UBSN) $85 million as part of a settlement to end interest-rate swaps, which taxpayers have had to pay over $200 million for in the last four years. Now, US Bankruptcy Judge Steven Rhodes must decide whether to approve the deal.

The swaps involved are connected to pension obligation bonds that were issued in ’05 and ’06. They were supposed to protect the city from interest rates going up by making banks pay Detroit if the rates went above a certain level. Instead, the rates went down, and Detroit has owed payments each month.

Under the swaps deal, the city owed $288 million. The settlement reduces the amount by 70%, which should help, as Detroit had to file for protection last year over its $18 billion bankruptcy.

Puerto Rico Senate Votes to Sell $3.5B in Bonds

Published on: February 28, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Senate for the Commonwealth of Puerto Rico has approved a bill authorizing the sale of at least $3 billion in bonds. The legislation is geared toward assisting the US territory from defaulting on its $70 billion of debt and boost the Government Development Bank’s liquidity. Wall Street investment banks Morgan Stanley (MS), Barclays (BCS), and RBC Capital Markets are going to handle the bond sale, which is expected to happen in March.

Among the issues that still must be resolved is where, if the Commonwealth defaults on the new issuance, the US Territory can be sued. Currently, Puerto Rico has sovereign immunity and therefore can only be sued in Puerto Rico under its own laws. However, US investors who will be needed for the sale to complete want the Commonwealth to agree to waive sovereign immunity and instead agree to be sued in New York courts if there is any dispute.

Since August of last year, Puerto Rico bonds have suffered significant losses. Recently, all three major ratings agencies downgraded Puerto Rico’s general obligation bonds, along with many other Puerto Rican issuances, to “junk” status. Many investors in the United States and in the Commonwealth have lost significant money on their Puerto Rico municipal bonds that were sold to them by UBS (UBS), Banco Santander (SAN), Banco Popular, and other brokerage firms.

SEC Staff Sold Shares Before Enforcement Actions in Securities Cases Were Made Public, Reports Study

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

Bloomberg is reporting that according to a new study, US Securities and Exchange Commissioner employees who own stock in companies that the agency is investigating are more likely than other investors to sell their shares in the months prior to the regulator’s announcement of an enforcement action. Shivaram Rajgopal, an Emery University accounting professor, and one of the study’s co-authors, said that there appears to be a suspect pattern of behavior going on even though the findings are not proof of misconduct.

Rajgopal and co-author Roger M. White, a Georgia State University doctoral student, obtained records from the SEC through a request they made under the Freedom of Information Act. Unfortunately, because individuals weren’t named, it was impossible to figure out whether the agency employees who traded were in jobs that might have given them insider knowledge about a pending action, and whether the action could lower stock prices, or if money was lost or made in the transactions.

Beginning August 2010, SEC ethics rules have forbidden employees from selling or buying shares in companies that are under investigation. They also have to get permission before trading, cannot trade in any financial firm that the SEC directly regulates, and they generally must hold any stock that they buy for six months before selling.

Lehman Makes Deal with SAP Founder, Frees Up Another $1.8B for Creditors

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

Lehman Brothers Holdings Inc. has arrived at an agreement with Klaus Tschira, the founder of SAP AG (SAP). The German software company had been the only holdout to a multibillion-dollar settlement with the firm’s former Swiss derivatives unit Lehman Brothers Finance AG. The deal should free up another $1.8 billion that can now go to the firm’s creditors.

When Lehman failed in September 2008, this became the largest bankruptcy in our nation’s history. Markets became troubled and the global financial crisis was started. Barclays PLC (BCS) bought Lehman’s main business.

Tschira had been in a dispute with the subsidiary for years over derivatives contracts that were canceled after Lehman collapsed in 2008. The disagreement was over the way the unit calculated dames related to the termination of certain forward contracts. While two entities, a nonprofit that Tschira controls and an investment vehicle that manages his money, accused the derivatives unit of owing them $798.7 million, the unit said that the entities were the ones that owed it money.

Berthel Fisher & Affiliate Fined $775K by FINRA Over Supervisory Failures Involving Non-Traded REITs and Leveraged and Inverse ETFs

Published on: February 25, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Berthel Fisher & Company Financial Services, Inc. and its affiliate, Securities Management & Research, Inc. are going to pay the Financial Industry Regulatory Authority a combined $775,000 for purported supervisory deficiencies related to leveraged and inverse exchange-traded funds and non-traded real estate investment trusts. The firm settled without deny or admitting to the allegations.

FINRA claims that from January 2008 to December 2012 Berthel Fisher had inadequate written procedures and supervisory systems to deal with the sale of alternative investment products, such as managed futures, non-traded REITs, oil and gas programs, managed futures, business development companies, and equipment leasing programs. The SRO says that the brokerage firm’s staff were improperly trained with regard to state suitability standards, and criteria wasn’t properly enforced in a number of alternative investment sales because the firm did not figure out the correct concentration levels of certain financial instruments.

FINRA also said that from 4/09 to 4/12, Berthel Fisher lacked a reasonable basis for certain ETF sales, resulting from numerous reasons, including a failure to properly review or research non-traditional ETFs before letting registered representatives make recommendations to customers. Inadequate sales training was not provided and some customers suffered losses because the brokerage firm did not monitor investment holding periods.

Morgan Stanley to Pay $275M to SEC to Settle Subprime MBS Investigation

Published on: February 25, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley (MS) has agreed to pay $275 million to the Securities and Exchange Commission to resolve the regulator’s investigation into the firm’s sale of subprime mortgage-backed securities seven years ago. The settlement reached is an “agreement in principal” and, according to the firm in its annual filing this week, it does not have to admit wrongdoing. However, the accord still needs SEC approval to become final.

The regulator had been probing the bank’s roles as an underwriter and sponsor of subprime mortgage-backed bonds that sustained losses after it was issued in 2007. Other firms that have reached similar agreements with the SEC include Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS).

Morgan Stanley is still facing litigation from government entities and private parties over derivatives and mortgage bonds that were set up leading up to the mortgage crisis. Last year, it’s litigation expenses reached $1.95 billion, which is a significant increase from $513 million in 2012.

SEC Reveals Plans to Examine Never-Before-Inspected RIAs

Published on: February 24, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has unveiled its Never-Before-Examined Initiative, which will allow it to look at registered investment advisers that have yet to be examined. The SEC shared details of its plan in a letter to these unexamined advisers, of which there are about 4,000. Some of these firms have been registered with the regulator for more than three years.

The SEC says it intends to inspect a significant number of the advisers who haven’t been examined yet but that the agency will place its emphasis on those who have been registered for at least three years. Its initiative will employ two approaches-focused reviews and risk assessment. The former will look at RIAs’ compliance programs, disclosures, filings, portfolio management, marketing, and client asset safekeeping:

Compliance Programs: Examiners will look at the effectiveness of an RIA’s compliance program. They will also review records and advisory books to figure out if an adviser has properly identified interest conflicts and risks, put into place the appropriate measures and procedures and policies to manage and mitigate both, and hire a competent Chief Compliance Officer.

Credit Suisse Admits Wrongdoing and Will Pay $196M to Settle SEC Charges That It Provided Unregistered Services to US Customers

Published on: February 22, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Credit Suisse (CS) is agreeing to pay $196 million and has admitted to wrongdoing as part of its settlement with the Securities and Exchange Commission over allegations that it violated federal securities laws when it gave cross-border investment advisory and brokerage services to US clients even though it was not registered with the regulator. According to the SEC’s order to institute resolved administrative proceedings, the financial firm gave cross-border securities services to thousands of clients in this country even though it hadn’t met federal securities laws’ registration provisions. In the process, Credit Suisse made about $82 million in fees even though its relationship managers that were involved had not registered with the Commission nor did they have affiliation to any registered entities.

The firm began providing cross-border brokerage and advisory services for customers in the US in 2002, setting up as much as 8,500 accounts that held about $5.6 billion in securities assets. Relationship managers visited the US about 107 times and serviced hundreds of customers when they were here. They would offer investment advice and effect securities transactions. When they were abroad, the managers worked with US clients via phone calls and e-mails. Also, some of the customers involved were Americans who had Swiss bank accounts at the firm. Criminal authorities continue to look into whether there were tax violations and if the clients were able to avoid paying taxes as a result.

Even though the firm knew about the registration requirements and made efforts to prevent violations, their initiatives didn’t work that well due to improper monitoring and the inadequate implementation of internal controls. The SEC says that it wasn’t until the civil and criminal probe into similar conduct by UBS (UBS) in 2008 that Credit Suisse started taking action to stop providing these cross border advisory services to UC clients. These types of activities were completely terminated but not until the middle of last year. During that time, the financial firm kept collecting investment adviser fees on some broker accounts.