Investor Lawyers Blog

Detroit Becomes Largest US City to File Bankruptcy Protection

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

In what is now the country’s largest public bankruptcy, the city of Detroit has filed for Chapter 9 bankruptcy. Michigan Governor Rick Snyder, who filed for the protection along with Emergency Manager Kevyn Orr, said that that there was no other alternative.

Investors who purchased securities issued by the city of Detroit at the recommendation of a financial advisor may have a claim to recover some or all of their losses. Please contact our securities fraud law firm to request your free case assessment.

At a joint news conference held by the two men, Snyder spoke about the need to bring to a halt to the city’s 60-year decline. He noted that 38% of Detroit’s budget is going to debt service, pensions, and other “legacy costs.” He also said 40% of street lights don’t work and, unlike the police response time national average of 11 minutes, the city’s police take nearly an hour to show up.

Detroit’s total liabilities are about $18 billion. Orr has already stopped paying about $2 billion of the city’s debt. His reorganization plan involves reducing $11.5 billion in debt to $2 billion, with retirees and investors getting just 17% of what is due to them.

According to CNN, public employee unions are expected to oppose the filing. They contend that Detroit did not exhibit good faith negotiation and it should not be able to get out of commitments it made to retirees and employees.

Needless to say, city employees and retirees won’t be happy if any of their pension benefits are cut. While the Pension Benefit Guarantee Corp. will usually intervene to offer minimum benefits when employees of a business that has gone bankrupt lose the pensions promised to them, the federal agency isn’t responsible for pensions in the public sector.

Deals are also in the works for the city to potentially pay bond holders Bank of America (BAC) and Merrill Lynch (MER) 75 cents on the dollar—that’s close to $340 million in secured debt, report some sources.

The Wall Street Journal says that per media reports and public filings, while it is not known at this time which of the city’s assets would have to be sold, possible contenders include a Van Gogh painting, the Detroit Zoo, Fort Wayne, or even all its assets.

Orr plans for the bankruptcy to be completed by the “summer or fall” of 2013. The process could cost Detroit hundreds of million dollars in financial and legal expenses.

Detroit’s bankruptcy filing will likely cause reverberations. Bankruptcies could make it harder for towns and cities to raise the funds to construct schools, bridges, and other infrastructures. Individual investor-held municipal bonds could also take a hit.

Chapter 9 Bankruptcy
Per the US Courts website, Chapter 9 bankruptcy protection is for municipalities. It enables them to come up with a plan so they can deal with their debts. It is up to a city or its to decide whether to liquidate its assets.

Detroit files for Chapter 9 bankruptcy protection, My Fox Detroit, July 18, 2013

Detroit’s bankruptcy could spell good-bye for Howdy Doody, CNN, July 19, 2013

More Blog Posts:
UBS, Morgan Stanley, Merrill Lynch, and Other Brokerage Firms Subpoenaed by Massachusetts Securities Regulator in Probe of Complex Investments Sold to Seniors, Stockbroker Fraud Blog, July 8, 2013

New Hampshire Investment Adviser Focus Capital Wealth Management Accused of Elder Financial Fraud to Pay Exchange Traded Fund Victims $2.4M, Stockbroker Fraud Blog, March 14, 2013

The 21st Century Glass-Steagall Act Seeks to Separate Investment and Commercial Banking Again, Institutional Investor Securities Blog, July 12, 2013

Highland Capital Sues Credit Suisse For $350M Over Resort Loans

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

Entities of Highland Capital Management LLP are suing Credit Suisse Group AG (CS) for over $350M. The plaintiffs are Haygood LLC and Allenby LLC. They claim that the financial firm marketed loans for high-end residential communities using appraisals that were deceptive and not reasonable. The disagreement is related to dividend capitalization loans for the Turtle Bay Resort, the Yellowstone Club, Ginn Clubs & Resorts and Rhodes Homes and the Park Highlands Master Planned Community. The securities case was filed in New York State Supreme Court.

According to the financial fraud lawsuit, managed investment funds that served as the loans’ lenders assigned the plaintiffs the claims. The latter are accusing Credit Suisse of working with “compliant stooges” in global appraisal firms to overvalue the communities that secured the loans so that lenders would invest in under-collateralized loans that would go on to fail.

A spokesperson for Credit Suisse says that Texas-based debt manager Highland Capital Management and entities related to it are behind this securities case and that this is one sophisticated investor’s “unfounded” effort to wrongly use the legal system to get back losses. The investment bank says it will fight the case.

Insurance Companies Experiencing Sellers’ Regret Over Variable Annuities

Published on: July 15, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to The New York Times, a number of insurance companies that sold variable annuities with healthy death or income benefits prior to the financials crisis are regretting this decision. One reason for this is that they are finding it hard to meet the obligations-payouts of at least 6% or guaranteed returns-that come with them.

Now, some insurers are currently trying to get annuity owners to agree to buyouts or move into investments that have lower returns. In some cases, the penalty for not complying is the loss of the payment that was guaranteed to them. Unfortunately, says The Times, the notice of these changes and potential ramifications are not being made explicitly clear to annuity owners, who may be hearing them via generic-seeming notices sent in the mail that don’t show no indication that the letter might be urgent.

One company, The Hartford, has notified advisers and clients that they have until October to change the asset allocation in specific variable annuities. This is to decrease the balance of the client, which would lower how much the company has to pay out. Rather than a 5% lifetime guaranteed payout, the annuity’s owner would receive a lower payout according to a decreased account value. Failure to comply will result in the loss of the rider that guaranteed payment no matter what the annuity’s value in cash. (A spokesperson for The Hartford, which is exiting the annuities business, said that the investment changes only apply to owners with contracts where such changes are allowed.)

Financial Firms Update: Morgan Stanley Now Owns Smith Barney, Wells Fargo & JPMorgan Defeat Estimates, MLB All-Star Sues UBS for $7.6M, & Ray Lucia, His Firm Fined Over “Buckets of Money” Strategy

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

Morgan Stanley Buys Smith Barney from Citigroup

Morgan Stanley (MS) now owns Smith Barney, which it just bought from Citigroup (C) for $9.4 billion. Smith Barney’s new name is Morgan Stanley Wealth Management. Based on its new number of financial advisers, the deal makes Morgan Stanley the largest Wall Street firm and comes in the wake of Federal Reserve approval.

Wells Fargo & JPMorgan Defeat Analysts’ Estimates

The 21st Century Glass-Steagall Act Seeks to Separate Investment and Commercial Banking Again

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

Senators Elizabeth Warren (D-Mass) and John McCain (R-Ariz.) have joined forces to unveil the 21st Century Glass-Steagall Act, which aims to create a definite divide between speculative activities and traditional banking. This is a modern day revision of the original Glass-Steagall legislation from the 1930’s, which placed definite limits on the types of business that regulated banks were allowed to conduct. That act was repealed 14 years ago. Then, the mergers that would form the biggest banks existing today happened. Senators Angus King (I-Maine), and Maria Cantwell (D-Wash.) also are co-sponsoring this bill.

Warren, who is spearheading the legislation, noted that the nation’s largest banks continue to take part in risky practices that could again jeopardize our economy. She said she is prepared for a tough fight, seeing as it may be hard to drum up enough support in Congress or get the Treasury Department or Federal Reserve to jump on board. If the 21st century version of Glass-Steagall becomes law, a lot of these banks might have to give up their trading operations.

Fond feelings for the 1993 Glass-Steagall Act could help build interest on this new version. The original act, unlike the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was just 37 pages long and easy to implement. It also made sure that banks that use federal deposit insurance did not get involved in volatile activities on Wall Street, including certain kinds of trading. No crisis like the one that happened in 2008 occurred while the original Glass Steagall Act was in place—although some critics don’t believe that it would have stopped that economic meltdown from happening.

Securities Headlines: Court Says SLUSA Precludes JPMorgan Mutual Fund Practices, Provident Royalties Ex-Executives to Pay $2.3M, & Two Securities America Advisers Are Rehired

Published on: July 10, 2013 | by Shepherd Smith Edwards & Kantas, LLP

SLUSA Precludes JPMorgan Securities Allegations Involving Mutual Fund Sales

As preempted by the Securities Litigation Uniform Standards Act, the U.S. District Court for the Northern District of Illinois dismissed what would have been a would-be state law class action against JPMorgan Securities LLC (JPM) and related entities over mutual-fund sales practices that allegedly maximized defendants’ revenues at cost to fund investors. Per the securities lawsuit, financial advisers were pressured and given incentives to sell the defendants’ proprietary mutual funds rather than ones run by third parties, placing their own financial interests before those of clients. The would-be class includes advisory clients from 2008 through that paid management fees and had assets in the defendants’ proprietary funds.

The defendants sought to have the case dismissed, contending that the claims alleging fraud related to the buying and selling of securities are precluded by SLUSA. The district court concurred, with Judge John Darrah noting that although the complaint presented state law claims involving breaches of fiduciary duty and contract, the allegations’ substance describes a fraudulent scam to sell securities.

Texas Judge Throws Out Verizon Retirees’ Class Action Lawsuit Over $8.4B Pension Sales to Prudential

Published on: July 9, 2013 | by Shepherd Smith Edwards & Kantas, LLP

In Dallas, Chief Judge Sidney A. Fitzwater of the U.S. District Court for the Northern District of Texas has thrown out the class action lawsuit filed by Verizon Communications (VZ) management retirees looking to stop their ex-employer from selling $8.4 billion of their pensions to Prudential Insurance Company of America (NYSE: PRU) . However, Fitzwater said that the plaintiffs can re-plead their case and they have 30 days to do so from June 24. He dismissed their Texas lawsuit per the federal Employee Retirement Income Security Act’s Section 404 (a) and noted that Verizon choosing to amend its management pension plan was not a fiduciary function.

Per the ruling, Verizon Communications and Prudential went into an agreement together last year involving the former’s pension plan agreeing to buy the latter’s premium group annuity. This would settle about $7.4 billion in liabilities. Also, Verizon would be handing over to Prudential the responsibility of giving pension benefits to approximately 41,000 retired employees. These transferred retirees are no longer part of the plan, while the about 50,000 beneficiaries and participants not included in the transaction are still part of the plan. The federal court in Texas had certified each group as a transferee class and the other as a non-transferee one, respectively.

According to the transferee class, Verizon didn’t reveal in the summary plan description that the annuity transaction might happen, which violates ERISA, breaches the company’s fiduciary duty, and discriminates against class members. Despite observing that choosing an annuity provider is a function that is a fiduciary one, Judge Fitzwater said that amending a plan is not a fiduciary function. He did say, however, that elements of the way Verizon executed the direct of the amendment might be considered fiduciary functions. (It was Fitzwater who earlier this year gave the 41,000 Verizon management retirees class status after he found that there were too many plaintiffs for them to each have their own lawsuit.)

JPMorgan Received Asset Management Conflicts Warning from OCC in 2012

Published on: July 9, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to a source with direct knowledge about the Office of Comptroller of the Currency’s findings, the agency had already warned JPMorgan Chase (JPM) last year that the investment bank had erred when it directed clients toward its in-house investment products.

OCC examiners found that in late 2011 JPMorgan had not complied with restrictions placed on in-house financial products sales, as well as fulfill its duties to retirement plan investors under ERISA (the Employee Retirement Income Security Act). Following these discoveries, the agencies ordered JPMorgan to pay back fees to customers.

While the issues highlighted by the OCC more than likely won’t pose much of a problem to JPMorgan—typically the US Department Of Labor resolves such violations by ordering restitution and in a confidential manner—the alleged infractions do point to what could become a problem of regulatory tension between federal regulators and JPMorgan, as the former group seeks to put to rest criticism that its poor oversight played a role in allowing the financial crisis of 2008 to happen. Now, since Thomas Curry took over as Comptroller of the Currency, OCC appears to have made it a priority to monitor the growing risks that can arise via routine bank functions, as well as from activities that could lead to “operational risks.”

JPMorgan Chase’s assets under management that are found in its proprietary mutual funds reached $223 billion at the start of 2013, which a significant rise from $96 billion in 2009. All assets under the bank’s purview, including retirement plans, alternate assets, and funds, have been growing for 16 quarters in a row.

Also during 2013’s first quarter, a $31 billion gain allowed JPMorgan’s client assets to hit $2.1 trillion. Unlike other asset managers, the bank conducts securities underwriting, commercial banking, and money management on such a big scale and in such an interlinked fashion that, per guidelines in the OCC’s exam handbook, such actions merit more regulatory examination.

Regulators & ERISA Assets
Because ERISA assets are some of the most legally protected, there is a greater chance that regulators will pay attention to them. That said, Section 406(b) of ERISA obligates retirement fund fiduciaries to always place clients’ interest first.

As OCC doesn’t directly supervise ERISA, its perspective is via supervising banks’ winder duties to make sure operations are performed in a way that decreases operational risks, as well as reputational and legal harm. Although monitoring ERISA compliance has long been part of OCC’s examination wheelhouse, some observers are finding that the agency’s current concentration on both the Act and how banks sell proprietary investment instruments is an add-on previous monitoring practices.

The Securities and Exchange Commission is also looking at JPMorgan and its proprietary products sales. While it is not known at this time whether the agency’s inquiries will result in formal action, a number of ex-JPMorgan Chase financial advisers already have sued or filed arbitration claims accusing the bank of pressuring them to place client assets in in-house products. The financial firm denies the securities’ cases allegations.

Meantime, according to Reuters last year, the Labor Department too has been examining JPMorgan. The DOL is looking at the firm’s purchases for 401(k) plan stable value funds under its management of $1.7 million in mortgage debt that it underwrote before the real estate crisis. Already, investors have filed securities cases alleging wrongdoing that, once again, the bank denies.

Office of Comptroller of the Currency

More Blog Posts:
California AG Files Lawsuit Against JP Morgan Chase Alleging Debt Collection Abuse Over 100,000 Credit Card Cases, Stockbroker Fraud Blog, May 16, 2013

Texas Judge Throws Out Verizon Retirees’ Class Action Lawsuit Over $8.4B Pension Sales to Prudential, Stockbroker Fraud Blog, July 9, 2013

UBS, Morgan Stanley, Merrill Lynch, and Other Brokerage Firms Subpoenaed by Massachusetts Securities Regulator in Probe of Complex Investments Sold to Seniors

Published on: July 8, 2013 | by Shepherd Smith Edwards & Kantas, LLP

William Galvin, the Massachusetts Secretary of the Commonwealth, is subpoenaing 15 brokerage firms in its probe into complex products that were sold to older investors. Morgan Stanley (MS), LPL Financial (LPLA), Merrill Lynch (MER), UBS AG (UBS), Bank of America Corp. (BAC), Fidelity Investments, Wells Fargo & Co. (WFC), Charles Schwab Corp (SCHW), & TD Ameritrade (AMTD) are among the broker-dealers that received notices from the state. The subpoenas are seeking information about investments that were sold to Massachusetts seniors, as well as data about the firms’ compliance, supervision, and training.

Galvin noted that when such investments are sold to inexperienced investors, this creates potential “accidents waiting to happen.” He is among a number of regulators that have expressed worry about how many complex products are being marketed to unsophisticated investors that want higher returns during this era of low interest rates. These financial instruments tend to be among brokers’ favorites because they garner higher commissions.

Already, Galvin has brought in over $11 million in fines from brokerage firms that sold illiquid real estate investment trusts to investors in Massachusetts. This type of REIT is hard to sell when a customer wants out. Galvin said that it was during that probe his staff discovered there were a lot of brokers, who were not only inadequately supervised, but also they were selling complex financial instruments that went beyond even their comprehension. The Massachusetts’s regulator office will continue to look into REITs, in addition into oil and gas partnerships, structured products, and private placement deals.

Securities Case Over Insuring The $160M in Disgorgement Paid to the SEC Goes Back to Trial Court

Published on: July 6, 2013 | by Shepherd Smith Edwards & Kantas, LLP

New York’s highest court has revived a declaratory judgment action against D & Liability insurers after finding that the Securities and Exchange Commission order mandating that Bear Stearns (BSC) pay $160M in disgorgement failed to establish in a conclusive manner that payment could not be insured. The securities lawsuit is J.P. Morgan Securities, Inc., et al. v. Vigilant Insurance Company, et al.

Claiming that Bear Stearns engaged in market timing mutual fund trades and illegal late trading and for certain clients over a four-year period, the SEC wanted $720M in sanctions from the firm. The financial firm, however, argued that the activities only caused it to make $16.9M in revenues. A settlement was reached ordering Bear Stearns to pay $160M in disgorgement and $90M in penalties, with the firm not having to deny or admit to the Commission’s claims.

A declaratory action followed with a plaintiff in the New York Supreme Court seeking to have D & O insurers pay for $150M of the $160M disgorgement. Citing New York law, the insurers argued that the case should be dismissed, noting that under state law disgorgement is not insurable. A lower court turned down these contentions, denying the motion.