Investor Lawyers Blog

CBOE Will Pay $6M Penalty Over SEC Charges Alleging Failure to Enforce Trading Rules

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

The Chicago Board Options Exchange, which is the largest options exchange in the United States, has consented to pay $6 million penalty to settle Securities and Exchange Commission charges accusing it of not fulfilling its obligation to enforce trading rules and failing to stop one firm member from engaging in abusive-short selling. The exchange is settling and taking corrective action but is not admitting to/denying wrongdoing.

While CBOE is an SRO (self-regulating organization), the SEC has wide oversight over trading. This is the first penalty that an exchange is paying for purported regulatory oversight failures. The Commission is also censuring the exchange, which means a tougher sanction could result if the alleged violation occurs again.

According to the regulator, in 2008, CBOE transferred the monitoring of member firms’ compliance via a rule for curbing abusive short-selling practices to a different department. This, contends the SEC, hurt the exchange’s ability to enforce the rule. (Short-selling involves a trader betting that a stock will drop in value. Short-sellers borrow the shares of a company, sell them, and then purchase them when the stock fails, giving them back to the lender while keeping the price difference. Unfortunately, too much short-selling focusing on weak companies can cause them to fail, inciting market volatility.)

Muni Bonds Draw Investors But Come With Serious Risks

Published on: June 11, 2013 | by Shepherd Smith Edwards & Kantas, LLP

With many municipalities exhibiting better financial health and tax-free bonds touting pretty good returns, municipal bonds are attracting investors. However, this doesn’t mean that you, as a prospective investor, shouldn’t approach munis with caution.

Investors don’t pay a commission when they purchase a municipal bond, but they do have to pay a “markup,” which is the difference between the price paid and the broker’s cost. Unfortunately, many brokers don’t tell customers about this markup, instead focusing on the benefits of yield rather than disclosing more about the price. Because of this, most retail investors don’t know how much these trades are costing them in charges. You should know that these markups can be pretty high.

The Wall Street Journal reports that according to a study from research firm Securities Litigation and Consulting Group, out of one in 20 trades, investors that purchased $250,000 or less in municipal bonds paid a 3.04% markup or greater, which, at today’s rates, is one year’s worth of interest income (compare that to the under $10 in commission investors pay when purchasing stock from the majority of online brokers-.004% interest on $250,000; meantime, management fees for mutual funds are approximately 1% yearly. The study examined close to 14 million trades involving long-term, fixed-rate munis between April ’05 to April ’13.

As Their Prices Hit a 2-Year Low, Gold ETFs Liquidate En Masse

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

Gold, once a hot commodity in the markets, is, at least for now, considered incredibly passé. ETF Trends editor Tom Lydon says that over 600,000 pounds of gold have been disposed of this year. He says that gold is out of favor for at least a couple of reasons: Central Banks aren’t as interested, and investors are currently looking more to back stocks and bonds, since both are doing relatively well.

Lydon, however, was quick to point out that gold isn’t gone for good, especially when investors will want to hedge against inflation and markets when the need arises once again. Meantime, investors may be opting to buy just a small amount of gold to stick in their portfolios.

Gold ETFs

Texas Federal Agents Pursue Largest Forfeiture Cases To Date

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

Federal agents in Texas are playing part in a number of the biggest forfeiture cases in the history of US law enforcement. However, the details of cases, which have involved the seizure Caribbean bank accounts, luxury condominiums, and stud racehorses purportedly linked to drug dealers and organized crime, money launderers, and Ponzi scammers, are generally kept secret. Many of the cases are a result of probes that haven’t been revealed in public records or looked at in court.

Two reasons for the secrecy are strategy and legal purposes. Sources and witnesses are generally kept confidential and protected, property connected to alleged crimes are preserved before public criminal actions are filed, and investigators are provided with the court authority that they need to freeze and trace criminals’ assets. However, civil rights advocates and defense lawyers are asking, does the secrecy surrounding forfeiture cases protect the government from having to reveal mistakes they’ve made in the investigations?

One of the largest successful forfeiture cases thus far involved Osiel Cardenas Guillen, a Mexican cartel leader. In exchange for a plea agreement with prosecutors in Houston, as part of his sentence the 42-year-old head of the Gulf Cartel agreed to fork over $50 million in assets.

Financial Firm Roundup: Citigroup Settles $3.5B MBS Lawsuit with FHFA, JPMorgan Unit Fined $4.64M, Court Won’t Dismiss USB Whistleblower’s Action, & Ex-Goldman Sachs Executive to Pay $100K Over Pay-To-Play Scam

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

Citigroup (C) Settle $3.5B securities lawsuit Over MBS Sold to Freddie Mac, Fannie Mae

Citigroup has settled the $3.5 billion mortgage-backed securities filed with the Federal Housing Finance Agency. The MBS were sold to Freddie Mac and Fannie Mae and both sustained resulting losses. This is the second of 18 securities fraud cases involving FHFA suing banks last year over more than $200B in MBS losses by Fannie and Freddie. The lawsuit is FHFA v. Citigroup.

J.P. Morgan International Bank Ltd. Slapped with $4.64M Fine by UK Regulator

Securities Criminal Roundup: Mail Fraud Charges Against Investment Company Owner, Ex-Bank of the Commonwealth Execs Convicted, Broker’s Elder Financial Fraud Sentence is Affirmed, and Ex-Fund President Goes to Prison for Ponzi Scam

Published on: June 7, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Flatiron Systems LLC Owner Pleads Guilty to Mail Fraud

In United States v. Howard, investment company owner David Eugene Howard has pleaded guilty to mail fraud charges. He is accused of engaging in a financial scam that obtained about $1.8 million from investors.

Prosecutors say that Howard, who owns Flatiron Systems, used operating agreements, letters, and account statements to make false representations that his company used a proprietary system named “Pathfinder” to trade pooled equity accounts. The Securities and Exchange Commission has submitted an enforcement action against Howard.

FINRA Headlines: New ATSs Sweep Letters Issued, SRO to Provide Surveillance for Direct Edge Market Exchanges, Court Says Ex-AP of Defunct Member Firm Can Enforce Arbitration Pact, & Madoff Feeder Funds Are Not Required to Arbitrate Claims Against KPMG

Published on: June 5, 2013 | by Shepherd Smith Edwards & Kantas, LLP

FINRA Issues Sweep Letters About Alternative Trading Systems

The Financial Industry Regulatory Authority has put out a new round of sweeps letters asking for more information about its review of alternative trading systems. The SRO’s Trading Examinations Unit is reviewing the off-exchange trading venues.

FINRA wants firms to provide information about how subscriber order flow is identified within the ATS, whether they are tracking the different kinds of order types in use, and where the ATSs orders are routed. Sweep letters let the regulator determine how to better focus its exams and discover what new issues may have arisen.

AIG Drops RMBS Lawsuit Against New York Fed, Fights Bank of America’s $8.5B MBS Settlement

Published on: June 5, 2013 | by Shepherd Smith Edwards & Kantas, LLP

American International Group (AIG) and Maiden Lane II dismissing lawsuit against the Federal Reserve Bank of New York regarding the $182.3 billion financial bailout that the insurer received during the 2008 economic crisis. In dispute was whether AIG still had the right to pursue a lawsuit over residential mortgage-backed securities losses and if the company had moved $18 billion of litigation claims to Maiden Lane, which is a New York Fed-created entity.

An AIG spokesperson said that in the wake of a recent ruling by a district judge in California that the company did not assign $7.3 billion of the claims to Maiden Lane, both are dropping their action without prejudice. This means that AIG can now pursue Bank of America (BAC) for these claims, which is what the insurer wants to do.

Bank of America had said that AIG could not sue it over the allegedly fraudulent MBS because the latter transferred that right when the New York Fed bought the instruments in question 2008. However, according to Judge Mariana R. Pfaelzer, even if the New York Fed meant for Maiden Lane II to have these claims, that intention was not made clear.

FINRA Orders Wells Fargo & Banc of America’s Merrill Lynch Ordered to Pay $5.1M for Floating-Rate Bank Loan Funds Sales

Published on: June 4, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority Inc. says that Merrill Lynch, Pierce, Fenner & Smith Incorporated (MER) and Wells Fargo Advisors LLC must pay $5.1 million for losses sustained by customers who bought floating-rate bank loan funds.

According to the SRO, brokers at Banc of America and Merrill recommended the purchase of floating-rate bank loan funds to customers who didn’t have investment goals, risks tolerance, or financial conditions that were consistent with the features and risks of these kinds of mutual funds. Instead, these were customers whose risk tolerance levels were conservative and wanted to preserve principal. FINRA says that the sale recommendations were made even though there wasn’t reason to believe that floating-rate bank loan funds would be suitable for these investors.

In regards to the allegations against Wells Fargo, FINRA, in its acceptance, waiver and consent letter, said that brokers there warned about the funds but that the firm failed to act on their worries. The SRO says that the brokers had even confused the funds with bank certificates of deposit and other less risky investments.

Synthetic CDOs Once Are Once Again In Demand Among Investors

Published on: June 4, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Despite the damage attributed to them during the 2008 credit market crisis, synthetic collateralized debt obligations are once again in high demand among investors. The popularity of these risky investments, with their high returns and rock-bottom interest rates, are so high that even after being denounced by investors and a lot of lawmakers back in the day, now Morgan Stanley (MS) and JPMorgan Chase (JPM ) in London are among those seeking to package these instruments.

CDOs allow investors to bet on a basket of companies’ credit worthiness. While the basic version of these instruments pool bonds and give investors an opportunity to put their money in a portion of that pool, synthetic CDOs pool the insurance-like derivatives contracts on the bonds. These latest synthetic CDOs, like their counterparts that existed during the crisis, are cut up into varying levels of returns and risks, with investors wanting the highest returns likely buying portion with the greatest risk.

Granted, synthetic CDOs do somewhat spread the risk. Yet, also can increase the financial harm significantly if companies don’t make their debt payments.